Allowing interstate gas pipelines to sell long-term turnbackcapacity at market-based rates, without first requiring a showingof a competitive market or mitigation measures, could trigger morealleged “anticompetitive” contract arrangements between pipes andmarketers – similar to the one between Dynegy Marketing and Tradeand El Paso Natural Gas, warned California regulators.

Other gas marketers could “simply duplicate Dynegy’s strategyand artificially increase transportation rates unless…safeguards”to minimize the exercise of market power are in effect before FERCpermits market-based rates for turned-back capacity, the CaliforniaPublic Utilities Commission said Monday in preliminary comments onthe mega-notice of proposed rulemaking (NOPR) and notice of inquiry(NOI).

The CPUC doubted 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.”

FERC floated the idea of removing the cap on long-term rates forturned-back capacity in the NOI, according to the CPUC [RM98-10,RM98-12]. California regulators contend that such a move wouldeliminate the “only” protection against the exercise of marketpower that presently exists for ratepayers.

The CPUC and others insist Dynegy’s acquisition of almost 1.3Bcf/d of turned-back capacity on El Paso was to blame for the two-to three-fold jump in the transportation rate differential on ElPaso and Transwestern Pipeline last year. The differential reflectsthe difference between California border prices and Southwestproducing basin prices.

“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 the exercise of marketpower under the rate caps, it noted. The NOI proposal seeking toremove the caps, the CPUC believes, has changed the score.

“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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