The D.C. Circuit Court of Appeals has remanded FERC’s rejectionof a 1997 complaint in which Southern California Edison accusedSouthern California Gas (SoCalGas) of gaming the secondary marketfor firm capacity on key transportation links between the low-costSan Juan producing basin and the California border.

The court said the Commission’s decision not to pursue themarket power issues raised by Edison in the complaint was both”arbitrary and capricious.” Edison accused SoCalGas, the dominantholder of interstate capacity into southern California, ofwithholding large amounts of unused firm capacity from the marketby steadfastly refusing to negotiate competitive prices for therelease of that capacity. FERC denied the utility’s complaint onthe ground that the prices sought by SoCalGas for its capacityreleases did not exceed the maximum tariff rate allowed forinterstate gas pipelines in the primary capacity market.

But FERC’s oversight is “not…limited” to rate matters, thecourt opined. “That the rate charged in a particular instance isjust and reasonable still leaves in place…other possible groundsfor Commission action.” Specifically, it noted Section 5 of theNatural Gas Act (NGA), in addition to giving FERC jurisdiction over”unjust” and “unreasonable” rates, provides it with authority overunjust and unreasonable practices, and over “unduly discriminatory”or “preferential” rates or practices.

In rejecting the complaint, the court further said theCommission assumed – mistakenly so – that a releasing shipper, suchas SoCalGas, “could not be better situated to abuse market powerthan a pipeline.” Although such an assumption “probably makes senseordinarily,” FERC overlooked the impact of the volumetricInterstate Transportation Cost Surcharge (ITCS) in this case.”While revenue losses on unmade sales constrain an ordinarymonopolist’s ability to reduce output and raise prices, the ITCSenables SoCal to give its own [affiliates] artificially low prices,and to price sales to others at unacceptable prices, with nosacrifice of transportation revenue whatever,” wrote Circuit JudgeStephen Williams for the court.

The ITCS, which the California Public Utilities Commissionestablished in 1991, permits SoCalGas to recover from its customersthe difference between what it pays for interstate pipelinecapacity and the actual rate it receives for released capacity. Itwas intended to help utilities recover stranded costs, but Edisoncontends SoCalGas has used the ITCS to manipulate the secondarycapacity market in southern California. The ITCS, in effect,permits SoCalGas to recover all of its capacity reservation costs -mostly from noncore customers, such as Edison – while withholdingcapacity from the secondary market, the utility charged. In 1997,when the complaint was filed, SoCalGas had about 393 MMcf/d ofunused capacity that was available for release.

The court also said it was not swayed by the Commission’s “finalrationale” for not pursuing Edison’s complaint, which was that itmight limit participation in the secondary market in southernCalifornia and possibly elsewhere. “There is no reason why adecision to examine market-power issues here need expose allshippers to possible scrutiny; the Commission could, by the termsof its decision, simply limit possible objects of investigation tothose capacity-holders who are faced with the same perverseincentives as SoCal with the ITCS,” the court said.

In remanding the case, the court instructed FERC take anotherlook at possible damages against Edison. Due to changes in theelectricity industry over the past few years, “the facts underlyingEdison’s claimed aggrievement are now unclear,” it noted. WhenEdison first filed its complaint, it “owned a number of gas-firstelectricity generation plants, and was harmed in this capacity byhigher gas prices,” the court said, but it sold the plants in 1998.Edison contends, however, that it continues to be “adverselyaffected” since electricity prices closely track natural gas pricesin the southern California market.

SoCalGas counters that other market changes – particularly itsmerger with San Diego Gas & Electric – don’t favor the kind ofmarket-power abuse alleged by Edison. “But manipulation of thedownstream electricity-generation market does not exhaust thepossible benefits to SoCal from abuse of its market power in thegas transportation market,” the court said. “Edison points to theenergy futures markets and to competition between electricity andcore gas services. We leave these to be considered by theCommission.”

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