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Shippers Show Harmonious Support for El Paso Rate Settlement

In an unusual display of harmony, the majority of California and east-of-California shippers, large natural gas consumers and state regulators either support or do not oppose El Paso Natural Gas pipeline's proposed three-year settlement for transportation rates and services on its system. It appears that the only shipper contesting the settlement is Phoenix, AZ-based Phelps Dodge Corp.

El Paso and its shippers have "kicked the can representing some of their [past] disputes down the road" in order to reach this compromise, said the El Paso Municipal Customer Group, a coalition of municipal gas distributors on the El Paso system, in comments filed at FERC [RP05-422]. "These disputes have not evaporated, but rather the parties have paused to do their business under a new regime and consider their positions afresh."

El Paso, a pipeline subsidiary of Houston-based El Paso Corp., and its shippers "have done a lot of things right in this settlement. Primarily, they have avoided a lengthy litigation," the municipal distributors said.

The proposed settlement provides certainty for both El Paso and its shippers by resolving "complex and contentious" rate and service issues for a three-year period ending Jan. 1, 2009. An El Paso spokesman, when contacted by NGI, was unable to provide some of the key terms of the proposed settlement. The rate agreement is subject to approval by the Federal Energy Regulatory Commission.

This marks the first general rate proceeding for El Paso in a decade. The last proceeding was resolved when the pipeline and its shippers negotiated a comprehensive settlement in 1996.

In contesting the settlement, Phelps Dodge said it "would pay substantially more than if there was a just and reasonable resolution of Article 11.2 issues [in the 1996 settlement] based upon a complete evidentiary record." That article specified that certain El Paso shippers would be subject to vintage rate levels in future rate cases and also limited the pipeline's ability to flow through to such shippers the costs of future stranded capacity, Phelps Dodge noted.

The company further said the evidentiary record in the case was incomplete because it failed to tackle the issue of El Paso's withholding of pipeline capacity in the 2000-2001 time period.

Arizona regulators said they did not oppose the El Paso settlement, but they could not support it either. The Arizona Corporation Commission (ACC) said it had "enough concern" with certain impacts of the agreement and the policy directions it takes.

For starters, "the ACC is concerned with the impacts of various penalty provisions on Arizona shippers and whether the end result of this case will be an overly punitive regime," the state regulators said. Another "major concern the ACC has had throughout this case is the impact...on the development of natural gas infrastructure in Arizona and the ability to efficiently move natural gas throughout the region," the commission noted.

"The bundling of services by El Paso and the elimination of a short-haul rate in this case [could] result in an atmosphere where investment in infrastructure, and particularly gas storage infrastructure, by entities other than El Paso is inhibited," the ACC said.

"The ACC believes that developments in other FERC proceedings will be of little or no assistance in developing natural gas storage facilities in Arizona if the underlying competitive paradigm, as reflected in the sum of the incumbent pipeline's tariffs and service provisions, is one that is skewed to the benefit of the dominant incumbent pipeline company in Arizona -- El Paso," Arizona regulators noted.

"This chilling effect is already evident in the exit from Arizona of various third-party storage developers who have considered construction of natural gas storage in the state in recent years, but are no longer active in Arizona."

Key supporters of the proposed El Paso settlement include the El Paso Municipal Customer Group, Southwest Gas Corp. (El Paso's largest East-of-California distribution shipper), Southern California Gas, San Diego Gas & Electric, Arizona Public Service Co., the California Public Utilities Commission, Public Service Company of New Mexico, Indicated Shippers (large producers and marketers) and the Pacific Gas and Electric Co.

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