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Dynegy Grabs Another Chunk of El Paso Capacity

Dynegy Grabs Another Chunk of El Paso Capacity

Adding to the lengthy and often heated controversy surrounding its contractual relationship with El Paso Natural Gas, Dynegy has signed up for another 196 MMcf/d of El Paso pipeline capacity, bringing under its control a total of 1.5 Bcf/d of space on the southwestern pipeline.

On April 30, El Paso informed FERC it signed two new negotiated rate agreements, one contract with Dynegy and another with KN Energy. The Dynegy contract is for backhaul capacity to the Waha Hub in West Texas in contrast to its three other contracts for 40% of El Paso's total forward-haul space to the California border from receipt points in the San Juan and Permian basins. Dynegy's first three contracts went into effect in January 1998 and terminate at the end of this year.

The fourth contract triggered an immediate protest from Exxon and the Joint Parties, a producer group including Burlington Resources, Marathon Oil Phillips Petroleum and BP Amoco subsidiaries. The producers are concerned that the contract may contain the "same anticompetitive provisions as the previous three contracts," and requested that the Commission order El Paso to file the new contract and subject it to the results of a pending rehearing of the entire Dynegy-El Paso case.

According to footnotes in El Paso's April 30 negotiated rate tariff filing, the fourth contract with Dynegy appears to have some of the same components as the other three, including a $0.12/Dth rate and the same 72% minimum flow commitment for 1999. But since the contract was not filed, it's not clear if it contains some of the other provisions that protesters claimed, and FERC agreed, were anticompetitive. It's not clear if the contracted volume represents an incremental addition to Dynegy's existing firm space on El Paso, the Joint Parties noted. It's also unclear how El Paso is treating the revenues from the fourth contract, or if the preexisting interruptible (IT) revenue crediting arrangement applies (see Daily GPI June 11, 1998).

In prior arguments, the producers and the California Public Utility Commission (CPUC) charged that certain provisions of the Dynegy contracts, particularly an interruptible transportation revenue sharing provision, were anticompetitive. The IT provision freezes El Paso's monthly IT volume sales at their 1997 sales level until the end of this year when the contract terms end. Dynegy insisted on the IT provision so that it wouldn't be "left holding the bag" if El Paso decided to sell IT capacity to the same demand that Dynegy was looking to serve. If El Paso should exceed the IT sales threshold, the agreement calls for the pipeline to adjust downward NGC's $70-million payment (for the group of three capacity contracts). Protesting marketers and producers blamed the IT crediting mechanism for El Paso's decision to halt discounting of California-bound IT capacity on its system.

Last June, however, FERC ruled that despite the anticompetitive nature of the IT revenue crediting provision the previous three contracts were not "unduly discriminatory." The CPUC has filed for rehearing of that order, and FERC has yet to rule on the rehearing request. The CPUC claims Dynegy's' "hoarding" of El Paso capacity and the IT provision in the Dynegy-El Paso contract are responsible for higher California border gas prices compared to the rest of the country and decreased competition in the secondary market (see Daily GPI Feb. 26).

El Paso responded to the rehearing request last week, submitting a lengthy study by Houston-based Lukens Consulting Group that basically concludes Dynegy's control over 40% of El Paso's capacity to California had nothing to do with higher California border prices or changes in the basis differential between the San Juan Basin and the California border last year. The study blames the 17-cent jump in San Juan-SoCal Border basis in 1998 on increasing California gas demand and greater competition between producers in Canada and the Rockies for markets in the Midcontinent and Midwest.

Meanwhile, the Joint Parties have lodged another thorn in FERC's side by submitting a recent decision by D.C. Circuit Court of Appeals that remanded a FERC order approving El Paso's last rate settlement for further review. FERC used the same rationale to decide the rate settlement case as it used in the El Paso-Dynegy case, according to Katherine B. Edwards, attorney for the Joint Parties. In both cases, FERC said that just because a rate for released capacity is much higher than the market rate it does not mean that rate is anticompetitive as long as it is less than the regulated maximum transportation rate charged on the pipeline.

"In this [El Paso-Dynegy] case we had a contract provision [the IT provision] that really had nothing to do with the rates, but it..minimized competition," said Edwards. "And the FERC said 'well we really don't have to look at that; we don't have to look at these antitrust type of issues or whether competition has been minimized. All we have to do under the Natural Gas Act is see if the rate is just and reasonable, and since these rates are less than the maximum rate, that's where our analysis stops.' The court said 'no,' and the court was right."

Edwards said she's concerned FERC may try to delay a decision on these issues until the Dynegy contracts terminate at the end of the year. At that point, FERC could rule the issues are moot. "The fact that somebody else could negotiate a contract like this means [FERC] needs to rule on the legality of these contracts. [They] can't hide behind mootness on this one."

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