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California Regulators, Utilities Seek FERC Action on Gas Prices

California Regulators, Utilities Seek FERC Action on Gas Prices

California consumers, regulators and utilities have expanded their complaints against sky-high power prices to include natural gas prices, leveling accusations against El Paso Natural Gas and demanding federal intervention in the 15-year old competitive natural gas market.

Power prices spikes are directly related to natural gas prices running $60 to $75/MMBtu, Kellan Fluckiger, COO of the Cal-ISO, said last week. "A peaking unit with a poor heat rate (15,000 instead of 10,000), buying $75 gas would actually cost $1,125 to create a megawatt. Add to that emissions and O&M costs and you might get prices of $1,500 or $1,200 based on those gas prices." Fluckiger spoke after gas prices at the Southern California Border hit a high of $69/MMBtu and averaged about $58 on Monday, Dec. 11, according to NGI's Daily Gas Price Index survey. By week's end the border price had declined to a high of $19.50 and an average of $15.65 in Friday trading.

The California Public Utilities Commission (CPUC) seized the opportunity to ask FERC to "act immediately" on its long-standing complaint against El Paso Natural Gas. The California regulators contend the high gas prices are due "in large part to the market manipulation caused by market concentration" resulting from a 1.22 Bcf/d contract arrangement between the El Paso pipeline and its two affiliates, El Paso Merchant Energy-Gas L.P. and El Paso Merchant Energy Co. The contract transaction awarded more than one-third of the pipeline's capacity rights to the California border to its affiliate companies, the CPUC said.

The CPUC renewed its request for summary disposition of the complaint in which it seeks to abrogate the transportation contract arrangement between El Paso and its marketing affiliates [RP00-241], which it said reflected "preferential treatment." The CPUC initially had sought summary disposition of the complaint last August, but FERC has yet to act.

Leprino Foods Co., a major cheese producer in the state, also urged FERC to quickly "address by summary disposition the market abuse and monopolistic and anticompetitive actions of the El Paso-related companies and others which the CPUC alleges have largely, if not exclusively, brought the crisis in the first place." Separately, Southern California Edison and California Dairies Inc., a California farmer-owned dairy cooperative, said quick action on the CPUC's complaint was needed in light of the "extraordinary events in the California gas and electricity markets" (see NGI, Dec. 11).

Edison charged that El Paso Merchant Energy currently is reaping "monopoly rents in excess of 7,000% higher than the just and reasonable rate approved by the Commission for its regulated sibling," El Paso Natural Gas.

El Paso Energy Chairman William A. Wise sought to deflect some of the criticism in a Dec. 13 letter to FERC. He called the CPUC allegations that the arrangement constrained capacity "totally unfounded." "Every day Merchant is nominating virtually all of its pipeline capacity to California. If Merchant fails to fully nominate this capacity, existing regulations require that any underutilized capacity be made available to other shippers by El Paso Natural Gas," he told the Commission.

In separate comments, a broad group of major-producer shippers, marketers and industrial customers on El Paso also disputed the accusations, saying "there appears to be no indication at this point in time that either capacity or supply is currently being withheld from the [California] market."

Wise further dismissed charges that El Paso Merchant and El Paso are trying to drive up the California border prices. He estimated that about 95% of the marketer's capacity is hedged in the financial markets. "These hedges fix the value Merchant will receive from this capacity. Therefore, El Paso has substantially limited its ability to benefit from higher gas prices in California."

He said the El Paso companies always have tried "to be part of the solution, not the problem." Toward this aim, Wise told FERC that El Paso Merchant is willing to enter into long-term gas-supply arrangements directly with California utilities to help cushion them against the volatile prices. The El Paso marketer, Wise noted, will offer utilities terms that "would result in [a] near-term pricing structure below market indices." Also, "El Paso would back-stop the commitment with equity reserves."

Moreover, El Paso Energy is committed to adding pipeline capacity over the next few years to serve the California market, and is attempting to expedite the development of a new power plant in San Francisco to meet the growing power demand, he noted.

In reviewing the gas price situation in California, Wise urged the Commission "not to rush to judgment." He warned "drastic regulatory intervention at this time could have unintentional, asymmetrical results on market participants and disrupt the market that the Commission has worked to develop over the past fifteen years."

As another potential remedy for the high gas prices, Leprino Foods said it also backed San Diego Gas and Electric's (SDG&E) emergency plea to reinstate price caps on short-term capacity releases for service to the California market [RP01-180]. But it noted the relief sought in that case is a "tourniquet that will stop the bleeding" only temporarily. "It does nothing to address the fundamental underlying problems" in the California gas market, according to Leprino. Rather, it believes the fundamental problems are "graphically" outlined in the CPUC complaint against El Paso.

But Enron North America Corp. (ENA), in a strongly worded filing, asked the Commission to jettison the utility's plea to reimpose price caps on short-term releases for transport to California, saying SDG&E's allegations that uncapped prices are to blame for the escalating gas prices in the state are "demonstrably false."

Resurrecting the price caps in the secondary market would not provide any price relief to gas consumers in California, ENA said, but rather would make a bad situation worse. As the Commission "has found elsewhere, price caps will only create arbitrage opportunities that will cause holders of capacity to release it for deliveries into other markets, reducing supply and further driving up Southern California prices," it told the Commission.

The utility has proposed the caps stay in effect until March 31, 2001. FERC lifted the caps last March, as part of Order 637. Absent this "limited relief" from FERC, California may be forced to declare a state of emergency "in the immediate future to avoid substantial and irreparable harm to the gas and electric consumers" in the state, SDG&E said.

In seeking removal of the price cap, ENA insists that SDG&E is trying to "deflect blame" for shortcomings associated with its own supply acquisition strategy. "During the past summer, there was capacity available into Southern California that was not used. SDG&E does not explain why it did not take advantage of that capacity to fill its local storage facilities. SDG&E's failure to do so, coupled with its failure to contract forward at prices that remain relatively low and stable, has made it reliant on inherently volatile spot and short-term markets," the Enron marketer said.

ENA proposed that FERC investigate the cause of the utility's vulnerability to volatile gas prices. "As with the case in its recent investigation in California's power market, the Commission will find the cause in reckless reliance on the spot market, too little hedging...and inadequate development of price-responsive demand."

Leprino wants the Commission to focus on remedies, rather than lay blame. ".[M]any businesses in California cannot withstand these increases and, so, are closing their doors. Other companies such as Leprino will need to make very difficult decisions in the near future regarding further investment in California-based facilities."

Houston-based Dynegy Marketing and Trade said it was "sympathetic to the challenges faced by SDG&E and others in the western markets, both power and natural gas," but it cautioned FERC against taking a "rifle-shot" approach to resolving the situation. The independent marketer believes if "left to its own devices, the market will solve these problems --- witness that cash prices [last Wednesday were] close to those quoted at the first of the month...the spike has all but disappeared." If the Commission should decide to impose fixes on the California gas market, it should be done in a "tempered, open, thoughtful forum., not through a rush to judgment."

In response to SDG&E's allegations, ENA said it reviewed the secondary capacity releases into California, and found that "there [have been] few, if any, releases at above-maximum rates at this time, as all firm capacity holders are utilizing the capacity themselves."

Of the 11 releases that Transwestern Pipeline, an Enron affiliate, had between Nov. 15-Dec. 15, ENA said "none were above the maximum rate; all were at the maximum rate." El Paso Natural Gas had "several dozen" releases during the same period in the California zone, it noted, and all but five were listed as straight maximum rate deals. Those five deals included fixed rates that were within plus-minus one cent of the maximum rate, according to ENA.

Even though gas prices have soared in California, ENA contends the market still is competitive. "The mere fact that the market produces spot prices that are higher than those which may have been planned for by SDG&E or are higher than SDG&E may wish to pay under ideal circumstances...does not mean that the market is not workably competitive. The opposite is true; it shows that supply and demand will find the right balance."

In addition to seeking a cap that would reduce prices for gas delivered to California by about 80%, SDG&E has asked that the transportation and commodity components of rates for bundled sales be stated separately "so that the cap can be enforced on these transactions." In the alternative, SDG&E proposed that bundled transactions be capped at "150% of the sum of a reported [national] average commodity sales price plus the as-billed rate for interstate transportation."

Price caps on bundled sales "will have the opposite impact on market prices from that sought by SDG&E," ENA contends. "One of two things will occur if SDG&E prevails. The commodity will go to other markets that place a higher value on gas or the California market will find ways to circumvent the new caps, which is easily accomplished." Moreover, ENA argues that the Commission does not have the legal authority to impose such price caps, which it contends would amount to "backdoor" regulation of wellhead prices (or first sales).

Likewise, major gas producers, while not opposing SDG&E's plea for price caps on short-term capacity release transactions, expressed concern about the utility's effort to cap the prices for bundled sales. ".[W]e believe that the risk of affecting the commodity portion of the border price would ultimately cause more harm to the market --- by sending inaccurate market signals at a time when increased production is vital to our country's energy needs," said the Natural Gas Supply Association.

Indicated Shippers, a broad group of major producers, marketers and industrial customers, also vigorously opposed price caps on bundled sales, saying such a move should only be taken as a last resort. "To the extent the Commission considers such an extreme measure as commodity price caps at the border, it should only be after a full investigation as to the extent and causes of the problem, and only if there is evidence of a chronic problem, rather than isolated cases of a market spike."

And while it was "sympathetic" to SDG&E's request for caps on short-term releases, the NGSA questioned how effective the move would be. Given that "much of the recent market activity in California has not been a function of the release of transportation capacity, we would not expect that, in this instance, significant relief would be provided to customers by this proposed action."

FERC has signaled that the Commission is investigating the causes for the rapid escalation in natural gas prices in California and elsewhere in the nation.

"Our energy market staff is continually monitoring the California situation and the Northwest, and the Northeast, for that matter. They are calling buyers and sellers and looking at individual transactions," said a knowledgeable source at FERC.

While the Natural Gas Decontrol Act of 1993 removed the Commission's authority over first sales of natural gas and wellhead prices, under the Natural Gas Act FERC still has jurisdiction over sales for resale by interstate or intrastate pipelines or LDCs or their affiliates. The jurisdiction applies except on sales by those entities directly to a consumer. Admittedly, this is a "limited class" of transactions, the source said.

All who sell in the market do so under FERC blanket certificates, which the Commission could revoke if it found misuse of the certificate, the source said. It could also add terms and conditions to those certificates.

There also is some question as to whether the Commodity Futures Trading Commission might have pre-emptive jurisdiction over online transactions, such as those by EnronOnline at the California border.

Contrary to industry beliefs, "some of us [at FERC] believe we have authority over the gray market" of bundled sales and transportation. "One could argue that the transportation was being overvalued when it is part of a high-priced contract."

In the emergency filing made by SDG&E, FERC has been asked to look at just that possibility. With respect to resurrecting the price caps on the secondary capacity, the Commission source questioned the effectiveness of such a move since it doesn't appear there's much capacity release going on in the California market.

In a recent speech to the Cambridge Energy Research Associates in Washington D.C., FERC Chairman James J. Hoecker acknowledged that this was not the "season to be jolly" for the natural gas and electricity markets in California.

"The energy crisis is only deepening in California as natural gas and electricity supply problems become manifest and give rise to other market dysfunctions," he said. This "crisis" prompted Gov. Gray Davis two weeks ago, when upon lighting the Christmas tree in Sacramento and then turning it off for reliability reasons, to remark: "We're going to send FERC a picture of the tree going dark."

Susan Parker

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