California regulators Thursday approved a sweeping set of rules for natural gas transmission and storage operations throughout the state, along with establishing a process for resolving the emerging issue of regulating gas quality and heating value from the expected influx of liquefied natural gas (LNG) imports into the state.

The 5-0 action by the California Public Utilities Commission (CPUC) rejected recommendations for delay by an administrative law judge (ALJ). However, the action received immediate opposition from some environmental groups and at least one major utility company.

CPUC President Michael Peevey and some of his colleagues said the CPUC wanted to “send a clear signal to the marketplace” that the state regulatory panel wants to take action in a timely manner and not delay decisions on contested issues. (The ALJ had suggested that issues of gas quality, pipeline/storage and environmental review be deferred, and each examined further in separate new regulatory proceedings.)

The action Thursday closes a nearly three-year-old proceeding that was split into two phases. As part of the action, the CPUC concluded that the state’s natural gas transmission and storage infrastructure is adequate and able to fulfill the state Energy Action Plan goal of assuring adequate, affordable supplies in the years ahead.

California’s new rules governing 7 Bcf/d of gas transmission capacity cover a 10-year future period and envision a global market for supplies while grandfathering historic in-state producers from many of the changes. Future oversight and planning of the state transmission system will be left to a newly created Infrastructure Working Group that will allow all major stakeholders, including state agencies, to monitor system use and identify expansion needs.

For now, “no party has identified a specific example of inadequate infrastructure affecting gas delivery over the next decade,” according to the final order. “Backbone transmission capacity on both the Pacific Gas and Electric Co. (3.28 Bcf/d) and Sempra Energy/Southern California Gas Co. (3.87 Bcf/d) systems is adequate, and we are comfortable with the proposed slack capacity ranges for backbone capacity as proposed by the utilities.”

While annual reserve margins for average years have been between 36% (PG&E) and 49% (SoCalGas), in the newly adopted 1-in-10 dry-and-cold-year planning scenario, Sempra’s utilities said “slack capacity,” or reserve margin, should be 20%-25%, and for PG&E it should be in the 11-25% range. The CPUC said, however, that the utilities will have to demonstrate the adequacy of their transmission pipeline/storage systems every two years, starting July 1, 2008.

The CPUC directed Sempra’s utilities to file an advice letter within 90 days to implement a proposal to offer tradable capacity rights on its local transmission system, as well as revisions to its open season commitment period. PG&E and Sempra are each directed to file advice letters by Nov.1 to implement the revised tariff specifications embodied in the changes. They must provide a deviation for gas flowing through each interstate pipeline connected to their respective systems, if requested, for a period of time no greater than 12 months from the date of this decision.

Thursday’s CPUC action covered at least a dozen major areas, transmission capacity just being one. The highlights include:

With an eleventh-hour oral argument held by the CPUC ALJ last Tuesday, gas quality was an unexpectedly high-profile issue in the second phase of the statewide gas proceeding, spilling over into general interest news media coverage with major electric utilities and environmental interests weighing in heavily. Even the arcane global gas measurement for heating value, the “Wobbe” number, was elevated to central status in the regulatory debate.

Under the rules adopted by the CPUC, the Wobbe for any imports would be capped at 1,385, a compromise brokered by Peevey over a 1,400 level recommended by Sempra’s two utilities. (Southern California Gas Co.’s current limit is 1,437, Peevey said.) In the future, gas operators, such as Sempra Energy’s two utilities, are required to avoid getting slugs of gas in the system with excessively high heat content that could causes problems at a major gas-fired electric generation plant or in home and small business water heating systems.

SDG&E and SoCalGas were directed to file revised (Rule 30) tariffs that contain the following specifications: minimum Wobbe index of 1279; maximum Wobbe index of 1385; minimum heating value of 990 Btu/scf; and maximum heating value of 1,150 Btu/scf.

“This provides the needed regulatory certainty that will encourage new investment in the LNG infrastructure,” said Commissioner John Bohn. “Looking forward, California must maximize its alternative sources of gas as we deal with a global market in order to have the best chance of keeping the costs of gas in some degree of order.” In addition, Bohn said it was important to have a gas quality index in order to access new supplies.

“Going forward there will be not just a national market, but a global market for gas, and we need to make sure we can access all of those options,” said Bohn, who noted that he would have supported a broader gas quality standard of 1,400 Wobbe.

Opposition Quick to Respond

However, organized opposition to a coastal liquefied natural gas (LNG) terminal in California, along with critical environmental organizations and utilities, Friday raised the spectre of challenging at least part of the sweeping new state natural gas rules. At least one group threatened to file a lawsuit in state Superior Court Monday.

An anti-LNG group called Ratepayers for Affordable Clean Energy, a coalition of environmental, consumer and community groups, said it will file the lawsuit in state court, challenging the decision’s lack of environmental review.

The opposition contends that the new rules should have been subjected to review under the California Environmental Quality Act (CEQA), an aspect that Peevey strongly disputed in introducing the issue. Nevertheless, the head of the South Coast Air Quality Management District (AQMD) said his regional environmental regulatory agency would “aggressively challenge” the CPUC’s action.

Southern California Edison Co. also criticized part of the new rules related to natural gas quality and heating value standards. Edison said in a statement that the new CPUC rules for the gas industry are “inconsistent with the nominal design of our Mountainview power plant [in Redlands, CA]. Therefore, we will need to gain operating experience to confirm that all existing emissions and operating capabilities will continue to be achieved when operating with LNG.”

A source indicated that Edison has not ruled out the possibility of challenging at least part of the CPUC action, but no decision is likely to be made for a few more business days while the utility’s internal experts review the final order.

Peevey said he “respects the view” of AQMD, but he thinks the emissions regulatory unit is wrong. Another CPUC regulator, Rachelle Chong, emphasized that gas was the cleanest of the fossil fuels and demand for it was growing, but she said the CPUC’s action was not “sanctioning LNG.” It is merely establishing the “terms for future access,” so developers can plan projects more specifically.

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