[BETA] Fortnightly

"People are starting to talk about ISOs on the gas side." So says Jerry Pfeffer, lay advisor on energy industries for Skadden, Arps, Meagher & Flom, the New York law firm well known for its work in mergers and acquisitions.

Pfeffer's comment alludes to events now unfolding in Southern California, that fount of fashion, where each round of "deregulation" only doubles the ante in billable hours. This time it's natural gas pipelines. Do they have market power too?

"It Would Not Surprise Me"

Southern California Edison Co. has now alleged that Southern California Gas Co. is manipulating capacity on natural gas pipelines. Edison accuses SoCalGas of limiting access by Edison to cheap gas for electric generation.

Edison's allegations parallel the issues at play in electric restructuring. Remember that California has formed a power exchange plus an independent system operator to ensure fair dealing over electric transmission lines. Now comes Edison, seeing the same need on the gas side. This idea carries implications for the proposed merger (actually a corporate reorganization) between Pacific Enterprises, the parent company of SoCalGas, and Enova Corp., which owns San Diego Gas & Electric Co., Edison's rival for electric sales.

None of this has escaped the attention of the Federal Energy Regulatory Commission, where the merger approval docket is stocked with "convergence mergers" between electric and gas companies.

In February, in its order approving the merger between Enron and Portland General Electric Co., the FERC asked whether the vertical consolidation of Enron's natural gas pipeline and Portland Electric's generation assets could "potentially present a problem" for competitors who rely on gas-fired generation.

In that case, however, the FERC saw "no indication" that Enron could restrict gas supply to drive up costs to PGE's competitors.

But that was then. Speaking on May 22, at the Restructuring and Convergence conference sponsored by PUBLIC UTILITIES FORTNIGHTLY, Commissioner Donald Santa predicted that the issue will likely come up again at the FERC:

"In the only convergence merger that we have acted on so far (em Enron/PGE (em we didn't address the gas/electric market power questions because no one raised the issue.

"It would not surprise me if, in reviewing the Enova/PE merger, we are asked to review that question again."

(Note: The FERC approved the convergence merger between PanEnergy and Duke Power some six days later, but at press time the commission had not yet released its 21-page opinion, nor explained whether it had reviewed pipeline market power in electric generation.)

"We Have Evidence"

"We have hard evidence of what SoCalGas is doing," says Stephen Pickett, associate general counsel for Edison. "About 60 percent of the gas flowing over the SoCal system is Edison gas. This happens

primarily during the shoulder months, when

SoCalGas is injecting into storage."

Pickett claims that SoCalGas is releasing gas pipeline capacity at a price set purposefully high to discourage buyers. Then, when no bid comes forward, SoCal pockets the capacity for its own core customers through an "internal transfer" at a price below market. Reportedly, SoCal posts the released capacity on its bulletin board. (The company