Taking seriously the likelihood that gas supply will remain tight and prices volatile, California’s two major gas utilities late Tuesday outlined their visions for opening up the market and infrastructure for more gas-on-gas competition. The details were filed at the California Public Utilities Commission (CPUC) as part of the CPUC’s Order Instituting Rulemaking (OIR).

The utility proposals drew a measure of skepticism and questions from stakeholders concerned about who will pay for system upgrades designed to bring in new supplies, including liquefied natural gas (LNG) imports.

Edwin Guiles, CEO of Sempra’s two major utilities, Southern California Gas Co. and San Diego Gas and Electric Co., said California faces “uncertainty and challenging times” in trying to work out of the aftermath of the 2000-2001 crisis. Sempra’s utilities are asking the CPUC to “adopt new policies that will allow us to provide the resources that will help California’s economy prosper now and in the future.” That means importing LNG into Sempra’s utility system and bringing in more supplies from the Rockies — both of which will require enhancements of the Sempra utilities’ gas system.

“A greater diversity of supply will lead to competition and help drive down natural gas prices for consumers,” Guiles said. “In addition, it is an essential element to ensuring future supply reliability.”

While sharing the utilities’ concerns about a “tightening of the supply/demand balance,” a CPUC staff member overseeing the gas proceedings said the regulators are particularly concerned about higher prices and volatility. “Along with that issue, the biggest issue arising in the natural gas market is the proliferation of LNG terminal proposals along the Pacific Coast.

“How many of these terminals are ultimately going to be built is a big question,” said the CPUC staff gas expert. “There is also a big question of about how much you can stifle the demand for gas by demand-response and energy efficiency programs. Those are big issues that really have to be addressed in the next couple of years.”

In its plans submitted to the CPUC, SoCalGas proposed: (a) enhancing the pipeline delivery system; (b) integrating the SoCal and SDG&E gas systems and providing one transportation rate throughout the southern-half of the state; (c) establishing a firm access rights system on capacity coming into the state; and (d) further diversifying supply sources.

Because of its corporate interest in LNG and plans to build terminals in North Baja California and Louisiana, Sempra is viewed suspiciously by some of the stakeholders, and parts of the SoCalGas proposal are causing concerns as articulated by several energy attorneys who represent varying competing interests to Sempra’s. SoCal’s proposal to roll-in the costs of the system enhancements to its transmission pipeline and storage system is viewed as favoring LNG projects in North Baja over ones elsewhere.

The utilities argue that the added supplies from diverse sources will result in lower overall average gas costs for all customers. Stakeholders want the projects causing the system upgrade costs to pay for them as is done on any new gas source that hooks into an existing interstate transmission system.

“When you have Sempra as a player in the (LNG) projects and SoCal advancing a pro-Sempra position, I just can’t take it seriously,” said Pat Power, a California-based energy attorney and former CPUC law judge, who now represents the City of Long Beach municipal energy department. The muni is backing Mitsubishi Corp.’s plans for building a LNG terminal in Long Beach harbor.

“I have to look at it as SoCal trying to promote the Sempra interests [when it advocates rolled-in rates].” In the past, Power alleges that the state has seen utility-affiliate abuse in the relationship between Pacific Gas and Electric Co. and Pacific Gas Transmission (now named Gas Transmission Northwest). “The CPUC made findings that there were conflicts of interest and did nothing about it,” he said.

Because of the concerns of undue affiliate influences and the always tough issues of allocating costs, Power agreed it would be quite a feat if the CPUC can complete the two-phase gas restructuring proceeding by the end of the year. Ultimately, he thinks the issue of merging the two Sempra gas utility systems will be on the table in the proceeding or concurrent to it.

“The SDG&E ‘brand value’ — if it exists — is on the electric side, not the gas business,” Power said. “There isn’t a lot of gas consumed in San Diego outside of the power plants. My expectation is that they will seek a single gas rate, too.”

The CPUC proceeding, which is targeting a Phase I decision this summer is going to have to assess the general regional gas demand/supply activity throughout the West. “How much gas we can realistically expect to come to California given the growing demand in nearby states (Nevada and Arizona particularly) is another issue we have to examine,” said the CPUC staff member, who confirmed that a general “let-the-market-decide” philosophy may still embody a lot of the ultimate direction of the so-called gas OIR.

“We have to take into account what the market has done the past few years and recognize what we might need to do to protect the interest of California consumers,” the staff member said. “Some of those issues have been raised, and there are things that we might consider doing, such as having an emergency supply reserve.”

Demand-side response programs, while crucial, the CPUC staff member said, most likely will not be covered in any depth in this OIR, but rather in other cases that arise at the CPUC.

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