4. Authority to Charge Market Based Rates for Expansion Project Service

Finding that as a new entrant without market share Wild Goose will lack market power, the original Wild Goose CPCN decision authorized Wild Goose to offer its storage services at market-based rates. Wild Goose seeks the same rate treatment for the expansion project's storage capacity. ORA supports Wild Goose's request, Roseville Land opposes it, and no other party takes a position on this issue. Essentially, the question before us is whether changes in the market, including the addition of expansion capacity, must change the Commission's previous finding that Wild Goose cannot wield market power.

Wild Goose offers, as Exhibit (Ex.) 9, a market power assessment prepared by MRW and Associates, Inc. This study analyzes the product market in four potential geographic markets, includes both a measure of market concentration, based on the Herfindahl-Hirschman Index (HHI) used by the Federal Energy Regulatory Commission (FERC), and of market share and, examines product substitutes (such as flowing supplies, balancing services and alternative fuels). Ex. 9 defines the product market as two separate storage services: (1) inventory or working gas capacity; and (2) withdrawal capacity. The four geographic markets (from narrowest to broadest) comprise: (1) storage within northern California; (2) all storage in California; (3) storage connected to California throughout the west and Pacific northwest via interstate transmission systems that serve California directly; and (4) storage accessible to California through connections to pipelines that interconnect with the major pipelines serving California. Wild Goose argues that all California is the appropriate geographic market because it is the narrowest geographic area that includes all direct interconnections to the Wild Goose facility via the PG&E and SoCalGas transmission systems. This market also encompasses Wild Goose's present customer base. Roseville Land contends that the relevant geographic market is northern California, since that is the location of the Wild Goose facility.

In fact, Ex. 9 shows that both of these geographic markets are highly concentrated markets for storage services (actually market concentration occurs in three of the four markets examined; only the broadest market definition results in HHIs of less than 1800).8 Under all market scenarios, however, the HHI is lower with the expansion project factored in. For example, the HHIs for inventory for the northern California and all California markets, respectively, are 3862 and 4129 without the expansion and 3482 and 3690 with it. The comparative values for withdrawal capacity are 5254 and 4795 without the expansion and 4109 and 4209 with it. Wild Goose attributes the California market concentration primarily to the large storage facilities owned by PG&E and SoCalGas. Roseville Land counters that because PG&E and SoCalGas must dedicate most of their storage facilities to core customers, Wild Goose's assessment elevates the impact of PG&E/SoCalGas storage above its real value. Core storage accounts for approximately 33 Bcf of PG&E's total storage capacity of approximately 41 Bcf. However, it is possible that Wild Goose storage could also serve core customers.

The high market concentrations for the two storage products examined concern us (whether the correct geographic market is northern California or all California), but we recognize that it provides only an incomplete picture of the possibility for market power to operate and we turn next to the market share evidence in the record. Where FERC has approved market-based rates for storage service, particularly in highly concentrated markets, generally market share has been low. Ex. 9 explains that "[m]arket share matters because `the smaller the percentage of total supply that a firm controls, the more severely it must restrict its own output in order to produce a given price increase, and the less likely it is that an output restriction will be profitable'." (Ex. 9 at 25 [italics in original], quoting the Horizontal Merger Guidelines from the U.S. Department of Justice, pp.8-9.)

Ex. 9 shows that Wild Goose's market share for inventory in the northern California and all California markets, respectively, is 19% and 8% based on current capacity but increases to 32% and 15% with expansion capacity factored in. For withdrawal capacity, Wild Goose's market share at present is 9% and 3%, respectively, in the northern California and all California markets; post-expansion, Ex. 9 shows Wild Goose's market share in those same markets increasing to 26% and 10%. When storage expansions that PG&E and SoCalGas have proposed are factored in as well, Wild Goose's post-expansion market share generally drops slightly. This scenario shows Wild Goose with a market share for inventory of 31% in northern California and 14% in all California; its market share for withdrawal capacity drops to 22% for northern California and remains at 10% for all California. Commenting on these numbers, Wild Goose notes that in a recent proceeding, FERC approved market-based rate authority for a gas storage entity with market shares for storage inventory capacity of 13.5% and for withdrawal capacity of 21.8%. (ONEOK Gas Storage, Inc. 90 FERC ¶ 61,283 (2000).)

This record necessarily leads us to conclude not only that the geographic market for gas storage is highly concentrated, but also that, post expansion, Wild Goose will have a market share higher than the percentages calculated in Ex. 9. Thus, the record leads us to be cautious in determining whether or not Wild Goose possesses market power, and leads us to conclude that its market power and behavior should be carefully monitored.

A further analysis is necessary to determine whether Wild Goose can exercise market power even if it is found to possess it. To provide a fuller picture of the potential for Wild Goose to exercise market power, we must consider the remaining factors that influence that ability, including the existence of alternatives to storage, which affect the elasticity of demand for storage injection and withdrawal. Ex. 9 identifies several potential alternatives including transportation capacity, which in many situations is interchangeable with storage, and balancing services, which permit natural gas shippers to "balance" short-term discrepancies between gas receipts and deliveries without purchasing storage. Other alternatives, such as alternate fuel usage, may exist in some instances, though California's air quality problems limit the viability of alternative fuels.

Ex. 9 lists several other controls on the potential exercise of market power that we address in turn: Wild Goose does not control transportation services; its affiliates will not give it an advantage; and it operates under a regulated rate structure. The first and second of these appear, on this record, to be the most limiting factors. Wild Goose must rely on its competitors' transportation services to move gas into and out of the Wild Goose facility. PG&E (and SoCalGas) own the transmission systems to which independent storage providers must interconnect and upon which they or their customers must depend for their storage to function as part of the natural gas system infrastructure. Wild Goose does not hold any transmission capacity itself and its affiliates hold only 38.5 MMcf/d of long-term transportation capacity on Pacific Gas Transmission (PGT).9 PGT's total capacity is approximately 2.7 Bcf per day; approximately 1.8 Bcf per day can be delivered to California, though deliveries tend to be lower.

The contention that regulated rates will prevent Wild Goose from exercising market power is less persuasive, since the market rate authority Wild Goose holds gives it substantial flexibility to negotiate rates. The rates PG&E and SoCalGas charge may or may not effectively "cap" Wild Goose's rates, since many factors, such as the demand for storage and availability of transportation access, will influence market realities.

We are unable to determine, on this record, whether or not Wild Goose can exercise market power. Neither can we determine that the potential for Wild Goose to exercise market power is fully mitigated by its lack of control of the transportation system, or by other factors discussed above.

The recent electricity crises in California and the gas price-spikes during the winter of 2000/01 have shown us, first-hand, the great public cost of energy market manipulation. We recognize, moreover, that the natural gas market is highly dynamic and that changes in storage, as well as in other parts of the market, may affect the storage market in critical ways. Given the characteristics of the present gas storage market, we conclude on this record as a whole, that we should condition our approval of the market-based rate authority sought in this application by first revoking the relaxed reporting requirements we approved in prior decisions. More specifically, we should rescind Wild Goose's exemption from GOs 65-A, 77-K, and 104-A and its authority to comply with §587 through filing a simplified report on affiliate activities.10 While we decline to conclude definitively in this decision whether Wild Goose possesses and can exercise market power, these reporting requirements should allow us to monitor the situation more fully in the future.

To further minimize the potential for exercise of market power, we will also impose another requirement on Wild Goose: we expressly prohibit Wild Goose from engaging in any storage or hub services transactions with its parent company or any other affiliate owned or controlled by its parent company. Both short-term and long-term transactions are covered by this prohibition. This prohibition was offered by Wild Goose in its comments on the proposed decision. We accept it, but do not intend for this rule to be precedential for other independent storage operators.

We also commit to reopening consideration of changes to our 1997 Affiliates Transactions Rules in R.01-01-001 (currently stayed and to which Wild Goose is already a respondent), as those rules pertain to independent storage operators. We encourage Wild Goose to help develop the record in that proceeding. We will consider modifying or removing the prohibition on affiliate transactions by Wild Goose after our reconsideration of the Affiliate Transactions Rules is complete.

The reporting requirements and rules identified above generally govern interactions between a utility (such as Wild Goose) and it affiliates, particularly affiliates with business in unregulated sectors of the energy market. We are concerned that the reporting requirements may be insufficient to allow us to adequately monitor market behavior and market structure on a continuing basis so that we can promptly remedy market power abuses by revoking market-based rates or taking other remedial action.

Therefore, as a final condition of the authorization of market-based rate authority for the expansion project, we should direct Wild Goose to promptly inform the Commission of the following changes in status that would reflect a departure from the characteristics the Commission has relied upon in approving market-based pricing: Wild Goose's own purchase of other natural gas facilities, transmission facilities, or substitutes for natural gas, like liquefied natural gas facilities; an increase in the storage capacity or in the interstate or intrastate transmission capacity held by affiliates of its parent, Alberta Energy or a successor; or merger or other acquisition involving affiliates of Alberta Energy or a successor and another entity that owns gas storage or transmission facilities or facilities that use natural gas as an input, such as electric generation.

We should also require Wild Goose to provide the Commission with service agreements for short-term transactions (one year or less) within 30 days of the date of commencement of short-term service, to be followed by quarterly transaction summaries of specific sales. If Wild Goose enters into multiple service agreements within a 30-day period, Wild Goose may file these service agreements together so as to conserve the resources both of Wild Goose and the Commission. The quarterly transactions summaries should list, for all tariffed services, the purchaser, the transaction period, the type of service (e.g. firm, interruptible, balancing, etc.), the rate, the applicable volume, whether there is an affiliate relationship between Wild Goose and the customer, and the total charge to the customer. For long-term transactions (longer than one year), Wild Goose should submit the actual individual service agreement for each transaction within 30 days of the date of commencement of service. To ensure the clear identification of filings, and in order to facilitate the orderly maintenance of the Commission's records, long-term transaction service agreements should not be filed together with short-term transaction summaries.

All reports required by the preceding paragraphs should be provided to the Director of the Commission's Energy Division within 60 days of the effective date of this decision on an initial basis and thereafter, as specified above or by the applicable rule, General Order, or statute. The reports, or portions of them, as applicable, may be submitted under the confidentiality and nondisclosure protection afforded competitive and commercially sensitive information under GO 66-C and § 583. With these conditions, we will approve the expansion project, and approve Wild Goose's request to continue to charge market-based rates. Our approval of market-based rates is subject to re-examination if significant change occurs in Wild Goose's market power status.

8 HHI analysis produces results ranging from one to 10,000, where 10,000 indicates the presence of a monopoly or other conditions resulting in a single entity serving the market. FERC considers an HHI below 1,800 to indicate a lack of market concentration; at 1,800 or above, FERC tends to apply closer scrutiny. 9 Several parties, in reply briefs, note the January 27, 2002 announcement that Wild Goose's parent, AEC, has contracted to merge with PanCanadian to form EnCana Corporation. If this transaction goes forward, at some point the merger partners will be required to apply to this Commission for approval of the resulting change in the control of Wild Goose. We will consider the market power ramifications of such a change in control at that time. 10 D.00-12-030 exempts Wild Goose from GOs 65-A, 77-K, and 104-A and authorizes a simplified annual report as compliance with §587. (D.00-12-030, slip op.) These provisions concern the following:

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