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’s 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 rejected the electric utility’scomplaint on the ground that the prices sought by SoCalGas for itscapacity releases did not exceed the maximum tariff rate allowedfor 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 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 with recovery of stranded capacitycosts, but Edison contends SoCalGas has used the ITCS to manipulatethe secondary capacity market in southern California. The ITCS hasenabled SoCalGas to recover all of the reservation costs of itsunused capacity – mostly from non-core customers, such as Edison -while withholding the capacity from the secondary market, theutility charged. In 1997, when the complaint was filed, SoCalGashad about 393 MMcf/d of unused capacity that was available forrelease.

Susan Parker

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