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CPUC Warns of More Large Marketer-Pipeline Deals

CPUC Warns of More Large Marketer-Pipeline Deals

Allowing interstate gas pipelines to sell capacity at market-based rates, without first requiring a showing of a competitive market or mitigation measures, could set the stage for more allegedly "anticompetitive" contract arrangements between pipes and marketers - similar to the one between Dynegy Marketing and Trade and El Paso Natural Gas, warned California regulators.

Other gas marketers could "simply duplicate Dynegy's strategy and artificially increase transportation rates unless...safeguards" to check abuse of market power are in effect should FERC permit market-based rates for short- or long-term transportation services, the California Public Utilities Commission said last week in preliminary comments on the mega-notice of proposed rulemaking (NOPR) and notice of inquiry (NOI).

"If they're able to artificially inflate prices in this [California] market, then pipelines or marketers will recognize that they can do it to any market. And if there isn't a rate cap, there's going to be major, major problems," cautioned Harvey Y. Morris, principal counsel for the CPUC, in an interview with NGI. "Without rate cap protection, there would be certain times when the sky would be the limit for what people could charge for capacity..."

This doesn't mean that the CPUC is against market-based rates, he said. "We're very much into relying on the market where we can." But "there [are] a lot of problems in the market with anticompetitive conduct or the ability to exercise market power," which California is feeling "first hand right now," that FERC needs to address before it can even think about removing rate caps and allowing market-based rates, Morris believes.

Kathryn L. Patton, Dynegy's director of regulatory counsel, said she agreed with a number of the CPUC's remarks - that pipelines shouldn't be allow market-based rates without first showing they lack market power and they shouldn't be permitted to transfer their market power to others. But she took issue with its "collateral attack" on the Dynegy-El Paso contract arrangement. She doubted the Commission's proposed lifting of price caps would trigger more such deals. "I don't necessarily agree because people still have to make the commitment of the demand charges, which is not something people take lightly."

Morris believes the Dynegy-El Paso arrangement, which was negotiated in December 1997, is the result of what can happen when pipelines and/or marketers flex their market power. The marketer purchased almost 1.3 Bcf/d of turned-back capacity on El Paso, which was all of the pipeline's remaining unsubscribed capacity at the time. The Dynegy deal has come under considerable fire since then, as shippers on El Paso have accused the marketer of withholding capacity from the market to drive up prices. The CPUC fears certain issues explored in the NOI, as well as proposals in the mega-NOPR, could bring more Dynegy/El Paso-like deals.

Of particular concern to California regulators is the request in the NOI for industry comments on the issue of permitting market-based rates for turned-back capacity [RM98-12]. In addition, it said the NOPR's proposal to lift the FERC-imposed rate cap on short-term capacity indirectly would remove any market rate ceiling on turned-back capacity, given that turnback "more or less" competes with capacity in the short-term market [RM98-12]. The California agency contends that such actions by FERC would eliminate the "only" protection against the abuse of market power - by pipes or "other entities" - that presently exists for ratepayers.

The CPUC doubts that FERC's auction proposal would be a sufficient mitigative measure to prevent the "hoarding or withholding of capacity rights," as it has accused Dynegy of doing in the California market. "...[I]t is not clear how or whether such auctions will work. Moreover, with interstate pipelines and certain LDCs challenging or resisting the FERC's auction procedures, it is unclear whether or not such mitigation measures will be enacted or be sufficient," it said. The pipelines want to "water the auction down a lot" so, in the end, "it might not be an effective tool," Morris remarked.

Still, he's not totally down on auctions. "Maybe if a workable auction could be put into effect and it really did stop people from withholding capacity from the market, maybe that would be the solution." But, he conceded, "those are a lot of what-ifs."

The CPUC and others insist Dynegy's acquisition of almost 1.3 Bcf/d of turned-back capacity on El Paso, compounded by little competition from released capacity in the California market, was largely to blame for the two- to three-fold jump in the transportation rate differential on El Paso and Transwestern Pipeline last year. The differential reflects the difference between California border prices and Southwest producing basin prices.

"This enormous increase in the rate differential resulted from Dynegy hoarding the otherwise unsubscribed capacity [on El Paso] and refusing to release unused capacity except under illusory offers with rates and conditions which were much too high and onerous...," the California agency said. The CPUC, marketers and end-users challenged the El Paso-Dynegy contract arrangement as being anticompetitive, but FERC refused to take action on the grounds that ratepayers were protected from abuse of market power under the rate caps, it noted. The CPUC contends, however, pipeline customers will lose that protection if FERC proposals to remove rate caps become a reality.

"The point of this illustration of the Dynegy situation is to recognize that there are not just hypothetical problems with the FERC's proposals. The Dynegy situation is a real problem which has already artificially inflated California border prices for an entire year. It is imperative, particularly in turnback situations (with minimal competition from capacity releases), that effective and appropriate safeguards are in place to mitigate the exercise of market power before the FERC removes any rate caps," the CPUC told federal regulators.

Susan Parker

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