At the outset, the only clear understanding of California’s prospective two-phase 2004 restructuring of its natural gas market is that nothing is clear.

Shreds of clarity are found in endless expectations and questions among the stakeholders. The major private-sector gas utilities are supposed to file by the end of this month their wish lists of issues to be dealt with in this omnibus proceeding.

The backdrop for this massive regulatory exercise is California’s recent taste of what regulators consider “the high price and volatility of natural gas,” ever-tighter space between supply/demand nationally, the prospect for large new sources in a state whose native production can satisfy no more than about 15% of the average demand, and grumbling from all sectors of the industry. And there is the assumption that the days of $2-$2.50/MMBtu supply are gone, if not forever, for a long time into the future.

If the California Public Utilities Commission, as expected, at its next meeting (Feb. 26) decides to table the long-stalled unbundling of the Southern California Gas Co. transmission pipeline and storage operations, an added weight of expectations will fall on the CPUC’s “order instituting rulemaking” (OIR) examining gas matters. Some observers interviewed by NGI earlier this month indicated the proceeding may be over-reaching if stakeholders expect all the bugs in the ongoing wholesale gas structure to be worked out by the end of this year.

Sea changes may be expected for California’s natural gas market, but “wait-and-see” may be part of the results of this year’s effort that has a lot of CPUC staff competition from electric and telecommunications major issues seeking resolution in 2004. Regardless, everyone agreed that the big “elephant” at this year’s California gas party is Sempra Energy, its two utilities and its strategic location at the proposed “citygate” for most West Coast liquefied natural gas (LNG) import sites.

One knowledgeable player in the state utility regulatory proceedings predicts that during or soon after the OIR, Sempra will merge its utilities and there will be one Sempra-wide set of rates. For electric generation customers there already is such a single-rate system because gas-fired power plants in San Diego were having to pay higher gas costs to accommodate separate SoCalGas and SDG&E transportation charges.

Anything covering rates and transportation charges is going to be heavily debated, and Dan Douglass, a California-based energy attorney representing various major gas and electric interests, including one of the proponents of an offshore LNG receiving terminal, said he and other parties are likely to ask for hearings on any ratemaking issues. (In its haste, the CPUC is not allotting much, if any, time for formal hearings as part of the OIR.)

Calling the issue of firm tradable rights a “complicated one,” Douglass said it is the type of issue that most likely will be dealt with more fully in Phase II where there are likely to be some hearings. His only major concern at the outset is what he called “trying to do all the LNG interconnection issues in Phase I without hearings,” along with the likely proposal for a system-wide Sempra transportation rate, and rolling in utility infrastructure enhancements instead of having the new gas sources, that cause the expenditures, pay for them as is done on any new interstate pipeline connections to new supply sources today.

Areas in the OIR that attract the most interest in the industry, also prompt disparate views. Issues such as:

It is unclear whether a majority of the CPUC’s five regulators want to spread a version of the Pacific Gas and Electric Co. “Gas Accord” unbundling into the Sempra utilities’ southern half of the state. Southern California Gas Co., Sempra’s primary gas utility, supposedly wants to have some variation, not a replication of the PG&E gas utility system in the north, according to a key CPUC staff member working on the gas OIR. SoCal and the other major stakeholders now support Commissioner Loretta Lynch’s proposal to vacate the outdated unbundling of transmission/storage in the south.

“SoCal still wants a firm-trade-able rights type of system, but it might have some significant differences in the details of that type of structure,” the CPUC gas analyst said. “They are also looking at holding off implementing, say not before 2006.”

While SoCalGas and other stakeholders may want the long-delayed unbundling dealt with in the 2004 OIR, it might not happen that way, the regulatory staff member said, noting the regulators don’t want to get “bogged down” trying to deal with everything going on in the wholesale natural gas market in this one proceeding. “I don’t think the commission is prepared to deal with the details of a firm tradable rights system within the framework of the OIR,” said Richard Myers, a CPUC gas analyst.

Myers said the CPUC wants to deal with broad over-arching issues and deal with them quickly. Issues like the details of a firm tradable rights system will be “controversial and take a long time to resolve,” he said. “The commission could issue guidelines and encourage SoCalGas to go down that road, or it could rule out such a move.”

On the laundry list of issues — and it is an ever-growing list — the CPUC staff has two items targeted for quick resolution: (a) establishing a process for the utilities to determine what their interstate capacity rights should be beyond 2006 (replacing the expiring long-term contracts that currently serve the utilities’ core loads), and (b) the guidelines for how to provide physical access to new sources of supply and capacity (LNG, new interstate pipelines, expansions of existing pipelines, etc.).

“We want to establish policies and procedures under which the utilities will go about setting up new contracts,” Myers said. “Guidelines on this and the interconnection of new supply/capacity are issues we want to be able to address fairly quickly (in Phase I of the OIR). And there are many other issues that could come up because the utilities and all the other parties are going to have an opportunity to tell us what they think needs to be addressed on a quick time frame.”

Several veteran energy attorneys in the state — some of whom previously worked at the CPUC — warned that the state regulators usually do some of their poorest work, “throwing the baby out with the bath water,” when they make doing something quickly and on schedule their highest priorities. Some mention the state’s electricity restructuring from the mid-1990s as an example.

Reliability and excess capacity in the gas infrastructure could consume the entire OIR. How much and who pays for increased excess, or “slack,” capacity in the system? That’s a concern for all the stakeholders.

“I think the OIR is going to look at how much excess capacity is a good idea as far as a policy matter and who pays for it; I think that will be looked at separately,” Myers said.

©Copyright 2004 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.