Regulators Question LNG Cost Driver

While the California Public Utilities Commission is charged with policing transactions between Sempra and its regulated utilities, many worry that LNG from a new gasification plant will saddle ratepayers with new costs and fail to bring promised gas price reductions. ?The main concern I would have would be whether ratepayers of the regulated utilities would be paying to benefit Sempra?s unregulated business,? said CPUC member Carl Wood. ?The PUC has to keep a very close eye over potential affiliate abuses.? Sempra is poised to become Southern California?s major natural gas supplier within just three years of building a liquefied natural gas terminal with its partner Shell in Baja California. Wood is one of at least a few California regulators who believe it will be extremely difficult to prevent crossover subsidies under the order adopted a month ago by the commission authorizing Southern California Gas and San Diego Gas & Electric to establish LNG receipt points. The controversial order passed on a 3-2 vote ( Circuit , September 3, 2004). ?The September 2 decision establishes subsidies right off the bat,? said Trina Horner, an adviser to commissioner Loretta Lynch. Under existing tariffs, SoCal Gas system users poised to receive LNG that ends up in Mexico would be subsidized by SDG&E customers. SDG&E and SoCal Gas are aware of the concern and hope to ?equilibrate? their differing transmission rates in an integrated transmission tariff filing due to the commission December 2, said Rick Morrow, vice president of customer services for the regulated utilities. The filing will be aimed at enabling gas to flow north from the Otay Mesa interconnection point to the Los Angeles area, he said. Under the commission?s order, Sempra and other LNG providers must pay to connect to the utility systems, but in upcoming filings the two utilities will likely ask the commission to fold into their rate bases up to $300 million of pipeline upgrade work needed to move LNG in their systems. ?Costs should be rolled in if the benefits exceed the costs,? Morrow said. The upgrades needed will depend on both the volume and the receipt points of LNG. The companies will seek to add those costs into rates on a project-by-project basis as LNG terminal proposals progress, Morrow added. The developers have promised that LNG will reduce future gas prices enough to outweigh those rolled-in costs. However, the promised price reductions are predicated on LNG actually increasing the supply of gas to the Southern California area. Given the growing demand for gas in Mexico, Phoenix, and the Las Vegas area, it may be premature to assume that LNG landed in Baja California will increase the gas supply in Southern California. For instance, a forthcoming free trade agreement between Mexico and Japan could dramatically expand an already increasing demand for natural gas in Baja California as Japanese firms build factories there, said California Energy Commission member John Geesman. Authorizing a receipt point for Mexican LNG at Otay Mesa will give California access to new gas, said Geesman, but without the interconnection, the gas still would find a market in Baja California and points east of Eherenberg, Arizona, just across the river from Blythe. The Baja pipeline could bring Sempra LNG to Southwest Gas, which serves Phoenix and Las Vegas, and power plant operators in Arizona, said Norman Pederson, an attorney with Hanna & Morton. He represents the Southern California Generation Coalition in a protest against SoCal Gas before the CPUC. The complaint focuses on the company?s plan to open a bidding war for gas between U.S. and Mexican businesses along a constrained pipeline in the Imperial Valley that interconnects with facilities operated by a Mexican pipeline company. Because of both constraints on transmission and the growing demand for gas in Mexico and areas of the Southwest, LNG may not necessarily prevent such constraint situations from arising in the future, particularly in the noncore market, Horner noted. Yet noncore customers are most likely to become reliant on LNG. Geesman, for instance, predicts it is unlikely that LNG will supply Southern California small ratepayers, core customers, but that it will instead be sold to major industries and power plant operators under short-term contracts. Another unknown is what will happen as SoCal Gas moves to reduce or terminate its capacity on the Transwestern and El Paso Natural Gas pipelines under last month?s CPUC decision. The company wants to diversify its supply and continue to cover core customers with interstate pipeline capacity, but changes to its supply mix remain to be seen. ?It?s all a matter of timing and when the new supplies become available,? Morrow said. As a safeguard to California?s economy, Geesman urged that the state ?force as much natural gas into the transportation system as possible.? On the other hand, that may not be in the interests of LNG terminal operators. Geesman noted that in the absence of ?take or pay? or long-term contracts, they bear tremendous financial risk in developing LNG import terminals.

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Regulators Question LNG Cost Driver

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