Accusing Trailblazer Pipeline of unlawful exercise of market power over capacity bidders on its 2002 expansion, Marathon Oil Co. has called on FERC to order the pipeline to disgorge "windfall profits" that it allegedly collected from the Houston producer under negotiated transportation arrangements over a nearly two-year period.
In a complaint filed last week with the Commission, Marathon contends that Trailblazer collected from it $15.35 million in revenue from two negotiated-rate contracts over and above what the pipeline would have collected if Trailblazer had allowed bidding shippers to bid a cost-based recourse rate for service on the 2002 expansion.
If the Federal Energy Regulatory Commission fails to take corrective action, Marathon estimates that it will pay Trailblazer more than $63 million in excess of the pipeline's FERC-approved cost-based tariff rate for service on the expansion over the 10-year term of the two contracts.
"Trailblazer did not allow potential shippers to bid a cost-based rate alternative [on the expansion]. In addition, Trailblazer required that bids be no lower than a minimum reservation rate of 17 cents when it knew or had reason to know that the cost-based rate for the expansion facilities would be significantly lower. Trailblazer also threatened to withhold much-needed new capacity from the market if shippers would not agree to its terms," Marathon told the Commission in the complaint [RP05-234].
Furthermore, Trailblazer "used its market power to entice bidders into a bidding war for the 300,000 Dth/d of expansion capacity being offered in the Expansion 2002 open season by advising bidders that it had received expressions of interest well in excess of 300,000 Dth/d and by advising shippers that capacity would be awarded to the highest bidders based on price, volume and term," the producer said.
"Trailblazer succeeded in its effort and, through the exercise of market power, obtained firm transportation contracts from Expansion 2002 shippers at rates many multiples above the otherwise applicable cost-based recourse rate for the service. In addition, Trailblazer unduly discriminated among the 2002 expansion shippers by charging rates ranging from a low of 17.8 cents/Dth to a high of 24 cents/Dth."
For the expansion, Trailblazer sought an initial cost-based reservation rate of 11.82 cents/Dth, which FERC approved in May 2001. But the pipeline did not tell FERC that it had required shippers participating in the Expansion 2002 open season to bid a reservation rate no lower than 17 cents/Dth; that it expressly conditioned the expansion on its obtaining negotiated-rate fixed price contracts with a minimum term of 10 years; and that the expansion shippers had not been permitted to bid a cost-based recourse rate for the expansion service, Marathon claimed.
Marathon was not an original shipper on Trailblazer's 2002 expansion. It picked up 22,500 Dth/d of capacity held by Pennaco Energy on Trailblazer when it acquired Pennaco in May 2001. The service rate for that capacity was 18.25 cents/Dth, which "is significantly higher than either the Commission-approved 11.82 cents/Dth initial recourse rate or the currently effective 8.0 cents/Dth recourse rate for the expansion...service," the producer said.
In March 2002, it also acquired 100,000 Dth/d of capacity held by CMS Marketing, Services and Trading (CMS MST) through a permanent release, and at a reservation rate of 24 cents/Dth for the remaining term of the firm transportation agreement with Trailblazer. As a result of its acquisition of Pennaco Energy and other production properties in the Powder River Basin, Marathon said it needed the CMS MST transportation capacity to move its basin production to the Midcontinent.
In its complaint, Marathon has asked that the rates in its two contracts not exceed 17.8 cents/Dth, which it says was the "lowest negotiated rate awarded by Trailblazer to an expansion shipper in the open season for Expansion 2002 capacity."
Marathon said it first became aware in the fall of 2003 that Trailblazer had not offered its Expansion 2002 shippers, including Pennaco and CMS MST, a cost-of-service recourse rate during the open season. "Since that time, Marathon has had numerous discussions with Trailblazer in an attempt to obtain rate relief under these two agreements. For more than a year Marathon has attempted to resolve this matter through negotiation with Trailblazer, its latest overture to Trailblazer having been made in February of 2005. All efforts at negotiation have failed."
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