Tariff May Limit Flow of Natural Gas

Two projects aimed at boosting the capacity of California’s natural gas delivery network are stalled by a little-known tariff that power companies would have to pay to use the new pipelines.

The tax was established six years ago by the Public Utilities Commission and requires electricity generators and other natural gas customers to pay an extra fee if they use pipelines not controlled by Southern California Gas Co.

At the time, officials as well as consumer advocates believed the tariff would protect the firm’s residential and small business owners.

But amid California’s energy crisis, some officials contend that the tariff is preventing the state from boosting pipeline capacity at a time when more natural gas is desperately needed to fuel power plants.

California, which makes more than half its electricity from natural gas, has not expanded its gas distribution network in eight years. Experts warn that the system is running close to capacity and that easing constraints is a crucial step in any rescue plan.

Two companies are trying to add capacity: Questar wants to convert an old oil pipeline that runs 700 miles underground from New Mexico to Long Beach, and Williams Co. wants to push its existing Kern River-Mojave pipeline farther west, also to Long Beach.

But both companies said they are having trouble signing up customers because power companies don’t want to pay the tariff.

Watson Cogeneration Co., which operates a 400-megawatt generator in Los Angeles County, is considering using Questar’s pipelines but said it cannot complete any deal until the tariff issue is resolved.

“With the state building all these new gas-fired plants, the question I have is, where are they going to get the gas?” said Pat King, executive director of the firm.

Questar, Williams Co. and other energy companies have been fighting the tariff in a series of hearings before the PUC. Last year, the commission concluded that the tariff may discourage the construction of badly needed new power plants in Southern California and asked the Gas Co. to develop a new pricing system.

But the issue was reassigned earlier this year to a new administrative law judge as the commission reshuffled its load to handle more pressing energy emergencies. That judge does not expect a final ruling any time soon.

“The case is in limbo,” said Carol Brown, the judge, who must sift through years of transcripts before writing a draft decision. She predicted that “we might all be old and gray” by the time a final vote is taken by the full commission.

Enacted in 1995, the so-called Residual Load Service tariff can levy massive penalties against Gas Co. customers who choose an alternate distributor but later have to return to the company’s network.

If service on a competing pipeline is interrupted, a power plant that had to switch back to the Gas Co. for a day of deliveries could be charged what it would cost to reserve that capacity for an entire year.

For many power plants, the risk of leaving the Gas. Co. with the tariff in place is simply too high.

“If there’s any risk that that might happen, there’s no way you’re going to sign up for another pipeline, because you’d end up paying twice for natural gas service,” said Tom Beach, a former PUC staffer and a consultant for Crossborder Energy who testified against the tariff. “It just shows how punitive this rate is and how it discourages people from bringing in new pipelines and trying to compete with SoCal Gas.”

Critics charge that the tariff is so punitive that not a single power supplier has left Southern California Gas.

The tariff was approved with ratepayers in mind--and actually was heavily endorsed by consumer activists. Without it, they said, Southern California Gas could pass on any loss in business from competing pipelines to its residential and other core customers.

Still, Pacific Gas & Electric Co., California’s other top gas utility, has never requested such a tariff to protect its Northern California territory from competitors.

But as PG&E; itself points out, the market is more competitive in Southern California, where four of the five major interstate pipelines serving California cross the state border.

“We never felt we needed it,” said Staci Homrig, a PG&E; spokeswoman. “There’s not the same competitive situation up here as there is down there.”

The Gas Co. says the tariff is necessary to prevent power plants from shopping around for the best pipeline deal and then using the company’s lines as a backup system during emergencies. The company said that could disrupt service to its regular customers.

“It’s not really economical to have our facilities standing by--not being used--and not being paid for it,” said Steve Rahon, a Gas Co. regulatory manager. “They want our facilities to be ready in case they can’t receive all of their load from the Questar pipeline. We want this tariff to be able to charge a fair price for that.”

Furthermore, the utility says, its customers need to be protected from higher rates and the utility needs to be able to compete on a level playing field with interstate pipelines that play by different pricing and delivery rules.

The pipeline companies agree that bypass customers should pay a price for swinging back and forth between providers. But they argue that the existing tariff is so high it is preventing fair competition. As proof of that, they say, energy companies have resisted siting power plants in the Gas Co.’s territory. What’s more, the tariff has never been triggered.

“It’s important to note that no one has ever taken service under this rate because it’s such a risk,” Beach said.

During a rate proceeding last year, the PUC found that “gas supply competition is critical to the economic survival of both existing and new electric generators” and agreed that the tariff may be discouraging the siting of new power plants in the Los Angeles Basin.

The commission ordered Southern California Gas to come up with a new pricing system that must “not be the equivalent” of the old one. The Gas Co. has proposed two alternative rate structures, both of which do not impress the pipeline companies.

It will be up to Brown, the administrative law judge, to choose between the Gas Co.’s proposals and those suggested by opposing parties. She could also suggest yet another rate, or repeal the existing tariff altogether.

“I need to write a decision. And that’s kind of a daunting project,” said Brown, who inherited the case in January.

“I really can’t give you a projection,” she said. “It’s one of those things that if the commission decides it’s incredibly important and needs it done, it will be moved to the top of my list. And that order could come at any time or it might never come.”