The California Public Utility Commission (CPUC) Thursday granted the state’s major utilities the authority to turn back interstate pipeline capacity under expiring long-term agreements and to reconfigure their capacity holdings, potentially with more capacity on pipelines transporting less expensive supplies from the Rocky Mountain region and from proposed liquefied natural gas (LNG) import terminals in the state and in Mexico.
About 2.5 Bcf/d of California core and non-core utility transportation contracts will expire in the next two years, including about 1.5 Bcf/d held by Sempra’s utilities, Southern California Gas (SoCalGas) and San Diego Gas & Electric (SDG&E), on El Paso Natural Gas (1,150 MMcf/d) and Transwestern Pipeline. The ruling gives the utilities flexibility to determine how much of that capacity will be retained for utility use and how much new capacity or access will be acquired on other pipelines.
“Today’s decision grants the utilities authority to negotiate for reduced amounts of capacity on certain interstate pipelines in order to seek a more diversified portfolio of interstate pipeline capacity in order to help ensure California’s future supply needs can be met at a reasonable price,” said CPUC President Michael Peevey. “Additionally this decision establishes a process for interstate pipeline capacity contract approval.”
In December 2003, the CPUC and the California Energy Commission sponsored a two-day workshop on the state’s long term gas needs and whether the current levels of infrastructure and supply were adequate enough to serve the needs of residential and business customers now and into the near future. A main theme during the December workshop was the conclusion that gas production in North America was not expected to keep up with future demand. There also was uncertainty whether there would be sufficient pipeline capacity under firm contracts to meet California’s needs given the expiring utility contracts.
“Today’s natural gas [Order Instituting Rulemaking (OIR)] decision represents a positive step in addressing these” concerns, said Peevey, noting the importance of moving quickly to provide regulatory certainty to the state’s utilities.
On the subject of LNG, an administrative law judge’s decision was amended to the order to establish Otay Mesa and two other locations, Salt Works near Los Angeles and Center Road near Oxnard, CA, as common receipt points for the purposes of gas delivery into both the San Diego Gas & Electric and Southern California Gas markets from proposed LNG import terminals.
Crystal Energy LLC and BHP Billiton are planning two separate LNG terminals offshore Oxnard with a total of about 1.3 Bcf/d of proposed sendout capacity. Sound Energy Solutions and ConocoPhillips are planning an LNG terminal near Long Beach with about 700 MMcf/d of sendout capacity. Sempra and Shell are planning the 1 Bcf/d Energy Costa Azul LNG terminal in Baja California Norte, which is among several other terminals proposed for northwestern Mexico, including an offshore Tijuana project proposed by ChevronTexaco and a project in Sonora proposed by DKRW Energy LLC (see NGI’s special report on North American LNG Import Terminals).
Commissioner Susan Kennedy said the designation of Otay Mesa as a common receipt point is significant because it “encourages the market to move additional supplies of natural gas into Southern California now, and it sends a very important signal to potential LNG suppliers that if you are going to build in Mexico you will have access into both the SDG&E and SoCalGas systems.”
Commissioner Loretta Lynch proposed an alternate decision, later rejected by the CPUC majority, that concluded that the plan to immediately establish a new receipt point at Otay Mesa would be a “rush to judgement,” giving LNG preferential treatment over other supply alternatives. Lynch’s alternative called for evidentiary hearings on the receipt point issue over the next four months.
Commissioner Carl Wood backed Lynch, saying California’s utilities should first have to file open access tariffs and the Commission should “evaluate the needs and costs associated with any new receipt point.”
But Kennedy said the Lynch alternative would “delay our ability to move additional supply into the system by requiring the utilities to file additional applications. [It] questions the need for LNG altogether and continues to study LNG for a dangerously long time,” she said.
“The decisions that we make today with regard to planning for what we know are constraints in the supply of natural gas are no less consequential that the decisions that were made before the electricity crisis,” said Kennedy. “We can all see the shortage of natural gas supply from where we sit right now. We are experiencing the high price of natural gas constraints today and we do not have a moment to lose in addressing this growing threat.”
The CPUC order also requires SoCalGas to file a plan in December to allow tradable firm access rights on its system. The proposal would require the utility to set up a trading system that will provide shippers with a means to trade in-state receipt point access.
A proposal by Sempra to integrate SoCalGas’ and SDG&E’s gas transportation rates was put off until December. The utilities must file a separate application on that matter.
The CPUC order also requires that Pacific Gas & Electric file an application that would make certain that third-party gas storage providers are afforded an opportunity to compete to address the natural gas storage needs of core utility customers.
Peevey said that the CPUC will address additional gas supply, infrastructure and other issues in a Phase II proceeding with evidentiary hearings at a later date.
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