FERC last week dealt a partial blow to Dynegy Marketing andTrade’s control over a portion of its contracted-for capacity on ElPaso Natural Gas to California, resulting in a measured victory forthe state’s regulators and San Juan producers. Dynegy enjoyed atriumph of sorts as well, however. The Commission upheld the bulkof its prior decision approving the whopping El Paso-Dynegyarrangement, finding that while it posed some competitive concerns,it was not “unduly discriminatory” in nature.

On rehearing, the Commission relaxed the circumstances underwhich El Paso shippers could recall from Dynegy the so-called BlockII capacity (614 MMcf/d) to deliver gas to northern Californiaexclusively. That particular block of capacity was included in thenow-infamous contract arrangement in which Dynegy purchased 1.3Bcf/d of unsubscribed capacity on El Paso in late 1997. Prior tothat, however, Pacific Gas and Electric (PG&E) paid $54 millionas part of El Paso’s 1996 customer settlement to preserve the rightof the pipeline’s shippers to recall the Block II capacity to serveend-users in its service territory in northern California. Bothsides have been battling over whose rights take precedence.

Significantly, the Commission’s draft order affirmed that ElPaso shippers were entitled to recall the capacity if they neededit to deliver gas to northern California while Dynegy was using itto provide service to other markets. The Block II capacity underthe El Paso settlement was set aside to ensure service to northernCalifornia primarily. FERC last week said the recall provisionswere an integral part of El Paso’s tariff when the pipelinenegotiated its arrangement with Dynegy and could not be altered bythe contract.

However, in a strange twist the Commission also granted Dynegythe ability to call back the Block II capacity if it is to be usedto serve end-users in northern California. “…..[I]f Dynegy wishesto use any of the Block II capacity to serve northern Californiathat other shippers have recalled for the same purpose, [it] may inturn recall the capacity for its own use” upon giving a 24-hournotice, it said [RP97-28-019].

Dynegy was “still analyzing” the changes made on rehearing, but”I don’t think that they are debilitating,” said Peter Esposito,vice president and regulatory counsel at Dynegy. “They’re not thetype at least at first blush — we have to talk to El Paso yet —that makes the contract useless,” he told NGI. “Our intent hasalways been to use the primary points [north of the system] toserve northern California,” he noted. Although he didn’t want torule out the possibility of Dynegy seeking rehearing, Esposito saidhe didn’t see a “screaming need” for it.

In its June 1998 order approving the El Paso-Dynegy contract,the Commission recognized that El Paso shippers had recall rightsto the Block II capacity but only on a limited basis. Last week’sdecision lifted some of the restrictions that had been imposedpreviously on the El Paso shippers, making it easier for them toseek recall. El Paso shippers were defined as either end-users innorthern California or sellers of gas/capacity to that market.

Probably most important, FERC reversed itself and found that ElPaso shippers could exercise the recall option on Block II capacityeven when other capacity was available on either El Paso orcompeting systems to northern California. Previously it held thatshippers had to exhaust all other avenues before they could seekrecall of the Block II capacity. But that “conclusion in the priororder [was] inconsistent with the 1996 [El Paso] settlement…”

In recalling capacity from Dynegy, El Paso shippers would berequired to pay the maximum rate to contract for one month or less,and “at least” 12 cents Dth/d for more than one month, the ordersaid. “[I]n neither case is Dynegy’s position likely to bethreatened as long as it has sales in northern California and canuse the capacity for its own use…”

The Commission also reversed its prior ruling that shipperscould only recall Block II capacity on terms that were acceptableto El Paso. It said the pipeline was bound by its tariffprovisions, which require it to recall Block II capacity if theshippers requesting the capacity “at least match the rate in thecontract covering the capacity to be recalled and subscribe [to]such capacity for more than one month.” These tariff provisions are”clearly obligatory in nature,” the draft order noted. “…..ElPaso may not withhold the capacity to obtain a higher rate as longas the [price bid by shippers] at least matches the price for whichthe capacity was sold” to Dynegy.

Right to Hold Idle Capacity Upheld

Responding to a request by the California Public UtilitiesCommission (CPUC), the Commission, however, upheld the right ofDynegy to withhold “idle” Block II capacity from the Californiamarket. “If the capacity is idle but is not being used [by Dynegy]to serve areas outside of northern California, under currentCommission policy Dynegy may hold the capacity without anyobligation to release it,” the draft order said.

The CPUC argued that withholding capacity from the Californiamarket violated the 1996 settlement with El Paso because it allowedDynegy to engage in the hoarding of capacity. But FERC counteredthat CPUC’s position didn’t “reflect the language of the 1996settlement.”

Although the Commission conceded some ground on the recallissue, it held firm to its previous finding that the El Paso-Dynegycontract arrangement was neither “unjust or unreasonable nor undulydiscriminatory.” It further rejected the requests of Exxon Co.U.S.A. and other major producers for FERC to subject the contractto a more rigorous review using antitrust principles.

Since early 1998, producers have voiced a number of concernsover the Dynegy contract, which required the Houston marketer topay for at least 50% of the 1.3 Bcf/d capacity in 1998 ($28million) and 72% in 1999 ($42 million). Aside from the sheermagnitude of the contract, producers have been most troubled by theReservation Reduction Mechanism (RRM) in the agreement, whichrequires El Paso to credit to Dynegy revenues generated from itssales of interruptible capacity that exceed an historicalthreshold. The net effect of the provision, producers complained,was to limit IT sales by El Paso, and to increase the deliveredprice for firm transportation to California. On rehearing, FERCaffirmed that the RRM was “anticompetitive,” but added that it wasnot “unduly discriminatory” given the “current levels of demand forgas transportation in the California market and the practicalimpact of the RRM in that market.”

The draft order reported that about 892 MMcf/d was available toDynegy competitors between January 1998 and January 1999, which wasmore than double the amount of capacity the Houston gas marketercould withhold from the market this year without incurring apenalty. “Where such a substantial amount of capacity isavailable…..neither Dynegy nor El Paso appears to have been ableto materially influence prices,” the draft order said.

And “while capacity-release prices have varied, they do notreflect the consistently high levels that might be expected ifDynegy’s withholding of capacity was determining the price oftransportation capacity paid by Dynegy’s competitors,” it noted.Any price increase in secondary-market capacity was attributed to a”reduction in the supply rather than [to] Dynegy’s and El Paso’sdecision not to compete with each other.”

Nor has Dynegy been able to “materially influence” gas sales inCalifornia, the draft order concluded. “If Dynegy possessed themarket power that Exxon, the petitioners and the CPUC ascribe toit, basis differentials between the California gas sales market andthe Southwest producing basins would be increasing compared toother differentials as Dynegy drove up the price of gas inCalifornia at a time that demand was increasing. This has notoccurred…”

Susan Parker

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