Coalition says SOCAL pipeline profits from constraints

Southern California Gas Co. (SOCAL) has little incentive to expand its pipeline capacity because of state rules that allow the company to pocket profits from reselling gas and other gas services in a tight market, witnesses said during a conference on the California gas market.

May 29th, 2001


By Ann de Rouffignac
OGJ Online

HOUSTON, May 29 -- Southern California Gas Co. (SOCAL) has little incentive to expand its pipeline capacity because of state rules that allow the company to pocket profits from reselling gas and other gas services in a tight market, witnesses said during a conference on the California gas market.

Norman Pederson, representing the Southern California Generation Coalition at a Federal Energy Regulatory Commission conference, said SOCAL, Los Angeles, a unit of Sempra Energy, is creating revenue and realizing profits by reselling gas and gas services to electric power generators and large industrials.

He said this partially explains the big price difference between gas at the California border, compared with the rest of the country. Spot prices at the southern California border have been at least three times what they are elsewhere in the nation.

The increased demand for gas from electric power generators and industrials coupled with SOCAL's pipeline capacity constraints means SOCAL can buy gas at the border points and then resell it at a much higher price to the generators, Pederson said.

SOCAL also provides "hub services" for noncore customers such as "parking" the gas in storage or "loaning" it when these customers need more than anticipated.

"When you (SOCAL) are the only entity with supply, you cut a deal. They (SOCAL) pull core supplies out and loan gas or if a generator has too much gas coming in they park it," said Pederson. "Since they are the only counterparty, they can demand what ever price the market will bear."

Pederson said SOCAL has been slow to add capacity. If the company adds capacity, he said, noncore customers won't have to rely on its hub services. A SOCAL spokeswoman said the company reported plans to expand capacity in March and May.

Mark Pocta of the California's Office of Ratepayer Advocate agreed "cross incentives" discourage SOCAL from expanding capacity because it would interfere with selling services like storage.

"There is no doubt that cross incentives exist for them," Pocta said.

The California Public Utilities Commission allows the money made from selling gas and gas services to be split evenly between core customers and shareholders. This is how it works.

SOCAL buys gas in advance for core customers at a price locked in for a given month. If demand surges and the price jumps in the spot market, then SOCAL can resell part of this gas at a higher price to noncore customers.

Last year, SOCAL was able to add $10 million to the bottom line for shareholders, said Pederson. For the fiscal year ended March 31, profits are expected to be in the "tens of millions," he said. Pocta agreed the amount of money SOCAL will file to receive from these transactions is "substantially" more than last year.

But Pocta would not reveal the amount. The formal request to keep its share of the profits will be filed by SOCAL with the PUC June 15. There will be a hearing to determine how much the PUC will allow SOCAL to keep, he said.

The coalition Pederson represents includes municipally owned utilities of Los Angeles, Burbank, Glendale, and Pasadena; the Imperial Irrigation District; generating units of Reliant Energy Inc., Houston; and Williams, Tulsa.

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