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Court Raps FERC in Capacity Gaming Case

Court Raps FERC in Capacity Gaming Case

The D.C. Circuit Court of Appeals has remanded FERC's rejection of a 1997 complaint in which Southern California Edison accused Southern California Gas (SoCalGas) of gaming the secondary market for firm capacity on key transportation links between the low-cost San Juan producing basin and the California border.

The court said the Commission's decision not to pursue the market power issues raised by Edison's complaint was both "arbitrary and capricious." Edison accused SoCalGas, the dominant holder of interstate capacity into southern California, of withholding large amounts of unused, firm capacity from the market by steadfastly refusing to negotiate competitive prices for the release of that capacity. FERC rejected the electric utility's complaint on the ground that the prices sought by SoCalGas for its capacity releases did not exceed the maximum tariff rate allowed for interstate gas pipelines in the primary capacity market.

But the court reminded the Commission that its oversight was "not...limited" to unjust and unreasonable rate matters. Specifically, it noted Section 5 of the Natural Gas Act (NGA) provides it with authority over "unduly discriminatory" or "preferential" rates or practices.

In rejecting the complaint, the court further said the Commission assumed - mistakenly so - that a releasing shipper, such as SoCalGas, "could not be better situated to abuse market power than a pipeline." Although such an assumption "probably makes sense ordinarily," FERC overlooked the impact of the volumetric Interstate Transportation Cost Surcharge (ITCS) in this case. "While revenue losses on unmade sales constrain an ordinary monopolist's ability to reduce output and raise prices, the ITCS enables SoCal to give its own [affiliates] artificially low prices, and to price sales to others at unacceptable prices, with no sacrifice of transportation revenue whatever," wrote Circuit Judge Stephen Williams for the court.

The ITCS, which the California Public Utilities Commission established in 1991, permits SoCalGas to recover from its customers the difference between what it pays for interstate pipeline capacity and the actual rate it receives for released capacity. It was intended to help utilities with recovery of stranded capacity costs, but Edison contends SoCalGas has used the ITCS to manipulate the secondary capacity market in southern California. The ITCS has enabled SoCalGas to recover all of the reservation costs of its unused capacity - mostly from non-core customers, such as Edison - while withholding the capacity from the secondary market, the utility charged. In 1997, when the complaint was filed, SoCalGas had about 393 MMcf/d of unused capacity that was available for release.

Susan Parker

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ISSN © 2577-9877 | ISSN © 1532-1266
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