FERC has come down on the side of Phelps Dodge Corp. in acomplex contract dispute with El Paso Natural Gas. In the end, ithas ordered the Texas-based pipeline to either add the deliverypoints sought by Phelps Dodge, or to show cause within a month why- due to operational and capacity constraints on its system – itcan’t comply.

The Commission’s ruling was in response to a complaint filed inDecember 1997 in which Phelps Dodge said El Paso agreed to add thedelivery points to service its Texas mining facility in the wake ofa global settlement in 1988, but then did a complete turnaboutafter a 1995 rate settlement because it realized it wouldn’t getany incremental revenue under Phelps Dodge’s existing agreement ifit did so. That’s because the rate settlement, to which PhelpsDodge’s contract is subject, locked in customers’ firmtransportation rates for more than a 10-year period in return forEl Paso shippers agreeing to underwrite some of the costsassociated with unsubscribed capacity on the pipeline.

Specifically, the contract demand and billing determinants onwhich the settlement rates are based would remain frozen for 10years. Consequently, any increase in a full-requirements customer’sgas usage during that period – such as Phelps Dodge is seeking -would not translate into higher reservation rates for El Paso. Infact, the end result would be a lower unit rate for gas serviceprovided to Phelps Dodge by El Paso.

El Paso’s denial of additional service to Phelps Dodge wasdriven by its after-the-fact realization that honoring suchcontractual commitments following the 1995 settlement would not bein its best financial interest, the refining corporation insisted.El Paso has offered to provide the service to Phelps Dodge’srefining plant in El Paso, TX., but under a separate contract.Phelps Dodge rejected the offer because it says such servicewouldn’t be subject to the rate moratorium of the settlement.

El Paso contends that Phelps Dodge’s agreement requires it toadd delivery points only in cases where an existing facility hasn’tbeen previously served – either directly or indirectly – by thepipeline. It noted it currently indirectly serves the PhelpsDodge’s Texas facility by delivering gas on behalf of BurlingtonResources Trading. But Phelps Dodge countered that its contract iswith Burlington Resources, not El Paso.

The dispute between the two “turns largely” on theinterpretation of the word “indirectly,” FERC said in its order[CP98-159]. The positions advanced by both parties are “plausible,”but “in our view, …extrinsic evidence supports Phelps Dodge.”

Phelps Dodge “has offered evidence that [certain] language wasadded to its service agreement, as well as to those of othersimilarly situated shippers, to clarify that non-LDC fullrequirements shippers had certain rights to add delivery points,”the order noted.

El Paso questioned whether FERC had jurisdiction over thecontract matter, but the Commission begged to differ – particularlysince the case involves the proper implementation of the terms of arate settlement. “It is important that the Commission ensures thatneither El Paso nor its shippers attempt to manipulate the terms ofservice agreements in order to take advantage of or avoid theintended effects of the rate settlement.”

Further, FERC said it was unable to determine whether there wasany merit to El Paso’s claims that it would be unable to providenew service to Phelps Dodge’s Texas facility due to operational andcapacity constraints on its system. If El Paso should decide toshow cause why it can’t add the delivery facilities, the Commissionordered the pipeline to provide the necessary flow information andcapacity data to back up its claim.

Susan Parker

©Copyright 1998 Intelligence Press, Inc. All rightsreserved. The preceding news report may not be republished orredistributed in whole or in part without prior written consent ofIntelligence Press, Inc.