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Court Upholds FERC's Order of CD Conversion on El Paso Pipeline

Court Upholds FERC's Order of CD Conversion on El Paso Pipeline

A federal appeals court in Washington, DC, has affirmed FERC's decision ordering the system-wide conversion of full-requirements (FR) service on the El Paso Natural Gas pipeline to cost-based contract demand (CD) service to remove long-standing capacity constraints in the Southwest.

Petitioners led by Arizona Public Service and Pinnacle West Energy Corp. challenged the 2002 and 2003 orders, which obligated them and other FR customers, who had locked-in rates under a 1996 settlement and unfettered access to El Paso capacity, to negotiate contracts for their exact transportation requirements (CD) and pay for capacity expansions on the pipeline that are prompted by growth in their natural gas demand.

Arizona Public and other shippers argued that the orders, which modified the terms established in 1990 and 1996 settlements between El Paso and its FR customers, did not meet the public interest standard under the Mobile-Sierra doctrine.

"We find no error in FERC's orders," the three-judge court said in its Dec. 28 opinion. The 11-page ruling was not published by the court, but it was later released by the Federal Energy Regulatory Commission [No. 03-1206].

In converting all shippers to CD service on Sept. 1, 2003, the Commission sought to create a more equitable system for allocating capacity on the El Paso pipeline, putting an end to a long-standing dispute over capacity between the FR and CD shipper camps. There had been considerable friction between the two El Paso shipper groups for years. As a result of the 1996 settlement between El Paso and its customers, FR shippers were allowed almost unlimited access to incremental capacity on El Paso's system at rates frozen by the 1996 settlement, while CD shippers bore the risks of higher cost-based charges for all of their capacity, even that which was subject to curtailments (see NGI, July 14, 2003).

Because of the unrestricted access, FR shippers were able to essentially hijack capacity to serve their markets in the Southwest (Arizona, New Mexico and Texas) that was originally intended for CD shippers' markets in California.

"The main factual question [in this case] is whether the record contains substantial evidence of capacity curtailments on El Paso's mainline severe enough to render firm service unreliable and thus justify Commission action under Mobile-Sierra," the court said.

The petitioners argued that the "capacity shortfalls...arose from 'aberrational' events such as the California energy crisis and an explosion in El Paso's pipeline at Carlsbad, NM" in August 2000, it noted. They claimed that FERC at a minimum should have conducted a hearing to verify the scope and origin of El Paso's capacity problems.

"Admittedly, FERC's investigation of the mainline curtailments could have been more searching. But its decision does not lack substantial evidence simply because petitioner's offered 'some contradictory evidence,'" the court said. "We are especially reluctant to second-guess FERC's findings because many of the present petitioners themselves moved for a summary FERC ruling that El Paso 'lacks up to 1.1 Bcf of mainline capacity needed to serve...its existing firm customers.'"

The majority of the petitioners earlier had complained to the Commission that customers on El Paso were experiencing cutbacks due to capacity constraints, the court pointed out. That most have now changed their position suggests that "their real complaint is only against the remedy FERC chose," it said.

Despite claims to the contrary, FERC found that FR growth was "the most significant part of the problem and any solutions must tie future growth in FR customers' demands to appropriate allocations of costs related to those demands as well as to capacity expansions," the court said. "In other words, FERC believed that it should address primarily those streams of gas whose growth, under the terms prevailing before the modification, was not 'tied' to sound cost allocation and incentives."

Prior to the conversion, petitioners' contracts allowed them to "use capacity that cost more -- both in opportunity cost (the foregone uses of the CD shippers) and in out-of-pocket cost (the expansion costs for El Paso) -- than they were obliged to pay," the court said. "Consequently, unless El Paso were required to eat the extra cost, the FR contracts would jeopardize firm service for other shippers."

The petitioners further argued that FERC via the conversion left them with access to less natural gas than their historical needs. "But in fact FERC assigned each FR customers (but one) capacity -- priced at the settlement rates -- in excess of its 2001 non-coincident peak demand, and made available to other FR shippers capacity that had been initially allocated to FR customers who said their allocation exceeded what they would like," the court said.

It further shot down petitioner's claim that El Paso reneged on its obligation to expand capacity.

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