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Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: quoted-printable X-From: IssueAlert@SCIENTECH.COM X-To: ISSUEALERTHTML@LISTSERV.SCIENTECH.COM X-cc: X-bcc: X-Folder: \Mark_Haedic_Jan2002\Haedicke, Mark E.\Inbox X-Origin: Haedicke-M X-FileName: mhaedic (Non-Privileged).pst <http://secure.scientech.com/images/spacer.gif<;=09 <http://secure.scient= ech.com/images/spacer.gif<=09 <http://secure.scientech.com/_IA_TEST/Corner_TL.jpg<=09 <http://secure.s= cientech.com/images/spacer.gif<=09 <http://secure.scientech.com/_IA_TEST/C= orner_TR.jpg<=09 =09 <http://secure.scientech.com/rci/wsimages/ia_banner02.gif<=09=09 <http://secure.scientech.com/_IA_TEST/Corner_BL.jpg<=09=09 <http://secur= e.scientech.com/_IA_TEST/Corner_BR.jpg<=09 <http://secure.scientech.com/images/spacer.gif<;=09 <http://secure.sciente= ch.com/rci/details.asp?ProductID=3D971< <http://secure.scientech.com/images/spacer.gif<;=09 <http://secure.scient= ech.com/images/spacer.gif<=09 =09 <http://secure.scientech.com/rci/wsimages/will100border_copy.jpg< <http://secure.scientech.com/_IA_TEST/Corner_TL.jpg<=09=09 <http://secur= e.scientech.com/_IA_TEST/Corner_TR.jpg<=09 =09 SPONSORS <http://secure.scientech.com/images/spacer.gif<; <http://secure.scientech.= com/main/ad_redirect.asp?URL=3Dhttp://wwwthestructuregroup.com<; <http://secure.scientech.com/images/spacer.gif<; INFORMATION PRODUCTS <http://secure.scientech.com/specialpages/Generation_Technology_IAs.asp< = <http://secure.scientech.com/images/spacer.gif<; <http://secure.scientech.c= om/specialpages/Generation_Technology_IAs.asp< <http://secure.scientech.c= om/images/spacer.gif< CONFERENCES <http://secure.scientech.com/images/spacer.gif<; <http://secure.scientech.= com/main/ad_redirect.asp?URL=3Dhttp://cpunmsu.edu/<;Center for Public Utilties The Basics: Practical Skills for a Changing Utility <http://secure.scientech.com/imag= es/spacer.gif< <http://secure.scientech.com/specialpages/New_Rate_Card.asp<= <http://secure.scientech.com/images/spacer.gif<;=09 <http://secure.scientech.com/_IA_TEST/Corner_BL.jpg<=09=09 <http://secur= e.scientech.com/_IA_TEST/Corner_BR.jpg<=09 December 17, 2001=20 Competition Approved for California's Intrastate Natural-Gas Pipelines=20 By Will McNamara Director, Electric Industry Analysis [News item from Associated Press] California state power regulators voted D= ec. 11 to deregulate further the transmission of natural gas within Souther= n California, a decision hailed by the industry and derided by consumer adv= ocates. The California Public Utilities Commission (CPUC) voted 3-2 to appr= ove a proposal that allows Southern California Gas Co., the nation's larges= t gas utility, and San Diego Gas & Electric Co. (SDG&E) to sell space on th= eir "backbone" transmission pipelines. These pipelines carry natural gas fr= om out of state to a smaller distribution system in California that then tr= ansports it to homes, businesses, factories, and power plants. Analysis: This controversial vote by the CPUC took place last week, but has= not received a great amount of industry analysis. This is rather surprisin= g because the vote carries enormous potential impact for the way in which n= atural-gas capacity is bought and sold along pipelines owned by Southern Ca= lifornia Gas Co. and SDG&E in the southern part of the state. Considering t= he fiasco that opening the state's electric market became over the last yea= r, it is a risky move for California's regulators to open a competitive mar= ket for the right to transport gas along these pipelines at this time, even= though the issue has been under debate at the commission for years. Howeve= r, the rationale for the decision is that the new system will allow custome= rs to better control the point from which their natural-gas supply originat= es, which theoretically should lower costs and preserve space along the pip= elines that the customers don't need. Critics of the plan, especially The U= tility Reform Network (TURN), say that allowing competition along the natur= al-gas pipelines in California could allow fewer companies to control most = of the pipeline space, which could in fact cause the opposite of the intend= ed effect and drive up energy costs. A case that has been used by both side= s of the debate is that of El Paso Corp., which found itself in a lengthy l= awsuit this year when it was charged with giving preferential access to its= pipeline to one of its affiliates, which allegedly played a role in drivin= g up energy costs in the state. Before analyzing the potential impact of the CPUC's ruling, let's first est= ablish specifically what the ruling entails and some background of the comp= anies involved. Put into a nutshell, the ruling creates a competitive marke= t for the right to transport and store natural gas along the pipelines owne= d by Southern California Gas and SDG&E, which are both subsidiaries of San = Diego-based Sempra Energy (NYSE: SRE). As noted, Southern California Gas is= ranked as the largest natural-gas distribution utility in the country and = serves a territory of 23,000-square-miles that ranges from central Californ= ia to the Mexican border. Following a standard that is already in place among interstate pipelines, i= ncluding the ones that transport power into California, both of these compa= nies will now be allowed to sell large industrial customers space on their = intrastate "backbone" pipelines, giving customers firm transportation right= s on the pipelines. The pipelines are referred to as "backbone" because the= y are part of the smaller distribution system that transports power to fact= ories and power plants (along with homes and businesses). It is important t= o note that the CPUC's ruling impacts only large consumers of natural gas i= n California, which includes electric generating plants. Residential and sm= all business consumers that use natural gas will continue to have regulated= gas-transmission costs.=20 Under the new auction system, power producers and industrial natural-gas cu= stomers of the two companies will bid to buy pipeline space, with preferenc= e being given to those bidders that intend to reserve space for the longest= period of time. According to the CPUC, the ruling creates three "tiers" of= accessibility to the capacity on the pipelines. The first tier includes re= sidential and small business customers, who are not included in the new com= petition and will automatically have about 1,044 million cubic feet per day= of capacity on the pipelines reserved for their use. The second tier inclu= des industrial customers who will now be able to participate in the competi= tion, and will be allowed to bid on half of the remaining capacity. The thi= rd tier includes all other market participants, including natural-gas marke= ters, which will be allowed to bid on whatever capacity is left. Both South= ern California Gas and SDG&E reportedly intend to phase in auctions by the = end of 2002 for their largest customers to transport natural gas. The aucti= ons will be for transmission rights that can be traded to other parties.=20 The CPUC also established two different levels of payment options for the b= idding process. As one option, bidders can pay a fixed price of 7.2 cents p= er million British thermal units (MMBtu) that would cover all of the capaci= ty on the pipeline that they have reserved, regardless if it is ultimately = used or not. As a second option, bidders can pay for only 50 percent of the= reserved capacity at the fixed price of 7.2 cents per MMBtu, and 50 percen= t at a higher price that only applies to the capacity that they ultimately = use. In addition, the ruling allows for the trading of capacity space, an i= mportant point that critics claim could allow buyers to gain more control o= ver the pipeline than allotted in the ruling.=20 As noted, the measure passed the CPUC in a 3-2 vote. The ruling will remain= in place until 2006, at which time the commission can decide to renew it. = The three commissioners that supported the measure were Richard Bilas, Henr= y Duque and Geoffrey Brown. Loretta Lynch, president of the CPUC, and Carl = Wood voted against the measure. Wood said he opposed the measure because it= was based on data accumulated before natural-gas prices dramatically incre= ased during the winter of 2000-2001. Another reason why the three commissioners voted to approve this measure wa= s a belief that deregulating gas transmission in the state would help to ke= ep large customers from leaving intrastate pipelines in favor of using inte= rstate pipelines, which are not regulated by the CPUC. An exodus among indu= strial users from intrastate pipelines, according to the three commissioner= s, could leave residential and small business consumers with higher costs a= ssociated with maintaining the pipelines. However, regulators were quick to= qualify their vote by saying the decision to allow competition for the cos= t of transporting natural gas for industrial users did not represent total = deregulation. Instead, the commissioners said that the ruling simply amount= s to "less regulation."=20 As I mentioned, the case against El Paso Corp. (NYSE: EPG) was used as an e= xample to support both sides of the debate over allowing competition among = the natural-gas intrastate pipelines. The case against El Paso Corp. is a v= ery complicated one, but it essentially comes down to one core issue. The c= ase revolves around allegations that during the period of May to November 2= 000, El Paso improperly shared market-sensitive information with one of its= affiliates, which drove up natural-gas prices, pre-empted competition from= non-affiliated companies and resulted in extra costs for fuel in the range= of $3.7 billion for Californians. El Paso Corp. has consistently maintaine= d that it engaged in no wrongdoing. According to a report issued by the sta= te Assembly, natural-gas prices in California increased from $6.6 billion i= n 1999 to $12.3 billion in 2000 to $7.9 billion for only the first three mo= nths of 2001. In October, El Paso Corp. was absolved of the charges of mani= pulating natural-gas prices in California, but an investigation continues r= egarding any improper sharing of information between affiliates. The releva= nce of this case is that those opposed to opening up California's intrastat= e pipelines to capacity believe the new rules could allow for one company t= o step in and gain control over a portion of the pipeline and thereby be ab= le to drive up price. Those in favor of the CPUC's new ruling say the comparisons to the El Paso = case are unfounded. For starters, the ruling restricts companies from ownin= g more than 30 percent of the pipeline, which theoretically should prevent = a company from gaining an ability to control prices. Critics, however, say = that the ruling allows for the trading of capacity space, which could poten= tially provide a loophole that would give a company control over more than = 30 percent of pipeline capacity.=20 The issue of potential price spikes associated with natural gas is one of t= he remaining questions that only time will be able to answer. Critics of th= e ruling such as TURN say allowing competition among the natural-gas pipeli= nes creates the same market dynamics as deregulation of the state's electri= city market, which some say opened the door to gaming and market manipulati= on. In other words, TURN argues, the CPUC ruling opens the door for one com= pany to enter the market and buy up a significant amount of capacity along = the intrastate gas pipelines, thereby giving that company the opportunity t= o control prices. As the new ruling won't take effect until another year wh= en Southern California Gas and SDG&E begin receiving bids for capacity spac= e on their pipelines, we won't know any time soon if prices will be impacte= d. However, critics claim that a sharp downturn in temperatures in Californ= ia during the winter season that drives up demand could be the first indica= tor of whether or not the new ruling will lead to a sharp increase in energ= y prices. Moreover, the opening of competition along capacity space on California's i= ntrastate natural-gas pipelines is a surprising departure from the state's = discontinuation of deregulation within the power sector. It is too early to= tell how the new ruling will impact energy prices, and of course this ques= tion is the source of great debate (with one side saying that prices will d= rop and the other side saying that prices will increase). Perhaps the large= r issue, however, is the control over the state's pipelines that could be i= mpacted by this ruling. Even 30-percent capacity control, the amount that t= he CPUC is opening to competition, would be considered excessive by some ot= her states. For instance, in Texas 20-percent control is considered a maxim= um standard. Again, whether or not the allowance of competition will spark = the abuse of capacity control on the intrastate pipelines is something that= remains to be seen. We do know that electric competition in California bec= ame a disastrous experiment, but even with this history the state is moving= forward with bringing competition to its intrastate natural-gas pipelines.= =20 An archive list of previous IssueAlert articles is available at www.scientech.com <http://secure.scientech.com/issuealert/<;=20 _____ =20 We encourage our readers to contact us with their comments. We look forward= to hearing from you. Nancy Spring <mailto:nspring@scientech.com< Reach thousands of utility analysts and decision makers every day. Your com= pany can schedule a sponsorship of IssueAlert by contacting Jane Pelz <mai= lto:jpelz@scientech.com<at 505.244.7650. Advertising opportunities are also= available on our Website.=20 _____ =20 Our staff is comprised of leading energy experts with diverse backgrounds i= n utility generation, transmission and distribution, retail markets, new te= chnologies, I/T, renewable energy, regulatory affairs, community relations = and international issues. Contact consulting@scientech.com <http://consulti= ng@scientech.com< or call Nancy Spring at 505.244.7613.=20 _____ =20 SCIENTECH is pleased to provide you with your free, daily IssueAlert. Let u= s know if we can help you with in-depth analyses or any other SCIENTECH inf= ormation products. If you would like to refer colleagues to receive our fre= e, daily IssueAlert articles, please register directly on our site at secur= e.scientech.com/issuealert <http://secure.scientech.com/issuealert/<;.=20 If you no longer wish to receive this daily e-mail, and you are currently a= registered subscriber to IssueAlert via SCIENTECH's website, please visit = <http://secure.scientech.com/account/<; to unsubscribe. Otherwise, please se= nd an e-mail to IssueAlert <mailto:IssueAlert@scientech.com<, with "Delete = IA Subscription" in the subject line.=20 _____ =20 SCIENTECH's IssueAlert(SM) articles are compiled based on the independent a= nalysis of SCIENTECH consultants. The opinions expressed in SCIENTECH's Iss= ueAlerts are not intended to predict financial performance of companies dis= cussed, or to be the basis for investment decisions of any kind. SCIENTECH'= s sole purpose in publishing its IssueAlert articles is to offer an indepen= dent perspective regarding the key events occurring in the energy industry,= based on its long-standing reputation as an expert on energy issues.=20 Copyright 2001. SCIENTECH, Inc. All rights reserved. <http://infostore.consultrci.com/spacerdot.gif?IssueAlert=3D12/17/2001<;
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