Battle Over El Paso Capacity Escalates
Natural Gas Clearinghouse (NGC) defended its large purchase of
long-term El Paso Natural Gas capacity as necessary to its
substantial and growing California markets last week at the same
time critics labeled its recent offer to sell off some of the
capacity a "hollow gesture."
The California Public Utilities Commission (CPUC) called NGC's
posting of 40% of the 1.3 Bcf/d it has contracted on El Paso a
"thinly veiled attempt to appear that it is not hoarding the Block
II capacity from shippers who intend to serve the northern
California market...." The marketer intentionally set a high
minimum bid and imposed "onerous" terms and conditions "to ensure
that no shipper would ever bid for it," the CPUC said.
Meanwhile, NGC insisted the protesters, mainly competing
marketers and producers, "are crying and crying loudly" because
they no longer are the beneficiaries of the "fire-sale release
prices" that they have grown accustomed to over the years in the
California market [RP97-287-010]. "They cry because NGC...agreed to
buy that capacity at a price that is greater than they were willing
Ever since the El Paso-NGC capacity deal went into effect in
January, competing shippers on the El Paso system have been
clamoring for NGC to release some of that capacity. But when it did
so earlier this month, offering the entire Block II capacity of
593,122 Dth/d, the silence was deafening.
That's because NGC set a bid price that was nearly triple what
it paid El Paso for the capacity, according to Michael J. Harris
of Reed Consulting Group. In an affidavit submitted to FERC on
behalf of a group of producers and marketers, Harris said the
minimum demand bid price established by NGC of $0.346 Dth/d was
288% more than the 12 cents Dth/d that it paid El Paso three months
Further, the posting required shippers to bid for the entire
amount of capacity, with a 95% take-or-pay requirement, for either
the month of April 1998 or the entire term of May 1, 1998 to Jan.
1, 2000. "NGC is fully aware that no shipper would need or ever bid
for this entire amount of capacity with a 95% TOP. Indeed, NGC
itself only was willing to bid for this capacity if it had no
greater than a 50% TOP in 1998 and a 72% TOP in 1999," the CPUC
said. It also "knew full well that no shipper would bid $0.35 Dth/d
under NGC's capacity release offer."
But NGC said it didn't receive a single inquiry from shippers
asking if it was willing to release a smaller amount or lower its
price. Furthermore, it said industry hasn't shown any interest in
the 45,000 Dth/d of California-bound firm capacity that El Paso
posted recently. The capacity was turned back by Amoco, one of the
loudest and sharpest critics of the El Paso-NGC deal.
"That none of the complaining parties...has taken NGC up on its
offer makes it crystal clear what they want, and it is not the
capacity for which NGC has committed to pay $70 million. Rather,
the complaining parties want deeply discounted capacity for which
they do not have to make a substantial up-front commitment. They
have no entitlement to this," NGC told FERC.
Harris said the bid price established by NGC was far in excess
of the average minimum bids achieved for capacity releases on El
Paso during 1997. He noted the average minimum bid then was $0.092
Dth/d, which makes NGC's asking price about 370% greater.
Additional "evidence of the uneconomic nature of the posting is
found by comparing NGC's minimum bid with the basis differential
between the San Juan Basin and the California Border," Harris said.
He estimated NGC's minimum demand bid ($0.346 Dth/d) and the
variable costs to transport on El Paso (about 12 cents Dth/d)
combined were almost 23 cents greater than the historical basis
differential of 24 cents Dth/d during 1997. "Under normal
circumstances, a shipper will only acquire released El Paso
capacity if the minimum demand bid rate plus commodity and fuel
charges is less than, or equal to, the San Juan-California basis
His affidavit was given on behalf of Amoco, Burlington
Resources, Marathon Oil and Phillips Petroleum, which have asked
FERC to set aside the El Paso-NGC contracts and order El Paso to
re-post the capacity for competitive bidding.
The marketers and producers reported the San Juan-California
border basis differentials for the February-March-April period of
1998 have more than doubled since last year. So far this year,
basis differentials have been 35 cents (February), 33 cents (March)
and 31 cents (April), up considerably from 17 cents, 15 cents and
16 cents, respectively, in 1997. "The spreads are getting wider,
suggesting that the injury to the marketplace will only get worse
with the passage of time," Amoco and the others contend. "This is
evidence of actual harm that has occurred..."
The marketers/producers, as well as the CPUC, have asked FERC to
investigate the alleged anticompetitive nature of the El Paso-NGC
contracts. "The magnitude of the amount of capacity in these
contracts (approximately 1.3 Bcf/d) in conjunction with NGC's
signing up for more than 40% of [Southern California Gas'] capacity
available year-long for capacity releases, strongly indicates that
NGC was taking firm capacity off the market in order to deprive its
competitors of discounts on southwestern interstate pipelines
serving California similar to the discount [it] enjoyed," the CPUC
said. It also insists the El Paso-NGC deal violates El Paso's rate
NGC Outlines Demand
Responding to the "incendiary" allegations, NGC revealed for the
first time why it purchased such a large amount of pipeline
capacity. Specifically, it said it bought the capacity to serve its
historical markets in California (on average 1 Bcf/d), which
includes the refineries of one of its major shareholders, Chevron;
its newly acquired El Segundo and Long Beach generation facilities
(400,000 Dth/d peak); the 11 cogeneration facilities acquired from
affiliate Destec, as existing gas supply contracts expire or are
renegotiated; power generation facilities it is considering
acquiring or building in the future; retail (mainly industrial)
markets it will compete for once access is permitted; and load
growth and new customers (i.e. generation units divested by
California investor-owned utilities in the future).
"NGC bought the capacity to use it, not to sit on it as alleged
by the parties in this case," it told the Commission. NGC said it
didn't buy capacity for the purpose of reselling it. "This doesn't
mean NGC won't release capacity; NGC just doesn't buy the capacity
with the intent of doing so." If it wanted to be in the business of
selling capacity, it would consider buying a pipeline.
The marketer acknowledged it "has been conservative in
determining what, if anything, it will voluntarily release...NGC is
still feeling out what its ultimate demand and market are going to
be" in the wake of electric restructuring, its acquisition of the
El Segundo and Long Beach generation facilities, and the closings
of other divested generation facilities.
NGC also defended itself against charges that the interruptible
revenue crediting mechanism in the NGC-El Paso contracts amounted
to a "covenant not to compete." The provision freezes El Paso's
monthly IT volume sales at their 1997 sales level for the next two
years. NGC insisted on it so that it wouldn't be "left holding the
bag" if El Paso decided to sell IT capacity to the same demand that
NGC was looking to serve. If El Paso should exceed that IT
threshold, the agreement calls for the pipeline to adjust downward
NGC's $70-million payment for the capacity. Protesting marketers
and producers blame the IT crediting mechanism for El Paso's
decision to halt discounting of California-bound IT capacity on its
system [See related story, page 7].
Although that mechanism does "limit NGC's downside risk should
El Paso suddenly ramp up its IT marketing efforts," it "clearly
does not limit El Paso's marketing efforts," the marketer said.
Indeed, "as the value of IT rises in the marketplace, El Paso has
greater and greater incentives to market IT, even at a discount.
And, should the price rise to the maximum lawful rate, El Paso has
an obligation to sell any capacity that any shipper, NGC or others,
is not using, thereby establishing an absolute cap on the prices of
Protesters also "make much of the rise in basis differentials"
since early this year, but they ignore the fact that gas prices at
the California border "have actually dropped since the contract
took effect and are roughly half of what they were a year ago," NGC
noted. It cited several reasons for the change in basis
differential, such as PG&E no longer dumping capacity onto the
release market and artificially driving down prices, and El Paso
implementing a new, more restrictive pooling scheme on its system
that gives shippers an incentive to use transportation contracts
directly rather than pools. The impact, if any, of NGC's ownership
of El Paso capacity on overall prices for transportation capacity
and/or natural gas in the Southwest is "speculative at best."
Likewise, NGC dismissed claims that it now has monopoly control
over California-bound pipeline capacity. "There are other pipelines
- Kern River/Mojave, Transwestern and PGT, in addition to in-state
production - that are sources of supply for the California market,"
it said, adding that its rights on these lines - including El Paso
- amount to only about 20% of the capacity. "...[A]ntitrust law has
used [at a minimum] a 50% marker for the transfer of monopoly
power, so there can be no argument that El Paso transferred
monopoly power to NGC."
Lost in the entire debate is the beneficial nature of the NGC-El
Paso deal for northern California customers, the marketer said.
Without it, El Paso and its customers would have been burdened with
the costs associated with the capacity that PG&E had planned to
turn back late last year. "Instead of the ratepayers of northern
California taking on $120 million in demand charges per year for
unnecessary capacity (and subsidizing artificially cheap released
capacity,) NGC is taking the risk, without any captive customers on
which to impose that risk."