Sempra, KN Defend Merger Against Market Power Claims
Merger partners Sempra Energy and KN Energy contend that Questar
Pipeline, which claims their marriage would subvert gas and
electric competition in southern California, is seeing monsters
where none exist. Nevertheless, they agreed to make certain
concessions to Questar to remove a potential threat to their merger
Specifically, the energy companies insist Questar gave them
credit for far too much power when it said their merger would
provide them both "motive and method" to block the entry of its
proposed gas pipeline, Southern Trails Pipeline, into the southern
California gas market. Southern Trails, which is awaiting FERC
approval to be converted to a gas pipeline, would run 690 miles
from the San Juan Basin to Long Beach, CA.
Their "motive," according to Questar, would be to prevent
Southern Trails from competing directly with Southern California
Gas, an LDC subsidiary of Sempra Energy, for generation and
industrial customers in southern California. Unlike most pipelines
coming into California, Southern Trails would not have to go
through SoCalGas to serve its customers, but would be able to do so
directly if approved by FERC.
And the "method" to block Southern Trails' entry, Questar said,
would be KN's interest in TransColorado Gas Transmission.
TransColorado - a 290-mile line that connects the Piceance and San
Juan basins - is a 50-50 partnership between KN and Questar.
Questar contends a merged Sempra-KN would have both "incentive and
ability" to disrupt gas flow on TransColorado, cutting off supply
sources from Southern Trails and ultimately the southern California
"This theory makes no sense," Sempra and KN told FERC [EC99-48].
"Even if KN could restrict the availability of capacity on
TransColorado...such a strategy would be manifestly futile.
Southern Trails and SoCalGas will compete solely as transporters,
not as sellers, and shippers on the two pipelines will have access
to essentially the same supplies, whether at the California border,
or in the San Juan Basin. Thus, the outcome of competition between
them will turn entirely on their respective transportation rates.
Stifling flows of TransColorado gas into the San Juan Basin would
not advantage SoCalGas in relation to Southern Trails."
Nevertheless, Sempra and KN agreed to make certain concessions
"to obviate any possible concern as to the effects of the merger on
Southern Trails." Most importantly, it will allow "Questar to hold
two-thirds of TransColorado's capacity [200,000 Mcf/d] - and more
if available - at the same rate that Questar and KN had previously
agreed..." Currently, KN and Questar each hold 100,000 Mcf/d of
TransColorado capacity, and the TransColorado partnership is
responsible for marketing the remaining 100,000 Mcf/d.
Additionally, KN agreed it would not oppose or prevent Southern
Trails' interconnections with the TransColorado line.
These concessions should "remove any possible suggestion that KN
will be able...to withhold TransColorado capacity and thus somehow
skew competition between Southern Trails and SoCalGas," Sempra and
KN told FERC. They asked the Commission to deny Questar's request
for a hearing on the proposed merger.
Questar sees the TransColorado pipeline as a vital link in its
plan to supply the southern California market with "cheaper" Rocky
Mountain gas supplies in competition with gas sourced from the San
Juan Basin. Without it, its vision of a
TransColorado-Questar-Southern Trails delivery chain to California
would be impossible. Sempra and KN, however, question whether Rocky
Mountain gas really is cheaper than San Juan gas.
KN and Sempra believe Questar has overemphasized the importance
of the role of TransColorado in serving the California market.
They noted that the total certificated capacity of TransColorado is
300 MMcf/d, which is less than one-eight of the 4 Bcf/d of supplies
that Southern Trails would have access to through multiple sources
- the San Juan, Permian and Anadarko basins, and Rocky Mountain
production. "Thus, even if KN, ignoring applicable Commission
regulations and its contractual obligations, were somehow to
embargo shipments on the TransColorado line altogether, its actions
would have a minimal effect on the supplies available to the
Southern Trails line at Blanco" in New Mexico.
Furthermore, KN and Sempra contend they would, in effect, be
shooting themselves in the foot if they were to disrupt gas flow on
TransColorado. "...[D]iminished flows on TransColorado would yield
diminished revenues to KN as part owner of that line. Moreover,
higher delivered gas prices in southern California would make the
electric generation plants served by SoCalGas and [San Diego Gas
and Electric] less competitive in relation to plants outside
California as well as non-gas fired plants within California,
leading to a loss of throughput, and thus a loss of transportation
revenues, for SoCalGas and SDG&E."