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Enron: Mandatory Capacity Assignment Illegal

Enron: Mandatory Capacity Assignment Illegal

The states' practice of mandating the assignment of LDC-held upstream capacity to marketers as an "express condition" to allowing them or their customers access to an unbundled natural gas marketplace flies in the face of antitrust laws and FERC's gas restructuring rule, contends Enron Corp.'s marketing arm.

"Mandatory capacity-release programs tie access for firm distribution service behind the city-gate to the purchase of upstream interstate pipeline capacity from the LDC. Tying a desirable service to one that is not desirable...is inconsistent with Order 636-A and federal antitrust laws," said Enron Energy Services Inc. (EESI) in response to issues raised at FERC's technical conference last month on state and federal regulation of the gas industry [PL99-1].

EESI contends the mandatory capacity-release arrangement meets the court's test for unlawful tying. First, two products are involved-upstream interstate pipeline capacity and firm transportation behind the LDC city-gate. Second, the LDC seller requires the consumer or its supplier to buy upstream capacity (the tied product) in return for access to service on the LDC's system, EESI noted. Third, the LDC, the seller, has all of the market power in the alleged tying arrangement And lastly, the arrangement prevents the customer or its supplier from buying capacity in the open market from other capacity sellers, it said. This "artificially maximizes" the value of the tying LDC's capacity, while it reduces the value of capacity held by others, including pipelines. The net result, EESI warned, is the LDC could become the primary seller of capacity into each of its markets.

"These programs are interfering with the development of the competitive marketplace behind the city-gate. More importantly for this Commission, they are adversely affecting the competitive capacity market" that was envisioned under gas restructuring, EESI said.

LDCs and even state regulators argue that mandatory assignment helps to minimize the costs associated with stranded, distributor-owned pipeline capacity in an unbundled gas market. But EESI noted that several gas distributors-Columbia of Ohio, Baltimore Gas & Electric, Washington Gas Light, Brooklyn Union Gas and other LDCs-have implemented "successful voluntary programs" to deal with service reliability and stranded-cost issues. "The states thus have the ability to establish retail-access programs without resorting to elements that are inconsistent with federal policies. Some have simply chosen not to do so," however.

Atlanta Gas Light (AGL) and other distributors couldn't disagree more with EESI. "The notion that the direct assignment provisions are anticompetitive or unduly discriminatory simply does not square with the facts," AGL countered.

Capacity assignment "ensures that all retail customers, and particularly captive customers who have little bargaining strength and who are least able to withstand an interruptible of gas deliveries, have access to upstream interstate capacity and intrastate capacity" to receive a reliable supply of gas, even if their marketer leaves Georgia, AGL said. "It disperses the benefits of competition not just to the densely populated areas, but to consumers in small towns and rural areas upstream and downstream of major market areas within the state." Additionally, capacity assignment helps to avoid the creation of stranded costs and protects customers against the abuse of market power, the Atlanta distributor noted.

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