BILL ANALYSIS 1
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SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
DEBRA BOWEN, CHAIRWOMAN
AB 14XX - Canciamilla Hearing
Date: August 29, 2001 A
As Amended: August 27, 2001 FISCAL B
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DESCRIPTION
Current law exempts companies who self-provide natural gas from
regulation by the California Public Utilities Commission (CPUC).
All other transmission of natural gas is regulated by the CPUC.
This bill creates a class of natural gas provider, known as a
Non-Utility Grade Natural Gas Provider, that is exempt from CPUC
regulation. Such a provider is defined as an entity which
produces, sells, or transports non-utility grade natural gas to
no more than five end users, excluding the pipeline owners,
their subsidiaries, or affiliates. Non-utility grade natural
gas is defined as natural gas which is outside of a
utility-specific heating range or which the utility determines
is of insufficient quality.
This bill provides that pipelines transporting non-utility grade
natural gas owned or operated by a non-utility grade natural gas
provider are, for purposes of safety regulation, subject to the
jurisdiction of the Division of Oil, Gas, and Geothermal
Resources (Division) if the pipeline is located within the
boundaries of an oil field, and the United States Department of
Transportation if the pipeline is located outside the
jurisdiction of the Division.
This bill provides that natural gas sold pursuant to this bill
is subject to the non-bypassable public goods surcharge.
This bill requires the CPUC to ensure that any costs resulting
from the implementation of this section don't result in cost
increases to small customers and/or natural gas utilities.
BACKGROUND
Regulatory Structure . Under federal law, the price of natural
gas isn't regulated. Instead, the price is set by the balance
of supply and demand. When that balance is lost, natural gas
price spikes occur, as they did in late 2000 when natural gas
prices increased by more than 600%.
While the price of natural gas isn't regulated, the price of
transmitting and distributing the natural gas is regulated by
the CPUC because the pipelines are bottleneck facilities. They
provide irreplaceable infrastructure for both the seller and the
buyer of natural gas, since both of them are customers of the
pipeline. Unregulated pipelines can use their control over the
bottleneck facilities to charge unfair prices, deny access to
the pipeline, or provide discriminatory access to the pipeline,
much as the railroads did to farmers in the early 1900's,
leading to the Progressive movement, the election of Hiram
Johnson, and the reformation of the predecessor to the CPUC, the
California Railroad Commission.
California Policy Related To In-State Natural Gas Production .
California has long had a policy supporting the use of in-state
natural gas. A May 2001 document by the staff of the California
Energy Commission (CEC) reports that California natural gas
production declined from the mid-1980's until the mid 1990's,
but has been climbing ever since and currently provides about
15% of California's needs. According to the CEC staff report,
the lack of pipelines for gathering the natural gas from supply
fields has restrained the growth in California-based natural gas
supplies. About 80% of California-based natural gas is produced
in association with the development of crude oil supplies.
Supply and Price Outlook has Improved Since January . The market
and outlook for natural gas price and supply has changed
materially since the beginning of the year. Prices have dropped
from more than six times the historic average back down to near
historic averages. The amount of natural gas in storage is well
above the most recent five-year averages. An August 22, 2001,
CEC staff report states the CEC's expectation that natural gas
supplies will remain generally plentiful over the long term,
though constraints on pipeline capacity and the ability to
refill natural gas storage facilities will be constrained this
year.
COMMENTS
1.Purpose of the Bill . According to the author, there are
untapped sources of California-based natural gas which don't
meet the quality of the gas sold by the utilities but could be
blended and processed to be sold to the utilities but
apparently there is little interest in doing so. However,
such gas may be of interest to certain types of large
customers that can run certain facilities on this lower grade
natural gas. This bill tries to create an incentive for gas
producers to drill for and sell this lower quality natural gas
by allowing purveyors and transporters to sell the gas without
having to become a public utility subject to regulation by the
CPUC.
2.If It Walks Like A Utility . . . This bill creates a new
class of natural gas providers that aren't subject to CPUC
oversight even though by transporting and distributing natural
gas, they are performing functions identical to public
utilities that are regulated by the CPUC.
One of the few relatively clear principles in public utility
law is that private sellers of public utility service are
regulated by the CPUC. Under this principal, public utility
service is an essential service for which they are no
substitutes. Rather than leaving the provision and pricing of
such service to "market forces," a company is allowed
exclusive authority to offer the service in exchange for
regulatory oversight on the price, terms, and conditions of
service. This regulatory oversight protects customers from
unfair pricing, discriminatory terms and conditions of
service, while at the same time providing for safe operation
and reasonable service quality.
An example of how a pipeline could utilize its monopoly power
is by denying access to other shippers or customers. The
State of California has alleged that one of the natural gas
pipelines supplying Southern California withheld capacity in
late 2000, thereby driving natural gas prices skyhigh to the
benefit of an affiliated gas supplier and to the great
detriment of the people and businesses of the state. Damages
are estimated in the billions of dollars.
Public utilities are also regulated because they are "natural
monopolies" in that the service is most efficiently delivered
by one large entity, rather than multiple competing entities.
Pipelines are good examples of this in that it's much more
economical for one hundred people to share one pipeline than
for each of them to build their own. Moreover, regardless of
the economics, the nuisance and disruption of pipeline
construction provides the encouragement to have a single,
regulated pipeline.
Given the state's experience with deregulation in the
electricity arena, the author and committee may wish to
consider why a certain class of natural gas providers should
be exempt from CPUC regulation even though they will be
performing the functions of a regulated public utility.
3.Fair Competition & The Level Playing Field . By creating a
separate, unregulated class of natural gas pipeline
transmission, this bill creates an unlevel playing field that
puts existing natural gas utilities at a disadvantage.
Existing regulated utilities (i.e. Pacific Gas & Electric and
Southern California Gas) must serve all customers, charge
non-discriminatory rates, and generally be subject to CPUC
review for their rates and practices. The new class of
unregulated pipeline proposed by this bill will be able to
cherry pick its customers and charge whatever rates they
choose. And, if the unregulated pipeline abandons service,
the regulated utility is obligated to step up and provide
default service.
As customers switch from the regulated utility to the
unregulated pipeline, costs will be stranded. The bill
provides that such stranded costs will not be paid by small,
or "core" customers, nor by the utility. Instead, those costs
will be spread among the remaining business customers.
Therefore, the business and agricultural customers which don't
take service from the unregulated pipeline will see their
rates go up. The size of any increases will naturally depend
on the number of customers that move from the regulated
utility to the unregulated pipeline.
A secondary effect related to stranded costs comes from the
reduced sales on the utility pipeline, which then causes the
fixed pipeline costs to be recovered from fewer sales, thereby
raising the per unit charge.
As such, the author and committee may wish to consider whether
it's appropriate to create an incentive for instate natural
gas exploration by, essentially, lowering the regulatory bar
at the expense of existing regulated utilities and their
customers.
4.Does Five Customers Really Mean Five Customers? The bill
limits the number of customers that an unregulated pipeline
can serve to five end users, which are defined as people or
corporations that receive natural gas for their own use and
don't resell or further transport the gas.
However, exempt from the definition of end user are
subsidiaries and affiliates of the pipeline owner. This
appears to allow subsidiaries and affiliates of these
unregulated pipeline owners to market and sell natural gas to
an unlimited number of marketers, re-sellers, and/or other end
users.
Furthermore, even if the number of customers is limited, each
unregulated pipeline will likely focus on serving large
customers, such as refineries or electric generators, making
any loss proportionately larger than the number of customers
due to the volume of gas that may be sold in an unregulated
fashion.
5.How Can The CPUC Enforce What It Doesn't Know About? While
the bill doesn't specify how it is enforced, because the
provisions are in the Public Utilities Code, the CPUC will be
the enforcement entity. Among the provisions where
enforcement will be an issue are whether the nonregulated
pipeline is obeying the five end user limit, whether end users
are subsidiaries or affiliates, and whether the natural gas is
non-utility grade.
The author and committee may wish to consider how the CPUC is
expected to know who is buying their natural gas from where,
since the bill doesn't require any of the unregulated entities
created by this bill to as much as register with the CPUC.
The bill requires the buyers of the natural gas to report to
the Board of Equalization that they are changing suppliers,
but there's no requirement for the sellers of this gas to
register with anyone.
Jurisdiction over safety is provided to the Division of Oil,
Gas, and Geothermal Resources and the U.S. Department of
Transportation (DOT). The CPUC's natural gas pipeline safety
rules are identical to DOT's, though DOT uses the CPUC to
enforce those rules. It's not clear how state legislation can
confer authority onto the federal government. In the absence
of the federal government accepting authority, and the cost
that goes along with it, the author and committee may wish to
consider who will have the responsibility of ensuring the
transmissions made under this bill comply with all safety
regulations?
6.Creating New Or Redirecting Existing Supplies? While the goal
of this bill is to facilitate the utilization of non-utility
grade natural gas, how much new natural gas might be tapped as
a result of this bill is hard to quantify. According to
Sempra, it accepts virtually all of the non-utility grade
natural gas it's offered, so the bill may bring little
additional natural gas to market in Southern California but
may move existing regulated natural gas transmissions to
unregulated transmission.
7.Related Legislation . SB 5X (Sher), Chapter 7, Statutes of
2001, provided $15 million in grants to offset the costs of
retrofitting existing natural gas powered agricultural
equipment to use alternative fuels, including non-utility
grade natural gas.
AB 1233 (Pescetti), which is pending in this committee today,
requires the CPUC to investigate any impediments to the
in-state production of natural gas and authorizes the CPUC to
adopt tariffs encouraging in-state production unless doing so
harms natural gas customers.
ASSEMBLY VOTES
Assembly Floor (76-0)*
Assembly Appropriations Committee (26-0)*
*Prior version of bill.
POSITIONS
Sponsor:
Author
Support:
Western States Petroleum Association
Oppose:
Coalition of California Utility Employees
Pacific Gas and Electric Company
Sempra Energy
Randy Chinn
AB 14XX Analysis
Hearing Date: August 29, 2001