CALIFORNIA IS AT IT AGAIN. THE SUBJECT IS NATURAL GAS. What the "blue book" promised for electricity, the newly issued "green book" says it will do for gas.

On Jan. 21, the Division of Strategic Planning at the state public utilities commission issued a new 125-page study, Strategies for Natural Gas Reform: Exploring Options for Converging Energy Markets. On the same day, the PUC opened a new rulemaking (R. 98-01-011), asking for input on the DSP report and posing its own list of some 25 questions on where to go with gas. By late March, nearly 50 companies and groups had filed comments, creating a stack 500 pages tall when downloaded from the Internet. The comments mull over the three basic ideas in the DSP study: (1) take LDCs out of the merchant business, (2) streamline the remaining pipes business with some sort of price cap or performance-based rate making, and (3) create parallel structures (unbundling, pricing, markets) for gas and electricity, since both industries are converging. The PUC promises a draft order by June 1.

The excitement began to fade, however, when the PUC opened its first hearing April 6. Though it attracted at least 30 witnesses (em representing LDCs, marketers, customers, power producers and advocacy groups (em the meeting failed to build much of a buzz. A trusted source who attended the hearings tells me that only two of the PUC's five commissioners, Jessie Knight and Gregory Conlon, asked any significant questions. I hear that President Richard Bilas had little to say, while Henry Duque and Josiah Neeper reportedly kept mum. As my source reports, the overall sentiment was more like, "If it ain't broke, don't fix it."

On the other hand, Conlon reportedly "seemed entranced" by the concept of an independent system operator for gas. However, the DSP has questioned its own suggestion for an ISO and most of the comments have come back negative.

Further, I understand that when Elena Schmidt testified for the PUC's Office of Ratepayer Advocates, she surprised certain of the commissioners by indicating that the ORA did not support the more dramatic proposals on the table. The DSP's market structure "Option 3" would remove utilities from the merchant function. Option 4 would even ban merchant participation by any LDC affiliate. The ORA supported Option 1 (em nothing more than open access for LDCs.

Here's the irony: California already has open access for gas LDCs. Since 1985, most large-volume California customers (the "noncore" group) have bought gas on open commodity markets, taking only transportation service from the local distribution company. If residential customers can aggregate into a big enough chunk, they can do the same thing (since 1992) under California's Core Aggregation Program.

So why the urgency for more deregulation?

The Coming Capacity Workout

The next step for gas restructuring is exactly opposite of what is needed in the power industry. Electric customers now pay for high-cost generation they don't want: nuclear, inefficient peakers, privileged cogeneration. There's not much to gain or lose with transmission.

With gas, however, California customers can already get the commodity 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 competitive retail segment for gas supply procurement cannot work without RCS unbundling, despite the safety concerns voiced by many parties if private companies manage gas hookups: "That a competitive market can offer not only procurement, but a wide variety of billing options, data management, meter reading technologies, and meter services, misses the point. The competitive market must first be able to offer these services if it is to exist at all. RCS unbundling is essential for retailers to offer customer interface services and create and maintain a market presence."

One group, SPURR (School Project for Utility Rate Reduction) sees that idea as essential: "[T]he same mechanisms that make service economically viable to the current utility need to be made available to the market."

In that case, says SPURR, "There is no such thing as a customer group that is unattractive."

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