NGI The Weekly Gas Market Report
Giving gas unbundling efforts in California a shot in the arm,FERC last week approved a major agreement to restructure thelong-term transportation and gas sales arrangements that haveenabled Southern California Gas (SoCalGas) over the years toreceive imports of Canadian gas through its paper pipelineaffiliate, Pacific Interstate Transmission Co. (PITCO).
The net effect of the settlement calls for PITCO to bedissolved, and for the U.S. affiliate of Pan-
Alberta Gas Ltd. (PAGUS) to step into its shoes. As itssuccessor, PAGUS will be directly assigned all of PITCO’s capacityon Northwest Pipeline and PG&E Gas Transmission, NorthwestCorp., which amounts to 244,000 MMBtu/d. It will use most of thatcapacity, 144,000 MMBtu/d, to provide SoCalGas with gas deliveriesuntil October 2003 [CP98-370].
The only remaining stumbling block to the settlement was anobjection to PITCO’s proposal to permanently assign to PAGUS itsentire capacity on the two pipelines, particularly the 100,000MMBtu/d on PG&E/Northwest, rather than release it. PITCO hadasked FERC specifically for a waiver of its capacity-release rulesto carry this out. But DEK Energy, a marketer, insisted that sincePAGUS didn’t need the entire amount of capacity to meet thereduced-contract needs of SoCalGas, there wasn’t any justificationto assign the capacity outside of the capacity-release mechanism ata lower price.
The Commission disagreed with DEK, saying that allowing thedirect assignment of capacity at the price currently paid by PITCOwouldn’t be “unduly discriminatory or anticompetitive…” Ifanything, it said the restructuring proposal, including the directassignment of capacity, would “preserve the status quo vis-a-visDEK’s competitive position” in the California market. Further, FERCindicated it was concerned that if it rejected PITCO’s request forcapacity assignment, it could trigger a chain reaction causingother parts of the settlement to unravel.
The settlement also stipulates that PAGUS will honor acontract-specific operational flow order (OFO), which has beenintegral to PITCO’s existing agreement with Northwest Pipeline,upon the transfer of PITCO’s capacity on Northwest andPG&E/Northwest to the Canadian aggregator. Obtaining acommitment from PAGUS on the OFO issue was critical to Northwestand its customers, which have depended on PITCO’s gas flows toprovide displacement service to shippers along Northwest’s route.
The agreement would hold PAGUS to the terms of thecontract-specific OFO until October 2003, requiring it to deliver144,000 MMBtu/d from Stanfield, OR, to El Paso Natural Gas andTranswestern Pipeline at the interconnections between the pipelinesand Northwest at Ignacio, CO, where it would then be picked up bySoCalGas. After 2003, PAGUS has offered to continue making thedisplacement deliveries in return for payment from Northwest. TheCommission declined to determine “at this time” to what extentNorthwest would be able to pass through to its shippers anyshortfalls in revenues resulting from the post-2003 displacementservice by PAGUS. This, it added, should be addressed in a ratecase.
Under the agreement, PITCO will be required to pay $16 millionto Northwest in an escrow account for the benefit of the pipeline’sshippers in the event the displacement capacity on Northwest’ssystem is compromised following the expiration of thecontract-specific OFO. The money could be used to build additionalpipeline facilities on Northwest’s system to eliminate or reducereliance on displacement.
FERC also granted PITCO’s request to abandon by sale its 30%interest in 351 miles of looping on Northwest. Under this deal,PITCO has agreed to pay Northwest an exit fee of $2.3 million tocover its share of the operating and maintenance expensesassociated with its 30% ownership interest until the operatingagreement expires in October 2003.
The settlement was largely in response to a 1994 globalsettlement between SoCalGas and its customers in which the LDC wasstrongly encouraged to restructure its gas supply andtransportation arrangements with PITCO, which most agree hasoutlived its purpose. PITCO was created solely to buy and transportCanadian gas supplies for resale to SoCalGas at a time, in theearly 1980s, when LDCs were severely restricted in their ability topurchase gas at the international border and transport it. Duringthat time, PITCO had been exempted from the Commission’srestructuring rulemakings. SoCalGas now is shedding its long-timearrangement with PITCO as part of its effort to become morecompetitive.
The settlement requires for SoCalGas ratepayers and shareholdersof Sempra Energy, SoCalGas’s parent, to share the costs associatedwith the PITCO restructuring, 82.5% and 27.5%, respectively. Underthis scenario, the amount of the passthrough to SoCalGas would belimited to $31 million, which is what PITCO would be required topay PAGUS for assuming its contract obligations. In the event aDec. 31 deadline isn’t met, SoCalGas will be held at risk for allcosts associated with ongoing PITCO service.
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