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CEC committee backtracks on gas storage idea after generators protest


By the OGJ Online Staff

HOUSTON, Sept. 27, 2001 — After industry protests, the California Energy Commission’s electricity and natural gas committee has backtracked on a controversial recommendation to force electric generators to inject gas into gas utilities’ storage facilities.

But the report to be considered Wednesday by the commission still includes an equally controversial reference to a proposal to require electric generators to sign 15-year contracts for firm capacity on intrastate gas utility systems.

Consideration of an earlier draft report was delayed after various parties, including state utilities, independent generators, consumer groups, and the California Public Utilities Commission, objected to some of its conclusions. The commission undertook the study, which includes a lengthy list of follow up recommendations, after gas prices skyrocketed to more than $10/Mcf last winter.

The CEC report initially recommended rebundling gas utilities’ noncore storage functions to meek peak needs and allocate rebundled storage costs to all customer classes. The CEC staff believed such a requirement would help avoid a repeat of mistakes made in 2000, when electricity generators failed to put enough gas into storage.

But the proposal was rejected by all parties, including market participants, utilities, and independent storage developers. Industry representatives observed long-term contracts will encourage generators to use storage, and generators are making significant investments in storage through participation in open seasons.

Duke Energy Corp. told the commission it is unalterably opposed to rebundling because it would undermine the viability of existing and expanded private storage fields in California. PG&E Corp. warned the idea raises practical and legal questions because the California Public Utilities Commission cannot order generators to store gas. Faced with overwhelming opposition, the CEC staff said it withdrew the proposal.

Sempra Energy, parent of San Diego Gas & Electric Co. and Southern California Gas Co., argued uncertainty about generator demand for gas could be solved by forcing power producers to sign up for long-term gas contracts with take or pay provisions. The utility holding company said its biggest challenge forecasting short-term needs for SoCal Gas was the unpredictability of demand by generators.

‘Profoundly anticompetitive’
In a sharply worded response, the Independent Energy Producers Association called the Sempra proposal “profoundly anticompetitive.” The producer group said, if adopted, the proposal would effectively kill any prospect for competitive intrastate gas transportation.

It forecast such a move would allow Sempra’s utilities to maintain a dominant share of the electric generator market, even if they were forced to compete for customers on the basis of terms and conditions of service.

Duke Energy North America, a unit of Duke Energy Corp., called the Sempra proposal discriminatory with respect to electric generation customers, who make up the largest gas transportation customers in the state. The proposal would end the ability to trade transportation capacity, Duke said.

Long-term firm commitments are an attractive hedge, but there also may be value in “maintaining a spot market to promote competition,” the report concluded. It proposed further study of the issue and its potential impact on the electricity and gas markets.

More controversy broke out over the draft report conclusions that insufficient receipt capacity within California and insufficient capacity on El Paso Corp.’s pipeline system contributed to the high price of gas in the fall and winter of 2000.

The California PUC commented the draft didn’t adequately reflect the agency’s charges of market manipulation by El Paso and its affiliates, allegations El Paso has denied. It also disagreed with the CEC committee about constraints on the intrastate gas pipeline.

Sempra demanded the committee excise from the report all references to more significant gas transmission constraints in its territory, compared to northern California. The utility holding company said the report doesn’t support its contention with evidence.