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
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