Explaining a Paradox: The Alberta-California Natural Gas Trade Dispute

Wilson, Patrick Impero, Policy Studies Journal

In November 1991 the California Public Utilities Commission (CPUC) shocked the government of Alberta and the province's natural gas producers when it attempted to impose a new set of trading arrangements on what had been a remarkably stable, mutually beneficial, and cooperatively regulated $1 billion (Canadian) a year producer-consumer relationship. The CPUC, responding to institutional and political pressure, sought to use its regulatory authority over gas distribution to force the giant investor-owned utility Pacific Gas and Electric (PG&E) to end its long-term trading arrangements with Alberta producers. The Commission was concerned that the existing arrangements between PG&E and the producers, dating back some 30 years, were an anachronistic regulatory leftover that forced California consumers to pay more for Alberta gas than market circumstances justified. The Alberta government, outraged at the unilateral action, retaliated by seeking to use its regulatory control over gas production to block the CPUC's efforts.

Given the monetary stakes and the issues involved, it is not surprising that the dispute between Alberta and the CPUC became the focus of extensive negotiations between producer and consumer representatives, extended discussions among federal, state, and provincial officials, highly rhetorical public posturing, and a great deal of political and economic brinkmanship. What was surprising was the willingness of government actors to intervene aggressively in the commercial relationship while loudly proclaiming their belief in and support for the "free" market. The outcome was a situation in which rhetoric diverged markedly from actions. This led to a complex mix of charge and countercharge, opposing interpretations, and conflicting regulations at odds with a publicly stated goal of creating a more open, competitive, and less regulated natural gas trade. From this vantage point the Alberta-California gas trade dispute presents something of a paradox. In other words, if both sides endorsed less intervention and free markets, why were they engaging in policies that produced the opposite?

The principal goal of this article is to explain this apparent paradox. Beyond this direct objective, the Alberta-California trade dispute offers an opportunity to explore a larger question: How can we interpret and explain the politics of deregulatory policymaking? Although deregulation can take many forms, it generally involves the restructuring of existing regulatory regimes to allow the market greater latitude to determine the terms of the producer-consumer relationship. Yet despite the complexity of the issues involved, deregulation, like all regulatory policy, is ultimately a political endeavor that entails making choices about the distribution of costs and benefits.

Twenty years after natural gas deregulation moved front and center onto the political agenda in the United States, the study of gas deregulatory policy has entered what might be described as its second generation. The first generation was directed largely at the perceived regulatory failure of U.S. gas policy (MacAvoy & Pindyck, 1975; Starratt, 1974), the struggle to produce the Natural Gas Policy Act (Nivola, 1980; Sanders, 1981; Tussing & Barlow, 1984), and the initial efforts of industry and government parties to adjust to fundamental regulatory change (Blaydon, 1987; Braeutigam & Hubbard, 1986; Snarr, 1991). The second generation of study has been concerned primarily with evaluating the lessons learned during the transition to more open and competitive markets and with predictions about the future of gas trade relationships (De Vany & Walls, 1995; Ellig & Kalt, 1996; Pierce, 1993).

An issue often overlooked in this new era of gas regulatory policy is the role and motivations of government actors. Drawing on the Alberta-California experience, this article directs attention to two considerations central to the debate over deregulatory policy choices - the inevitable pressure on governments to shield important constituents from the effects of economic uncertainty, and the differing, sometimes contested, expectations various interests hold about the purpose and goal of deregulation. Part one explores how government actors in California and Alberta sought to use their regulatory authority to control the direction and substance of gas trade deregulation. Part two assesses the dispute as an exercise in deregulatory policymaking. It examines the attempts of government actors to protect or promote the interests of particular industry parties, and argues these efforts were driven in large part by contrasting visions of the public interest - visions rooted in the producer or consumer frames of reference of the two sides. Finally, the conclusion suggests the need for increased study and analysis of the role of subnational regulatory actors and continued attention to the challenge of recasting regulatory policy in the midst of long-term contracts and well-established trade relationships.

Manipulating the Commercial Relationship: Government Intervention and the Price of Gas

The anger of Alberta parties at the CPUC's actions was fueled by a belief that the November decision was the latest and most egregious example of the Commission's attempts to undermine the trading arrangements between PG&E and producers. The trade relationship had been established in the early 1960s when gas trading arrangements across the industry were characterized by vertical integration and long-term supply contracts (see Figure 1). In the Alberta-California case, PG&E and a pool of Alberta producers had formed a close, exclusive relationship that precluded participation by consumers or producers not part of the relationship, and left PG&E in almost complete control of the supply system.(1) By the early 1990s, however, this type of closed relationship was increasingly at odds with the CPUC's long-running efforts to restructure the California gas market.

The Commission's restructuring efforts had originated in 1986 with adoption of the New Gas Program (NGP). The NGP was developed in response to the increasing demands of large industrial consumers for the transportation service necessary to access the growing spot market for gas from the U.S. Southwest. The most important changes introduced by the NGP were the unbundling of the utilities' gas sales and transportation services and the segmentation of consumers into core and noncore markets.(2) The division of the California market into core and noncore classes had significant consequences for the Alberta-California natural gas trade. By dividing the California market into different classes, the CPUC created a category of consumers now able to seek out and buy their own gas supplies. This change in regulatory policy, however, meant little as long as the exclusive nature of the PG&E-producer relationship prevented third party access to the Alberta-California supply system. As a result, there was continued pressure on the CPUC to increase consumer access to gas transportation services and to promote producer competition in the California market.

In February 1990, the Commission proposed several changes in regulatory policy. The proposals were in response to allegations that California gas markets were uncompetitive because the private utilities such as PG&E had too many advantages over competitors. The principal reason for this advantage, according to the Commission, was that the utilities' exclusive access to firm interstate pipeline capacity limited that available to other parties. In the case of PG&E, the Commission felt that the company was using its priority transportation rights and large purchasing requirements to prevent competitor access to the interstate pipeline capacity necessary to ship Canadian gas to California. To open up capacity the Commission proposed that PG&E be restricted in its ability to sell to certain sectors of the northern California market. In July 1990 the CPUC issued a set of proposed niles on pipeline capacity and focused further attention on PG&E's Canadian supply arrangements. To promote competition in …

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Publication information: Article title: Explaining a Paradox: The Alberta-California Natural Gas Trade Dispute. Contributors: Wilson, Patrick Impero - Author. Journal title: Policy Studies Journal. Volume: 25. Issue: 3 Publication date: Fall 1997. Page number: 387+. © 1999 Policy Studies Organization. COPYRIGHT 1997 Gale Group.

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