in accordance with Transwestern's FERC Gas Tariff.

Articles IX IV. Transwestern will make an interim rate reduction beginning on the earlier of October 1, 1990, or the first day of the first month following certification by the ALJ of this settlement to the Commission as uncontested as to all matters, which is, again, October 1, 1990. The interim rate reduction will expire on the effective date of the settlement which is to be the first day of the first calendar month after the Commission enters a final order approving without modification or condition the terms of Transwestern's settlement, including approval of the application filed in Docket No. CP88-133-001 to implement a Capacity Brokering Program; withdrawal of Transwestern's application in Docket No. CP89-1126-000, and approving its abandonment application in Docket No. CP89-886-000 et al. The settlement will terminate when new section 4 rates become effective or January 1, 1993, whichever comes first.

Indicated Shippers' Alternate Program Indicated Shippers calls its filing a capacity brokering "settlement." However, it is really more in the nature of a protest to specific aspects of Transwestern's Program. In this regard, Indicated Shippers requests the Commission to replace Transwestern's proposed provisions with the following:

(1) Transwestern and any shipper proposing to broker capacity on Transwestern's system would be required to file for and obtain a section 7(c) certificate describing the brokering plan. The certificates would specify the method that the holder of firm capacity would use to broker its capacity (e.g., open season, auction, etc.).

(2) Capacity would be brokered only on a firm basis. An independent accountant must oversee the bidding process. The right to recall such firm capacity must be only for clearly defined emergency situations where the capacity is required for human needs.

(3) Rates for brokered capacity would be no higher than the "as billed" rates charged by the pipeline for firm capacity, calculated on a 100% load factor basis.

(4) Any certificates issued would be conditioned upon the Commission keeping the authority to modify or end the brokering program at any time and the program would be reviewed when Transwestern files

12 The comments of the intervenors in the certificate docket (listed in Appendix A to this order) will be discussed here to the extent their arguments differ from those of the intervenors in the settlement docket.

13 Indicated Shippers clarifies that the certificate requirement would apply only to SoCal and not to

its next rate case, no later than January 1, 1993.

(5) Any entity brokering or rebrokering capacity would have to comply with not only the reporting requirements of Texas Eastern, but also all the Commission's reporting requirements relating to interstate pipelines and Transwestern must remain subject to the requirements of Order No. 497 [FERC Statutes and Regulations ¶30,820] for the duration of the program.

Settlement Comments and Discussion

I. Capacity Brokering

The California Public Utilities Commission (CPUC), Southern California Gas Company (SoCal), San Diego Gas and Electric Company (San Diego), Pacific Gas and Electric Company (PG&E), Yates Petroleum Corporation (Yates), GasMark West, Inc. (GasMark), Southern California Edison (Edison), Natural Gas Clearinghouse (NGC) and staff all filed comments generally supporting Transwestern's Program. 12

The State of New Mexico Department of Energy, Minerals and Natural Resources and the New Mexico State Land Office (New Mexico), Transwestern Producers Group (Producers Group) and the Producer-Marketer Transportation Group (Producer-Marketer Group) all support Indicated Shippers' Alternate Proposal.

1. Certificate Requirement

In order to implement a capacity assignment program, Transwestern has filed in Docket No. CP88-133-001, an application to amend its Part 284 blanket certificate. The certificate application provides that if an entity that is not an interstate pipeline and is not otherwise subject to the Commission's jurisdiction wishes to participate in the Program then the Commission will exercise only limited jurisdiction over that entity. Thus, under the terms of Transwestern's certificate, SoCal would only need to notify Transwestern before assigning any of its rights to firm capacity on Transwest

ern.

Indicated Shippers and its supporters object. They argue that SoCal 13 should be required to file an application for a section 7(c) certificate before it assigns capacity on Transwestern.14 They contend that an individual section 7(c) certificate is necessary because they allege that

assignees under the program. Indicated Shippers' Reply Comments at p. 9, n.3.

14 New Mexico goes even further. It argues that SoCal cannot be expected to fairly administer a program involving its competitors serving the southern California market. Therefore, it urges the Commission

(a) the Commission has sole jurisdiction over interstate capacity brokering programs and should not leave any aspect of the capacity assignment program in the CPUC's hands, (b) SoCal may use its rights to all the firm capacity on Transwestern's system within California to discriminate in favor of its customers, and (c) Transwestern's Program lacks specificity. Each of these allegations will be discussed below, in turn.

Jurisdiction. Indicated Shippers argues that the Commission has exclusive jurisdiction over the interstate transportation of natural gas which extends into a state's boundaries. It cites the court of appeal's recent decision in California Public Utility Commission v. FERC,15 as authority for this proposition. By extension of that precedent here, Indicated Shippers argues that the CPUC may not attach any conditions to the brokering of SoCal's own capacity within California. This, it argues, would amount to an improper usurpation of federal authority. Instead, Indicated Shippers submits that the Commission should require SoCal to file a detailed section 7(c) certificate application before any assignment commences.

An explanation of our jurisdiction to regulate in this instance is in order. First, SoCal is a "Hinshaw" pipeline. The "Hinshaw Amendment," contained in section 1(c) of the NGA,16 exempts from Commission jurisdiction a person transporting or selling gas in interstate commerce so long as the gas is received by that person and consumed within a state and that person is subject to the regulation of a state commission. Accordingly, our jurisdiction does not extend to SoCal's transportation or sale of gas in California or to the brokering of its own capacity in California.

to

However, the Commission agrees with Indicated Shippers that SoCal's brokering of its interstate pipeline transportation capacity on Transwestern is a jurisdictional activity. Since the act of brokering or assigning interstate transportation capacity controls access capacity, the Commission has held that brokering is tantamount to transportation.17 However, the Commission may regulate SoCal only if and when it brokers capacity on Transwestern and only to the extent of that brokering activity and the rate charged. Therefore, the certificate authorization being granted SoCal is a "limited jurisdiction" certificate covering only the brokering of its capacity on Transwestern not other aspects of SoCal's business and operations in California.

(Footnote Continued)

to modify the settlement so that Transwestern retains control over brokering on its system.

15 900 F.2d 269 (D.C. Cir. 1990).

Because the Commission is setting rate and service conditions relative to brokered, jurisdictional transportation on Transwestern's system, we are generally refraining from commenting on the specifics of the CPUC's rate design policies and local resale rates which we deem to be within the state commission's authority. However, we find one area where a conflict with our authority may arise.

According to Indicated Shippers and Edison, SoCal has proposed to the CPUC an in-state capacity allocation procedure. The proposal would offer intrastate and interstate transportation service through an auction process as a combined or bundled service from the point of receipt at the wellhead to the end-user's point of delivery. This way, Edison asserts, any amount exceeding the combined interstate and intrastate rate could be impermissibly attributed to intrastate transportation at a single bundled rate.

Salmon Resources, Ltd. (Salmon) argues that the CPUC is considering approval of a "priority" charge for in-state reliability. Salmon submits that such a charge would actually be a charge for interstate reliability. Salmon argues that if the CPUC permits such a charge in addition to the fully allocated share of interstate pipeline reservation charges, then shippers would pay a total rate in excess of the asbilled firm transportation rate on Transwestern's system. Therefore, Salmon requests the Commission to either require SoCal to submit a detailed capacity brokering program or to establish a hearing to examine the issues it has raised.

The Commission shares the intervenors' concerns about the auction process. As we understand it, the proposal before the CPUC would bundle interstate and intrastate portions of the brokering transaction. An auction would be held and the available capacity on both SoCal and Transwestern would be assigned to the highest bidder.

This process, if approved, would make it difficult, if not impossible, for the Commission to determine which component of the bundled rate is attributable to the interstate portion of the transaction and whether the as-billed cap on the rate for that brokered interstate capacity has been breached. In this way, the proposal clearly is inconsistent with the exercise of our jurisdiction over the brokering of interstate capacity. The interstate brokering transaction must be unbundled from and bid for separately from SoCal's capacity in California. Because

we cannot allow the CPUC to control the assignment of interstate capacity, this type of auction process is unacceptable. Parties who believe that such a tie-in arrangement has occurred may file a complaint with the Commission setting forth their objections. With the foregoing clarifications, the Commission believes the proposals for additional certificate conditions or for a hearing are unnecessary.

The Commission does not find, however, that SoCal's position as Transwestern's sole firm transportation customer necessitates a departure from our precedent of regulating otherwise nonjurisdictional entities in a light-handed manner. The Commission believes that requiring an individual certificate would delay the proceedings without any attendant benefits. Moreover, it would be duplicative to require more than one certificate for the brokering of firm capacity by any person other than an interstate pipeline since the terms of each certificate would have to be the same to avoid undue discrimination. Therefore, the limited jurisdiction exercised by the Commission over capacity assignment adopted in Texas Eastern and on other pipelines 18 will be adopted here.

Consistent with the discussion above and our prior actions, the Commission will grant limited-jurisdiction certificates to entities, such as SoCal, that are not interstate pipelines or are not otherwise subject to the Commission's regulation. The limited-jurisdiction certificates will last as long as the term of the assignment programs and do not affect the status of activities of these entities that are not otherwise subject to the Commission's regulation. The "limited jurisdiction" certificate is limited to the jurisdictional transaction but does not mean that the Commission is precluded from exercising, as necessary, the full extent of its authority under sections 4 and 5 of the NGA. While the Commission is not requiring the filing of rate schedules at this time, if it becomes necessary to protect against undue discrimination or unjust and unreasonable rates in the future, the Commission can do so.

The Commission has, of course, issued limited jurisdiction certificates for the brokering of capacity by firm transportation shippers on other interstate pipelines, such as Texas Eastern, UTOS, HIOS, and Transco. The scope of those certificates, as here, does not preclude the Commission from exercising its full authority under sections 4 and 5 of the Natural Gas Act. Our concern in this proceeding, however, is heightened by the unique nature of the relationship between SoCal Gas and Transwestern as well as the current nature of the California

18 See Transcontinental Gas Pipe Line Company, 52 FERC 61,277 (1990); U-T Offshore System, 53

market. SoCal Gas controls 100% of the firm capacity on Transwestern. Accordingly, its capacity brokering rights on Transwestern in effect turns control of that pipeline over to the distributor. Also at present, the Hinshaw status of SoCal Gas (i.e., all interstate pipelines, with the exception of a couple of affiliated offshore pipelines, stop at the California border) precludes markets behind SoCal Gas from direct access to the interstate grid. Simply put, SoCal Gas will have a dominant market position over pipeline capacity into the southern California gas markets.

Consequently, the certificate issued to SoCal Gas in this order presents the potential for that company to exert monopoly power over access to the interstate facility, and favor an affiliate, for example, over a nonaffiliate. This potential is especially troublesome if the distributor would not offer open access transportation on its own system, thereby potentially coupling its control over that system with its control over the interstate system. It is these concerns which prompt us to speak more extensively than in prior orders on this scope of the limited jurisdiction certificate issued here.

In the Commission's judgment, if capacity brokering is to realize its full competitive benefits, federal and state regulation must be complementary, and not working at cross purposes. This is especially important where, as here, the operation of the brokering program will have a significant impact on interstate commerce. If capacity brokering is to enhance the development of a more competitive gas market in the affected markets, capacity must be available on a nondiscriminatory basis. Since the CPUC has established a nondiscriminatory access policy in California, and while its experience may be limited especially with respect to the core markets (for which the program has only been in effect for a short time), we are optimistic that the combination of the federal and state programs will enable California consumers to realize the benefits of a competitive natural gas market. Should that optimism turn out to be unwarranted, we will not hesitate to revisit this issue whether on a generic or case-specific basis.

Nonetheless, as a condition to the issuance of a limited jurisdiction certificate to SoCal, the Commission is requiring the provision of written procedures stating how SoCal plans to implement the open-access, nondiscriminatory requirements for the assignment of capacity on the Transwestern system, as set forth in the body of this order. The procedures must be filed for review by the Commission and other

interested parties to this proceeding within 30 days of the date of this order. In addition, SoCal is subject to a continuing requirement to update the procedures to reflect any material modifications which may occur during the term of the limited jurisdiction certificate issued herein within 30 days of the implementation of such modification.

If SoCal, or any other like entity wishes to assign capacity under the certificate, it may do so subject to the following certificate conditions: (1) the brokering of capacity must be on a nondiscriminatory, first-come, first-served basis; (2) the rates charged for such capacity must be no higher than the as-billed rates charged by Transwestern for such capacity; and (3) the broker must comply with the specified reporting requirements. These brokers are not required to make a rate filing or comply with the Uniform System of Accounts or other certificate reporting requirements applicable to interstate natural gas companies, apart from the reporting requirements set forth in this order.

Presently, there are no interstate pipelines who hold assignable firm capacity on Transwestern. If the situation changes and jurisdictional pipelines wish to participate as assignors in the Program, they will be required to obtain Part 284 open-access blanket certificates and to comply with rate, reporting and other requirements contained in this order.

Although no jurisdictional pipelines presently are capable of assigning capacity on Transwestern, the Commission is amending the blanket certificates of participating jurisdictional pipelines to authorize them to assign their firm transportation capacity rights under Rate Schedule FTS-1 on Transwestern. This authorization will apply to any interstate pipeline which obtains a Part 284 blanket certificate during the term of this amendment. No further authorization will be required for jurisdictional pipelines to participate in the Program. However, before participating in the Program, an interstate pipeline must make a tariff filing setting forth any changes necessary to reflect the authorizations granted in this order. Additionally, the tariff filing must set forth the establishment of an open season and provisions for the allocation of assignable capacity.

19 In contrast, Texas Eastern listed 97 current shippers entitled to contract for firm transportation on its system. 48 FERC ¶ 61,248, at p. 61,864, n.6.

20 Edison, while otherwise supportive of Indicated Shippers' views, dissents on this point. It asserts that such contracts are not unduly discriminatory per se and may be reviewed by the Commission when it

Second, Indicated Shippers states that SoCal's intention to favor certain shippers is shown by the fact that it has already sought the CPUC's approval of a number of long-term contracts.20 According to Indicated Shippers, approval of the contracts would result in an off-the-top assignment of SoCal's capacity rights and would leave remaining "non-core"21 customers with inferior service.

Third, Indicated Shippers argues that the CPUC does not intend to adhere to the Commission's open-access, nondiscriminatory policies. This, it states, is evidenced by the CPUC's recent approval of Transwestern's contract with San Diego Gas and Electric Company (San Diego). Indicated Shippers states that the CPUC's rationale for approving the contract

because San Diego has some residential load is no basis for allowing it preferential access, before there is federal authorization of capacity brokering.

SoCal denies that the contracts such as the one with San Diego were intended to shut out other parties from obtaining capacity on the interstate system. Rather, it claims that when it proposed the contracts in question it was mindful of the amount of capacity available and of the CPUC's end use priority system in California. Accordingly, it states that it restricted the amount of firm service available to low priority customers, so that high priority customers could contract for their full requirements if they desired.

Both sides in this proceeding have filed extensive documentation to draw us into the debate which properly remains within California. Essentially, the documentation shows that the CPUC is developing an in-state brokering program with the stated goal of fostering a competitive market for natural gas and insur

reviews the capacity brokering program before it is implemented.

21 Under the CPUC's regulations the "non-core" market consists of large commercial, industrial and utility transportation end-users while the "core market" consists of captive residential and small commercial ratepayers.

ing against monopolistic behavior on the part of LDCs. In this regard, the CPUC has issued proposed rules22 which are intended to protect core customers while also increasing competition for the non-core market.

The documentation also shows that the CPUC has rejected all but one of the long-term contracts between SoCal and its customers that dealt with the allocation of capacity. The contract approved was between SoCal and San Diego.23 The contract governs all aspects of SoCal's services for San Diego including sales, transportation, storage and, of importance here, interstate capacity. The CPUC approved the contract because it found that San Diego, one of SoCal's largest non-core customers, is a utility with its own public service obligation to its customers. The contract was approved with safeguards the CPUC states were intended to assure that the contract would not interfere with the effectiveness of a final brokering program. Specifically, the contract is interim in nature, subject to any conditions that the Commission or the CPUC may impose in their respective capacity brokering proceedings and does not allow San Diego to broker capacity until the CPUC adopts a comprehensive brokering program.2

24

Arguments about the San Diego contract must be viewed in the context of the central finding above, i.e., that the Commission has exclusive jurisdiction over SoCal's brokering of interstate capacity. The CPUC can not regulate the terms of contracts governing brokering of interstate capacity just as it may not regulate the rate for brokered interstate capacity by allowing a bundled rate that covers such brokering. A contract for the brokering of interstate capacity is within our exclusive jurisdiction and must separately set forth contractual arrangements and rates regarding the interstate capacity from the provisions regarding local California rates and services that are within the CPUC's jurisdiction. It is also within our jurisdiction to decide whether or not to require SoCal to file its interstate brokering contracts with us. In keeping with our decision to regulate brokering in a light-handed manner, as discussed above, we have determined not to require the filing of such contracts.

Finally, the Commission is unconvinced that anything the CPUC has proposed with respect to matters that are within its jurisdiction will interfere with the capacity assignment program under consideration here. Accordingly,

22 Attachment C to the CPUC's Initial Comments to the Settlement, CPUC Decision (D.) 90-07-065 on Rulemaking (R.) 90-02-008, July 18, 1990.

23 Attachment B to the CPUC's Initial Comments to the Settlement.

we are unwilling to sit in judgment on the CPUC's own efforts to devise a capacity brokering program within California with respect to matters within its jurisdiction. Nor do we find merit in Indicated Shippers' arguments that Transwestern's Program will provide a fertile field for abuse. At this juncture the Commission is unconvinced that SoCal's status as Transwestern's sole firm transportation customer makes it a foregone conclusion that Transwestern's Program will be subject to abuse. Accordingly, we see nothing that requires us to impose on SoCal the full panoply of NGA rate and certificate obligations.

More recently, Indicated Shippers filed two additional motions to support its claims that the CPUC is infringing on Commission jurisdiction over capacity brokering in a way that discriminates in favor of state utilities. First, on October 5, 1990, Indicated Shippers filed a motion to lodge supplemental authority. The filing consists of a CPUC order, D. 90-09-089 (Procurement Decision), issued on September 25, 1990, adopting rules for California utilities regarding procurement and transportation. Indicated Shippers alleges the CPUC's decision indicates that it continues to be actively involved in the federally preempted area of interstate transportation. We disagree. The Procurement Decision directs California utilities to, among other things, eliminate their non-core gas portfolios so that competitors may better compete with utilities for the non-core market. We will grant the motion to lodge the CPUC order, but are unpersuaded that the order indicates CPUC intrusion into our jurisdiction over interstate transportation.

Second, on February 8, 1991, Indicated Shippers filed an emergency motion to prevent SoCal from engaging in an open season to determine how capacity may be allocated in the future under a capacity brokering program. It also requests the Commission to order SoCal to halt another open season it is conducting which was authorized by the CPUC's Procurement Decision discussed above. The decision authorizes SoCal to enter into short-term arrangements to buy and sell gas on behalf of end-users until the CPUC and FERC approve capacity brokering programs. On February 12, 1991, Indicated Shippers filed a supplement to its February 8 emergency motion reiterating the need for Commission interdiction of the capacity brokering open season in spite of a ruling made by a CPUC Commissioner indicat

24 Exhibit C to Indicated Shippers' Alternate Program at p. 21.