After years of regulatory processing and stakeholder settlements, California regulators Thursday unanimously established "firm access rights" (FAR) for wholesale natural gas customers on the Sempra Energy utilities' gas transmission and storage system. It was recognized that stakeholders see the new system as far from perfect, and the utility was directed to take steps to fine tune the program before it becomes fully implemented in 2008.

Regulators said Thursday's action anticipates continued growth in California's gas system, with the likelihood of liquefied natural gas (LNG) being part of the mix.

To kick-start FAR, the utilities will hold a three-part open season: first, set-asides for retail and wholesale core customers will be established; second, customers adding expansion or displacement capacity at receipt points can bid; and third, the rest of the receipt points would be covered for all creditworthy market participants. In the second step, end-users or their designated agents can bid for a certain amount of capacity at each receipt point after taking away the first step's collective set-aside for the core sector.

Under FAR, there will be a secondary market where holders of firm capacity can release all or a portion of their holdings. And in this secondary market, any creditworthy party can purchase the FAR capacity.

The action by the California Public Utilities Commission (CPUC) brings to a close a major gas case for the southern half of the state's transmission pipeline and storage system that originally had been hammered out in a modified comprehensive settlement approved by regulators in 2001 that subsequently "languished" at the CPUC, according to Commissioner Geoffrey Brown.

The Sempra utilities' integrated transmission/storage system will now have a series of firm rights available to shippers, marketers and end-users on the merged system operated by Southern California Gas Co. and San Diego Gas and Electric Co. The new system eventually will mirror the so-called "Gas Accord" established in the northern half of the state in 1998 for Pacific Gas and Electric Co.

"Customers on the integrated transmission system [eventually] will be able to move their gas supply with certainty from receipt point to delivery point," Brown said in urging his colleagues at the CPUC to support the new system. "Over the years the flow of natural gas supplies were subject to enormous variations due to the fact that the upstream [interstate] pipeline capacities now and previously greatly exceed downstream takeaway capacities."

As a result, over the past decade suppliers at various times have faced problems that have made it difficult, or impossible, to get their gas to end-users, Brown said. He said problems occurred in four of the past seven years (2000, 2001, 2003, 2004). Although constraints have not been as significant in the last two years, during times of high demand it has been nearly impossible to get supplies into the SoCalGas system, Brown said.

He said the FAR system recognizes a changing market, anticipating LNG flowing through the Sempra utility system at multiple points, more receipt points, and the integration of the SoCalGas and SDG&E systems.

He said the new system's benefits are "overwhelmingly clear, providing more certainty of delivery to end-users and providing more market flexibility and liquidity." Although it comes at a time of "relative tranquility" in the state's gas transmission system, FAR anticipates future times when constraints and high demands will occur, and provides a means of "anticipating, rather than reacting to them," Brown said.

The new FAR system will allow anyone to procure access for a fee of 5 cents/Dth as a reservation charge. Brown rejected calls to make the charge higher (15.7 cents/Dth) and argued that a lower fee should encourage more customers to become actively involved in FAR.

Some market participants argued the proposed 5 cent/Dth monthly reservation charge had no corresponding cost basis. For interruptible receipt point access service, SDG&E and SoCalGas proposed -- and the CPUC adopted -- a volumetric rate of up to 5 cents/Dth. SDG&E and SoCalGas have proposed a 90/10 (ratepayer-to-shareholder) incentive sharing mechanism, with a $5 million/year cap on the shareholder portion for interruptible revenues.

"[The utilities] contend this will provide an incentive to ensure that the maximum amount of interruptible capacity is offered, and to ensure that firm capacity cannot be profitably withheld from the secondary market," Brown said in his alternate proposal.

Among the active participants and critics of the FAR system approved were the CPUC's Division of Ratepayer Advocates (DRA), The Utility Reform Network (TURN), the Southern California Cogeneration Coalition, an "ad hoc" coalition called the "Indicated Producers" that includes Chevron, ConocoPhillips, Occidental Energy Marketing and BP America, and LNG developers including BHP Billiton.

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