Sempra Energy’s utility overhaul of the Southern California natural gas transmission pipeline and storage system with its new firm access rights (FAR) was implemented late last month. And while experts agree that it will take several months for the market to make a complete transition to the new system, trading liquidity and volume were promising at the delivery location, providing ample data for NGI to debut its new SoCal Citygate price index on Oct. 1.

The new system is aimed at providing more flexibility and reliability in the region. Formerly only end-user customers could hold transmission rights on the Southern California Gas (SoCalGas) system, but now any party (end-user; wholesale customer; SoCalGas and SDG&E gas-buying units; California gas producers; marketers; core aggregators or energy service providers; storage customers; and other creditworthy parties) can pick up firm rights, similar to the way it is done on the Pacific Gas & Electric (PG&E) system.

Real beneficiaries are found among marketers and others with interstate pipeline firm rights, something many of the local generators do not have, one municipal operator said. He sees it as a “flawed program” that went through numerous changes over six years, during which a lot of the more “toxic stuff” was removed. It was sold as a reliability product, but the generators didn’t accept that rationale.

Sempra Energy director for energy market supply and capacity products Rodger Schwecke, told NGI he thinks the market was as prepared as it could be for the transition and the majority of the customers were “very pleased,” although he acknowledged some individual customers may be unhappy and will have to get used to the new operations.

A major generator in Southern California questioned the need for the extensiveness of the changes; he questions who is benefiting the most — Sempra shareholders or utility customers — and whether it would have been better to leave the system more or less the way it was. Schwecke disagreed, noting a “few start-up bumps,” but with a “more seasoned operations now, things are working.”

The new world of intrastate transmission in one of the nation’s largest gas markets was resisted for a number of years by many stakeholders, particularly major generators in the region. (Southern California Edison Co. was asked for a reaction to the Oct. 1 start-up but declined to respond to several queries from NGI.) Generally, the generators didn’t think the change would do much for their operations, and in some cases they see it complicating their operations.

“A lot of the existing contracts call for [Southern] California border deliveries, so once those deals start changing out, I would think there would be a lot more action there [at the new SoCal Citygate],” said Chris Garner, director of the city of Long Beach Gas and Electric Department. He said he thinks the new pricing point and SoCalGas transmission/storage operations may help his municipal gas utility operations in the long run.

Long Beach has a long-term deal with Merrill Lynch for most of its gas supplies, tied to a Southerrn California border price, but Garner said the city may change some of its pricing to the SoCal Citygate price. “Physically, however, I don’t think it will change much for us,” he said, noting that the Merrill deal looks secure despite the ongoing Wall Street crisis, which he and other municipal utility operators in the state are keeping a wary eye on.

“As far as we can tell now everything is going fine. With them being purchased by Bank of America, our deal is pretty secure,” he said. Garner said he also is feeling pretty good about wholesale gas prices going into this winter, telling NGI that prices appear to be back “where they were last year, or even a bit lower.”

The municipal electric utilities that make up the Southern California Public Power Authority (SCPPA) group all have their own power plants and receive gas supplies at their individual plant citygates. They aren’t anticipating much impact from the new Sempra utilities’ transmission/storage operations that now will operate with a bid-based FAR and off-system (OFF) deliveries system, a SCPPA source said.

(Sempra completed an auction for FAR in July and August, netting contracts that averaged 2.8 Bcf/d of capacity rights, Schwecke said. The utilities have a filing pending at the California Public Utilities Commission (CPUC) for an auction for firm rights. In the auction, most of the FAR capacity was taken in the northern transmission zone, including receipt points of Kramer Junction, Topock and North Needles; limited capacity was taken in the southern zone that includes Ehrenberg; and a “fair amount’ was taken at Wheeler Ridge.)

SCPPA uses Shell’s gas marketer, which acts as a balancing agent between the gas suppliers for the individual munis and their specific generation plants, which are spread around the southern half of the state.

“We’re happy where everything is, but overall we see it as sort of an unnecessary program,” said a large muni power generator. “It was a solution that didn’t really have a problem.”

Will the new SoCal Citygate get the liquidity that was originally envisioned? “I think it is going that way,” said the generator. “But I think a lot of people found it pretty cumbersome to get by the FARs, to handle them and manage [firm access]. SoCalGas used to take care of a lot of that stuff, but now it’s going to the major marketing companies. They are picking up the FARs as intermediaries.”

In response to the creation of the new system (see Daily GPI, April 24), NGI formed a new SoCal Citygate index. If volume and number of deals utilized by NGI for the October bidweek are any indication, liquidity was not a problem at the new point. After experiencing no trading volume Wednesday of last week (Sept. 24) on the first day of October Bidweek, SoCal Citygate activity ramped up on the following Thursday and Friday to provide a wealth of data from which NGI could use to calculate an index. In its Bidweek Survey dated Oct. 1, NGI debuted a SoCal Citygate pricing point with an average of $5.59 and a range of $5.17 to $5.85. Those prices were based on 38 individual deals comprising a volume of 180,000 MMBtu/d.

By comparison, NGI‘s Southern California Border index, which is commonly used as the basis for supply contracts to price gas at the California/Arizona border, averaged $5.67 for October, with a range from $5.11 to $6.12, 121 individual deals and a volume of 641,000 MMBtu/d. Several sources were surprised that the border index for October was 8 cents higher than at the citygate when most folks were looking for the citygate to trade at about a nickel premium. Most sources agreed that this apparent pricing anomaly was mainly the result of the timing of the deal making this month and that a normal pricing relationship where the citygate trades at a premium to the border would likely develop over time.

On Wednesday (Sept. 24) a western trader reported seeing bids of $5.72 and offers of $5.78 but no deals for October at the SoCal Citygate. That range was starting out below the Southern California border, which had more than 100 MMcf/d actually trade in the low $5.80s on Wednesday, he said. But that’s just a matter of timing with mismatched bids and offers, which is understandable with a brand new location, he said, adding that the relationship will get adjusted eventually.

But the ice was breaking (so to speak) slowly Thursday, as IntercontinentalExchange (ICE) reported that 52,500 MMBtu/d of October baseload traded that day at an average of a little more than $5.72.

“It [the SoCal Citygate] will take some time to get going,” said a Calgary-based producer, who added that he saw a range of $5.63-85 posted on ICE Thursday (Sept. 25). His company is going to wait a while; he said he would do Southern California border deals for October “and then maybe jump in” the citygate market in daily trading during the month. He said the industry should expect further growth at the SoCal Citygate in the following months.

A Texas-based producer said she thought most traders had a “wait and see attitude” on the SoCal Citygate. They want to see how other people are going to treat it first, she said. Like her Canadian counterpart, her company is “taking a conservative approach;” it wants to make sure the point is firmly established before participating in trading there. Maybe the initial deals done Thursday (Sept. 25) would help get the ball rolling for others, she suggested.

A Washington, DC-based attorney who represents large California industrial gas users said he was not aware of any start-up problems in the new Sempra utilities system. He was involved in the more than six years of regulatory processing at the CPUC that led up to the new market, with 14 receipt points and six transmission zones for the 3.875 Bcf/d capacity SoCalGas transmission system, which averages about 2.6 Bcf/d in gas flows on an annual basis.

While no one seems to be against the new SoCal Citygate, some generators see it as being “undersold” at the start. Others argue that constraints at older receipt points along the border were cited as the reason for needing the 14 new points and the designation of transmission zones, but they argue that there have not been any real constraints for a number of years other than what the Sempra utilities themselves might have caused by requirements on their system.

“We felt there were ways that [Sempra utilities] were operating their system where they could have made adjustments to relieve the problems if there were any to begin with. They are technical operating requirements that I can’t get into all the details about. They could have done some stuff to move things around,” a muni generator said.

At the outset of the new market taking hold, Sempra’s Schwecke said the utilities have implemented all of their systems, including a new scheduling and nomination system, along with a secondary market. Is he satisfied with the volume and liquidity? “We don’t really track the volume at the citygate,” Schwecke. “We’ve only gone through one cycle so far, and just like any other point, I would assume over time we will get more activity.”

He agrees that there are still deals outstanding whose termination dates run beyond Wednesday (Oct. 1) and use the California border as a pricing point, so over time as these deals expire, it should add to the action at the new SoCal point. In response to another question, Schwecke said he didn’t see any impact on the gas operations or the new market from the ongoing Wall Street credit crisis.

SoCalGas has billed the new pricing point as eventually being the equivalent of PG&E’s well established citygate in Northern California. From what he has seen so far, Schwecke said that is still his expectation.

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