Tossing aside arguments by an Arizona regulatory commission representative who came to San Francisco to articulate his state’s case, California regulators Thursday unanimously agreed to adopt proposed rules for mandating that the state’s major gas and electric utilities bid to keep up to 725 MMcf/d of firm capacity on El Paso Natural Gas serving the state to prevent it from being shifted to neighboring Arizona.

In supporting the measure in a 5-0 vote, the California Public Utilities Commission’s newest decision-maker, Michael Peevey, urged the Arizona regulatory commission to formally participate in California’s statewide procedure examining the issue. Final comments will be due July 12, so the CPUC can vote on two rules covering the state’s major energy utilities when it next meets, July 17, in order to head off the recent Federal Energy Regulatory Commission action authorizing gas marketers now serving California to turn back their capacity to east-of-California customers. FERC’s action is effective July 31.

CPUC President Loretta Lynch said California “could permanently lose” the capacity without the regulators’ latest proposed action. Therefore, Lynch urged that the state’s major utilities become “replacement shippers” to keep the capacity in the state. Peevey said Pacific Gas and Electric Co. was concerned about how this move might affect its contracts with Transwestern Pipeline and urged the commission to take this into consideration before its final action next month.

In its actions Thursday, the CPUC first adopted a proposed rule that would require both the major electricity and natural gas utilities to “sign up for as much of this turned-back capacity as possible at appropriate El Paso delivery points” unless other California shippers do so. Those utilities include: Southern California Gas Co., Southwest Gas Corp., San Diego Gas and Electric Co., Pacific Gas and Electric Co. and Southern California Edison Co. The second proposed new rule would authorize the CPUC’s “pre-approval” of covering the cost of this replacement capacity in the California-regulated utilities’ rates.

The CPUC is concerned that the FERC’s action May 31 doesn’t address the state’s concern that the capacity first be offered to a replacement shipper serving the state. “I believe that [today’s action] demonstrates that California is not asking for a handout,” Lynch said. “We are more than willing to pay for our fair share of pipeline capacity, or course, particularly pipeline capacity that was certificated by FERC to serve the California market.

“El Paso pipeline is required to serve the full, certificated needs of all of its customers. If El Paso had built and made available enough capacity to serve the growing needs of its customers all along its system, we would not be in today’s unprecedented situation as the representative from Arizona discussed. Arizona, given the capacity constraints, clearly has a policy dispute with California and would like the capacity now under contract to California, but that is not the case because that line [in Arizona] has not been expanded.”

The FERC case goes back to April 4, 2000 when the CPUC filed a complaint with FERC, challenging what it called “anti-competitive” contracts between El Paso and its marketing affiliate, El Paso Merchant Energy. The CPUC has alleged in FERC proceedings that El Paso and its affiliate “withheld substantial amounts of interstate pipeline capacity to California, causing $3.2 billion of excessive natural gas costs to California consumers.”

The CPUC interprets the FERC’s latest order as requiring east-of-California customers to decide by July 31 how much El Paso capacity rights they will need in so-called “contract demand” (CD) in the near future, and in addition, allowing marketers currently serving California under CD contracts to turn back between 592 and 725 MMcf/d of firm capacity to the east-of-California customers to meet their new demands.

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