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Frontlines

Fortnightly Magazine - May 1 1998

they want. What they don't need (em but which many must still buy (em are the high-cost pipes and ancillary services: demand charges for interstate transportation; hub and field storage; balancing.

Gas deregulation in California is all about a restructuring of pipeline services, where all the risk now lies. Consider this comment from Southwest Gas Corporation, an LDC that serves fringe rural areas: "The current excess of available interstate pipeline capacity into California is¼ the driving force¼ It is not the commodity side of the equation."

Southwest says LDCs can already compete against core aggregation marketers for commodity sales. It identifies the pipeline grid as the next profit center: "By combining supply with interstate capacity bought at depressed prices, and undercutting the tariffed rates only slightly, the marketers stand to gain considerable economic profits and marketshare¼ [W]hat the marketers have long desired is to abandon the firm interstate capacity reserved by the utilities for their core customers and substitute the discounted released or relinquished capacity available."

Unfortunately, some of this excess LDC investment in pipeline capacity may become stranded and the risk of stranding varies considerably among LDCs. With its Gas Accord settlement approved last year (CPUC Decision 97-08-055, Aug. 1, 1997), Pacific Gas & Electric Co. has unbundled all interstate pipeline capacity from core customer rates, plus intrastate and local transmission.

Not so for Southern California Gas, which holds 300 million cubic feet per day of capacity reserved for core customers on the Transwestern system and 744 MMcf/d of capacity on El Paso. Notes ORA: "This issue pertains strictly to SoCalGas, which is the only utility with interstate capacity cost not yet unbundled."

Natural Gas Clearinghouse adds this comment: "Up until now, SoCalGas has been successful in shielding its shareholders from the burden of these above-market costs. This cannot go on forever."

Other factors muddy the water. First, with up to 20 percent of California gas consumption served by direct sales delivered from backbone pipelines instead of LDC distribution networks, according to the California Energy Commission, a "nonbypassable" charge to recover stranded costs appears problematic. Second, with Canadian gas supplies remaining much cheaper than gas from the Southwest (transported in large part by El Paso to the California border), PG&E's reserved capacity on its own pipelines may rise in value. Third, with the merger of Pacific Enterprises and Enova approved March 26 (CPUC Decision 98-03-073), it's not clear whether Mineral Energy (the new holding company) will operate the two combined LDCs (SoCalGas and San Diego Gas & Electric Co.) as one system or two.

The Retail Future

Speaking at the April 6 hearing, Fred John of SoCalGas noted that the average residential bill at his utility is only $1 a day, with 33 cents paying the commodity cost and 67 cents for transmission, storage and distribution.

Can marketers can play the retail game with so little in the pot? The answer may come from unbundling so-called revenue-cycle services, such as metering and billing, as the PUC is doing on the electric side.

The ORA believes that even with unregulated marketers, a