FERC Chairman James J. Hoecker has signaled that the Commissionis investigating the causes for the rapid escalation in natural gasprices in California and elsewhere in the nation.

“Our energy market staff is continually monitoring theCalifornia situation and the Northwest, and the Northeast, for thatmatter. They are calling buyers and sellers and looking atindividual transactions,” said a knowledgeable source at FERC.

While the Natural Gas Decontrol Act of 1993 removed theCommission’s authority over first sales of natural gas and wellheadprices, under the Natural Gas Act FERC still has jurisdiction oversales for resale by interstate or intrastate pipelines or LDCs ortheir affiliates. The jurisdiction applies except on sales by thoseentities directly to a consumer. Admittedly, this is a “limitedclass” of transactions, the source said.

All who sell in the market do so under FERC blanketcertificates, which the Commission could revoke if it found misuseof the certificate, the source said. It could also add terms andconditions to those certificates.

There also is some question as to whether the Commodity FuturesTrading Commission might have pre-emptive jurisdiction over onlinetransactions, such as those by EnronOnline at the Californiaborder.

In addition, “some of us [at FERC] believe we have authorityover the gray market” of bundled sales and transportation. “Onecould argue that the transportation was being overvalued when it ispart of a high-priced contract.”

In an emergency filing made by San Diego Gas and Electric(SDG&E) last week, FERC has been asked to look at just thatpossibility. Also, the California utility has proposed that theCommission resurrect the price cap on the secondary market, but theCommission source questioned the effectiveness of such a move sinceit doesn’t appear there’s much capacity release going on in theCalifornia market.

FERC is asking industry to file comments by Wednesday (Dec. 13)on SDG&E’s emergency bid to immediately reinstate price caps onshort-term capacity releases for service to the California borderand to points of interconnection between interstate pipelines andstate LDCs. The utility proposes that the caps stay in effect untilMarch 31, 2001.

This is a “very shortened time frame” for filing comments, aCommission spokeswoman said, indicating that FERC intends toquickly respond to SDG&E’s request for emergency relief.

SDG&E, a Sempra Energy utility, made the emergency plea asprices for natural gas delivered to the California-Arizona borderskyrocketed by more than tenfold over those of last year,surpassing the $50/Mcf mark last Thursday. Gas delivered to theSouthern California Border hit a high of $69 per Mcf yesterday.

“The market for interstate pipeline capacity in California isshowing significant distortions,” the utility told FERC, addingthat “swift action” must be taken by the Commission to “avoid thenatural gas price crisis now looming.”

Absent this “limited relief” from FERC, California may be forcedto declare a state of emergency “in the immediate future to avoidsubstantial and irreparable harm to the gas and electric consumers”in the state, SDG&E cautioned [RP01-180].

Specifically, SDG&E is proposing a cap that would reduce the$50/Mcf price for natural gas to less than $10/Mcf, or by about80%. In addition, it has asked that the transportation andcommodity components of rates for bundled sales be statedseparately “so that the cap can be enforced on these transactions.”In the alternative, SDG&E proposed that bundled transactions becapped at “150% of the sum of a reported [national] averagecommodity sales price plus the as-billed-rate for interstatetransportation.”

In another attempt to win “immediate relief” from the high gasprices in California, Southern California Edison asked FERC last weekto act quickly on a complaint seeking to abrogate the 1.22 Bcf/dtransportation contract arrangement between El Paso Natural Gas andits affiliate, El Paso Merchant Energy (see Daily GPI, Dec. 11).

Immediate resolution of the complaint, which was brought by theCalifornia Public Utilities Commission (CPUC), is critical in lightof the “extraordinary events in the California gas and electricitymarkets,” Edison said. It claims that El Paso Merchant is reaping”monopoly rents in excess of 7,000% higher than the just andreasonable rate approved by the Commission” for capacity on El PasoNatural Gas [RP00-241].

Sempra Energy Chairman Stephen L. Baum and Edwin A. Guiles,Sempra’s group president of regulated operations, have called onCalifornia Gov. Gray Davis to support SDG&E’s emergency filingat FERC. This gas price cap, combined with SDG&E’s proposal forcost-based electric generation price caps, “would allow a return tomore reasonable natural gas prices for generation in California andensure these benefits are passed on to customers through cost-basedelectric rates,” they said in a letter to Gov. Davis.

In a speech last Thursday to the Cambridge Energy ResearchAssociates, Chairman Hoecker acknowledged that this was not the”season to be jolly” for the natural gas and electricity markets inCalifornia.

“The energy crisis is only deepening in California as naturalgas and electricity supply problems become manifest and give riseto other market dysfunctions,” he said. This “crisis” prompted Gov.Davis last week, when upon lighting the Christmas tree inSacramento and then turning it off for reliability reasons, toremark: “We’re going to send FERC a picture of the tree goingdark.”

Davis’s comments reflected a “perfectly understandable level offrustration with a [power] market that is capacity-starved, poorlystructured and conceivably manipulated, but where neither quicksolutions nor culprits are easy to come by,” Hoecker noted.

With respect to the state’s electric market, the Commissionfinds itself in an “uncomfortable position” now, the chairman said.”It is being looked to for sure-fire remedies to reliability andpricing problems that are (at least for now) often beyond its legalauthority and its traditional range of responsibility.”

If California officials and FERC aren’t careful, they couldeasily “learn the wrong lessons” from market events in the state,Hoecker believes. “Fear of the justified anger of consumers maypanic us into doing the wrong things, if we take the wrong lessonsfrom what we have seen.”

Some of these “wrong lessons” would be: 1) competitive marketsdon’t work; 2) states can control their own energy and design theirown exclusive markets; 3) retail markets are separate fromwholesale markets; 4) “we just need to get the bid structure for aspot market right, then everything else will be fine;” and 5) if atfirst you don’t succeed, go back to old-style regulation.

“Some of the most important things that we can do are not thethings that most people will recognize as dramatic, but many ofthem are the very solutions that we have known from the beginningneeded to be done, but were too politically difficult,” Hoeckersaid.

Above all, California and FERC “have to get beyond the turffights that in part have led to the circumstances that we are in.We also need to get all [power] transmission under the sameframework of open-access rules, whether those facilities arepublicly owned or investor owned.”

Contrary to reports, “these difficult times find us [at FERC]hard at work formulating changes for California, examining themerits of RTO proposals and current ISO operations, andinvestigating markets for conduct that manipulates price indiscriminatory or otherwise unlawful ways.” In fact, Hoecker noted,”I have asked our staff to conduct unannounced on-the-ground auditsof plant outages and bidding behaviors where needed.”

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