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Koch Parking Deal Irks Shippers

Koch Parking Deal Irks Shippers

Amoco Production, Amoco Energy Trading, Dynegy and Marathon Oil have filed a protest at FERC charging Koch Gateway with discrimination and violation of affiliate rules. The four shippers said the pipeline and its affiliate, Koch Energy Trading (KET), have been speculating on price spreads between market points and the Henry Hub using Koch's gas parking and lending (PAL) service, and preventing other Koch shippers from taking advantage of the same opportunities.

Under the PAL service, in which the pipe essentially is used as short-term storage, Koch Gateway receives 80-90% of the parking customer's profits on index-based spreads. It has been providing the service for more than a year and often handles significant quantities of gas under the program. This dispute primarily involves four PAL contracts filed late last month that were signed last fall by the pipeline and its affiliate. The contracts called for various large packages of the affiliate's gas (totaling more than 345,000 MMBtu/d) to be parked on the pipe for the month of February 2000 and returned in portions during March, April and May. The affiliate pays an option fee of between 1 cent and 5 cents plus 90% of any profits won using the service.

The service has been designed "to permit KET to buy and sell offsetting futures contracts in order to profit on any spread difference," the shippers explained to FERC. "Supposedly, KET would not exercise its option for the parking service unless it has entered into contracts resulting in a positive spread differential for KET."

"While this type of arrangement between affiliates may make economic sense where 100% of the profits all go to the same parent corporation, as applied to non-affiliated marketers, this approach is clearly unduly discriminatory and preferential," the four shippers said.

According to the shippers, Koch Gateway shifted to a 90% profit-sharing requirement "only after Dynegy contacted Koch and requested the same deal as KET... Although Dynegy believes the 80% figure was overly rich for the pipeline, hedging/trading profits were possible at these levels. The shift to 90% simply underscored the fact that this type of parking arrangement is only available to Koch's marketing affiliate."

The shippers also told FERC that Koch unfairly waited four months to inform the Commission of its transactions. They claim the reason was to prevent others from requesting the same service while it was particularly valuable.

"...Koch and KET combined could make substantial sums on these deals by trading on Nymex futures in advance of the arrangement's effective date," they told FERC. "For example, when the Jan. 14, 1999 agreement was entered into, Nymex gas prices for November 1999 and April 2000 were fairly flat. Under that agreement, KET had 9 months (January until Nov. 1) to enter into futures contracts where the November 1999 Nymex.....price was trading at a price lower than the April 2000 commodity futures price. (KET could lock in pricing spreads by entering into one contract to buy gas to be parked in November 1999 and a separate contract to sell gas in April 2000 when the parked gas is returned). In addition, KET could enter into these types of futures contracts each time the spread moved, thereby multiplying its profits.....

"Furthermore, KET has had the unique opportunity to tie up more than half of the capacity moving into the Henry Hub for the month of November 1999," they added. "Koch's physical design capacity at the Henry Hub is about 300,000 MMBtu/d and KET has the option to inject up to 166,667 MMBtu/d for the month of November. This factor alone provides KET with an unfair competitive advantage over its competitors on Koch's system, and in combination with the factors described above, devastates the ability of any shipper to compete with KET on Koch's system.....

"This overt gaming of the Commission's market affiliate regulations is utterly and completely contrary to principles of open and nondiscriminatory access."

The shippers urged the Commission to reject all negotiated agreements between Koch Gateway Pipeline and its marketing affiliate. If FERC does not do this, it should at least require the pipeline to post all agreements on its electronic bulletin board at the time they are entered into and require Koch to offer the same basic deal to non-affiliated shippers.

Rocco Canonica

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