Southern California Gas Co.’s proposed restructuring plan hasbeen pushed aside by six new confidential alternatives becausecertain aspects of the utility’s plan have been deemedanticompetitive and have the potential to allow gaming at theTopock, AZ, receipt point, according to observers and participantsin discussions taking place at a downtown Los Angeles hotel.

The discussions are designed to produce a restructuringsettlement that must be filed with the California Public UtilitiesCommission by Sept. 6 or the parties involved will be drawn into alengthy hearing process. The close scrutiny from all segments ofthe gas industry and the time constraints set by the CPUC have ledSoCal to propose a postponement of the settlement deadline to Dec.6 which would push scheduled hearings into late winter. Aprehearing conference currently is slated for Sept. 1 and hearingsare expected to start this fall. Most parties, however, see therequest as further stalling by the utility and are unlikely to goalong with a postponement.

In the meantime, SoCalGas is expected to produce acounterproposal, responding to the six alternatives, and distributeit to the parties by Sept. 3, prior to another all-parties meetingin Los Angeles Sept. 9.

A key to the settlement is opening up SoCalGas’ tradable accessrights to transmission and storage and developing secondary marketsfor those rights. Pacific Gas and Electric, for the most part,offers these already. SoCalGas’ proposal is described as “verydifferent” from the PG&E’s system already in place. They bothinvolve auctions, but after that the similarity ends. SoCalGasproposes to auction off receipt-point interstate capacity on anannual basis but would not unbundle any of the intrastatetransmission; that tariff would still be paid in addition to thenew price set for receipt-point capacity.

In addition, SoCalGas proposes what some of the parties arecalling “a dramatic change” to a daily balancing requirement.”Almost all of the parties have expressed considerable concern withthat approach,” one of settlement participants said.

“In its initial proposal, SoCalGas was setting a plan that stillmaintains a utility-controlled transportation and deterscompetition the way they are proposing to set up auction rights,”according to a Texas-based trader who focuses on the western U.S.and has reviewed a copy of the initial proposal, which involvesreceipt-point interstate auctions and a daily balancing scheme.

“I don’t think anyone is really thrilled about going to dailybalancing,” according to the trader. “I don’t know if the telemetryis in place on the end-use meter side to the degree it is reallyneeded. I think it is for the larger facilities, but not for thesmaller facilities.”

This trader who spoke on the condition of anonymity speculatedthat SoCalGas is feeling the heat of two competing proposed newinterstate pipelines (Questar and Kern River) into the heart of itsservice area, and it wants to use the settlement as a means ofholding those competitors at bay with its current proposal. “Ithink they should unbundle in a way that allows competitive forcesto make their way to where there isn’t any clear advantage foranyone,” the trader said. “From a purely trading perspective, youpotentially create some confusion with SoCal’s proposed auctionpoints.”

One of the shippers on SoCalGas’ system, the City of Long BeachGas and Electric Department, has not offered any alternatives,according to Elizabeth Wright, the city utility’s energy manager.However, she said the city utility is concerned that whateveremerges as an auction for interstate and intrastate capacity rightsdoes not pare down the number of suppliers participating in itsregular bid program for short-term supplies.

“Our concern is that [the new auction system] may shrink thepool of available suppliers, and we could get caught in achicken-egg situation,” Wright said. “We go out currently formonthly solicitations and ask for qualified bidders for theupcoming months. Now we’re concerned that we will want suppliers toassure us that they have this auctioned capacity accessible inorder to bid into a program, but we realize they may not want topick up that capacity unless they have a contract with us.”

A key to the settlement is opening up SoCalGas’ tradable accessrights to transmission and storage and developing secondary marketsfor those rights. Pacific Gas and Electric Co. for the most partoffers these already; SoCalGas does not. Increased transparency andclarity in both major gas distributors’ systems is also part of thesettlement talks.

One aspect of the desired SoCalGas changes is to create a seriesof citygates within the gas-only utility’s service territory. Oneobserver described it as a “Los Angeles Loop,” with three receiptpoints based on three transmission pipelines into the majordistribution system serving most of southern and centralCalifornia. This is a preferred alternative among traders toSoCalGas’ proposed receipt points, which one source thought mightincrease the chance of the system being gamed and market powerabused. There is a potential for that to occur at theCalifornia-Arizona border (Topock) where there is a “constraint”point for bringing in economical San Juan Basin supplies. And underits proposal, SoCalGas originally was suggesting it maintain the”lions share” of the capacity rights at that point, according tothe observer who has reviewed the gas utility’s initial proposal.

“There is the potential to game by taking over control of Topockthrough the bids,” the source said.

Richard Nemec, Los Angeles

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