NGI The Weekly Gas Market Report
Allowing interstate gas pipelines to sell capacity atmarket-based rates, without first requiring a showing of acompetitive market or mitigation measures, could set the stage formore allegedly “anticompetitive” contract arrangements betweenpipes and marketers – similar to the one between Dynegy Marketingand Trade and El Paso Natural Gas, warned California regulators.
Other gas marketers could “simply duplicate Dynegy’s strategyand artificially increase transportation rates unless…safeguards”to check abuse of market power are in effect should FERC permitmarket-based rates for short- or long-term transportation services,the California Public Utilities Commission said last week inpreliminary comments on the mega-notice of proposed rulemaking(NOPR) and notice of inquiry (NOI).
“If they’re able to artificially inflate prices in this[California] market, then pipelines or marketers will recognizethat they can do it to any market. And if there isn’t a rate cap,there’s going to be major, major problems,” cautioned Harvey Y.Morris, principal counsel for the CPUC, in an interview with NGI.”Without rate cap protection, there would be certain times when thesky would be the limit for what people could charge forcapacity…”
This doesn’t mean that the CPUC is against market-based rates,he said. “We’re very much into relying on the market where we can.”But “there [are] a lot of problems in the market withanticompetitive conduct or the ability to exercise market power,”which California is feeling “first hand right now,” that FERC needsto address before it can even think about removing rate caps andallowing market-based rates, Morris believes.
Kathryn L. Patton, Dynegy’s director of regulatory counsel, saidshe agreed with a number of the CPUC’s remarks – that pipelinesshouldn’t be allow market-based rates without first showing theylack market power and they shouldn’t be permitted to transfer theirmarket power to others. But she took issue with its “collateralattack” on the Dynegy-El Paso contract arrangement. She doubted theCommission’s proposed lifting of price caps would trigger more suchdeals. “I don’t necessarily agree because people still have to makethe commitment of the demand charges, which is not something peopletake lightly.”
Morris believes the Dynegy-El Paso arrangement, which wasnegotiated in December 1997, is the result of what can happen whenpipelines and/or marketers flex their market power. The marketerpurchased almost 1.3 Bcf/d of turned-back capacity on El Paso,which was all of the pipeline’s remaining unsubscribed capacity atthe time. The Dynegy deal has come under considerable fire sincethen, as shippers on El Paso have accused the marketer ofwithholding capacity from the market to drive up prices. The CPUCfears certain issues explored in the NOI, as well as proposals inthe mega-NOPR, could bring more Dynegy/El Paso-like deals.
Of particular concern to California regulators is the request inthe NOI for industry comments on the issue of permittingmarket-based rates for turned-back capacity [RM98-12]. In addition,it said the NOPR’s proposal to lift the FERC-imposed rate cap onshort-term capacity indirectly would remove any market rate ceilingon turned-back capacity, given that turnback “more or less”competes with capacity in the short-term market [RM98-12]. TheCalifornia agency contends that such actions by FERC wouldeliminate the “only” protection against the abuse of market power -by pipes or “other entities” – that presently exists forratepayers.
The CPUC doubts that FERC’s auction proposal would be asufficient mitigative measure to prevent the “hoarding orwithholding of capacity rights,” as it has accused Dynegy of doingin the California market. “…[I]t is not clear how or whether suchauctions will work. Moreover, with interstate pipelines and certainLDCs challenging or resisting the FERC’s auction procedures, it isunclear whether or not such mitigation measures will be enacted orbe sufficient,” it said. The pipelines want to “water the auctiondown a lot” so, in the end, “it might not be an effective tool,”Morris remarked.
Still, he’s not totally down on auctions. “Maybe if a workableauction could be put into effect and it really did stop people fromwithholding capacity from the market, maybe that would be thesolution.” But, he conceded, “those are a lot of what-ifs.”
The CPUC and others insist Dynegy’s acquisition of almost 1.3Bcf/d of turned-back capacity on El Paso, compounded by littlecompetition from released capacity in the California market, waslargely to blame for the two- to three-fold jump in thetransportation rate differential on El Paso and TranswesternPipeline last year. The differential reflects the differencebetween California border prices and Southwest producing basinprices.
“This enormous increase in the rate differential resulted fromDynegy hoarding the otherwise unsubscribed capacity [on El Paso]and refusing to release unused capacity except under illusoryoffers with rates and conditions which were much too high andonerous…,” the California agency said. The CPUC, marketers andend-users challenged the El Paso-Dynegy contract arrangement asbeing anticompetitive, but FERC refused to take action on thegrounds that ratepayers were protected from abuse of market powerunder the rate caps, it noted. The CPUC contends, however, pipelinecustomers will lose that protection if FERC proposals to removerate caps become a reality.
“The point of this illustration of the Dynegy situation is torecognize that there are not just hypothetical problems with theFERC’s proposals. The Dynegy situation is a real problem which hasalready artificially inflated California border prices for anentire year. It is imperative, particularly in turnback situations(with minimal competition from capacity releases), that effectiveand appropriate safeguards are in place to mitigate the exercise ofmarket power before the FERC removes any rate caps,” the CPUC toldfederal regulators.
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