Competition in Natural Gas Market Is Shut Off

Questar Corp. is a Salt Lake City natural gas supplier that once cherished the quixotic notion of competing with Southern California Gas Co. on the latter’s own turf.

Having purchased a decommissioned oil pipeline running from the Rockies into Long Beach for $38 million in 1998, Questar set about converting it to carry natural gas into California. It even lined up a potential customer, a cogeneration plant in Carson hoping to use its access to an alternative gas supply as a cudgel to negotiate lower rates from SoCalGas.

But the deal never happened. Questar’s plans ran into a hurdle SoCalGas erected years ago, with the acquiescence of the California Public Utilities Commission, to block competing pipelines from entering its service area.

The obstacle is a special surcharge applied to big customers such as power plants that want to bypass SoCalGas’ pipeline for most of their energy needs while keeping the utility service for a backup option, as would be prudent for almost any major user. If the customer needs to return to the SoCalGas pipeline, say in an emergency, the surcharge kicks in at such a punitive rate -- in some cases, potentially doubling the customer’s bill -- that it renders the entire arrangement uneconomical.

“We haven’t been able to line up a single customer,� Alan Allred, executive vice president of Questar Gas, told me not long ago. Thanks to this and other alleged stratagems we’ll get to in a moment, SoCalGas has maintained its solid dominance of the local gas delivery market through the deregulatory era and beyond.

Is this a good thing? Consider: During the 2000-01 energy crisis, the Southern California Gas pipeline network had so little excess capacity that the bottleneck contributed to the price spike experienced by customers.

The point is relevant because a federal report last week resurrected one of the enduring mysteries of the state’s energy deregulation crisis: how our local utilities have managed for so long to avoid blame for their complicity in the disaster.

The report from the Federal Energy Regulatory Commission staff lists Edison International’s Southern California Edison unit, PG&E; Corp.’s Pacific Gas & Electric Co. and SoCalGas’ parent, San Diego-based Sempra Energy, among the companies it suspects of having “gamed� the system, in some cases by faking demand.

The FERC report further names SoCalGas as having potentially profiteered from the crisis by purchasing gas cheaply at the California border, warehousing it while prices soared, then selling it dear. The upshot, according to FERC: The company may have funneled a trading profit of at least $71 million into shareholders’ pockets.

The company denies this, contending that the FERC staff failed to realize it applied most of the trading gains to reducing customer bills rather than paying shareholder dividends. Its gas prices stayed well below the state average during the crisis, the company further contends.

Still, this is not the first time SoCalGas has been accused of failing to place the interests of its customers first and foremost.

Let’s start with the so-called motel room conspiracy of September 1996.

That’s when a group of SoCalGas executives allegedly met with their opposite numbers from El Paso Corp. upstairs at the Phoenix airport Embassy Suites Hotel. According to a lawsuit pending in state court in San Diego, one purpose of the meeting was to sidetrack two California pipeline projects through which El Paso was planning to compete with SoCalGas.

SoCalGas had reason to be concerned. Statewide deregulation was at hand, and the company feared that rival pipelines would cherry-pick its “bypass customers.� Those big industrial users purchase their gas directly from suppliers rather than indirectly through SoCalGas; they then pay SoCalGas only for the pipeline capacity needed to bring it in.

To forestall this threat, according to the complaint filed by the city of Los Angeles, the state of California and a group of private plaintiffs, SoCalGas agreed to withdraw its bid to operate a lucrative Mexican pipeline project for which El Paso was its only rival. In return, El Paso allegedly killed the California pipelines, which solidified SoCalGas’ grip on the regional pipeline business.

SoCalGas “wanted the economic benefits of deregulation and the privileges of monopoly,� says Carole Handler, one of the lead attorneys in the lawsuit.

SoCalGas executives loudly deny these allegations. Despite the existence of a typed program naming the meeting’s participants from the companies and listing “Discussion of Opportunities resulting from Electric Industry Restructuring� as an agenda item, SoCalGas spokeswoman Denise King maintains, “There was no agreement, no discussion. It simply didn’t happen.�

She adds that El Paso had shelved one of the pipelines before September 1996. (The project, however, had secured federal approval, which means it could easily have been revived.) El Paso extricated itself from the lawsuit as part of its $1.7-billion settlement this month of state and civil complaints that it manipulated gas prices during the energy crisis. But it has agreed to cooperate in the plaintiffs’ continuing action against SoCalGas.

The so-called peaking rate tariff, meanwhile, remains as an obstacle to the construction of a competing pipeline in Southern California.

The peaking rate has a long and checkered history. It first appeared in a slightly different form in 1995, when changes in federal law first exposed the SoCalGas pipeline monopoly to competitive assault. The company contended that allowing rival pipelines to siphon off its biggest customers would mean sticking the remaining ratepayers -- mostly homeowners and small businesses -- with the enormous bill for its infrastructure. Therefore, it contended that any defecting customers should pay a large premium for the right to demand backup service from the utility.

When even consumer groups lined up on SoCalGas’ side, the PUC went along. But it soon became clear that the tariff, as written, was potentially more a detriment than a boon to the California market. Pipeline competition was supposed to be a virtue, but the tariff was so stringent that no pipeline company was able to sign up a single customer.

It soon became evident that there had to be a middle ground between allowing unbridled competition for SoCalGas’ pipeline business and allowing SoCalGas to reign as undisputed lord of all it surveyed. The PUC and the company dickered over a solution for more than two years, prompting the judge on the case to remark gloomily that “we might all be old and gray� before the matter was resolved.

Finally, in January, a supposedly more temperate rate went into effect. Yet it has done nothing to revive anyone’s interest in competing with the SoCalGas pipeline. SoCalGas executives say this is less a proof that its terms remain onerous than evidence of the reluctance of potential rivals to shoulder the entrepreneurial risks of competition.

Besides, with the energy crisis over, the economy staggering and SoCalGas having added considerable capacity in the last two years, the company now boasts an average 35% slack in the system. Company executives say that’s more than even robust growth in Southern California would eat up over several years, if not longer.

That’s possible, of course. But such a confident outlook could well amount to whistling past the graveyard. Nobody expected the last crisis to erupt as it did, after all. When it happened, California was unprepared -- a fate that might well be repeated as long as real competition in the natural gas market fails to materialize.

Golden State appears every Monday and Thursday, Michael Hiltzik can be reached at [email protected].