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FERC, Justice Nip at Kinder Morgan's Heels

FERC, Justice Nip at Kinder Morgan's Heels

Last week was an "Excedrin headache" kind of week for Kinder Morgan Inc. It began with the company trying to get a Colorado court to toss out a Justice Department complaint alleging that affiliate Natural Gas Pipeline Co. of America (NGPL) failed to obtain the necessary air quality permits for a compressor station it built in Colorado more than 20 years ago. The complaint, which Justice brought on behalf of the Environmental Protection Agency, seeks the maximum statutory penalties from the company, which could soar into the millions.

Things went downhill after that. Next, Kinder Morgan was ordered to pay a whopping civil penalty of nearly $5.1 million and make refunds to gas customers, as well as to comply with certain contract and business restrictions, in a far-reaching stipulation and consent agreement that it signed with the Federal Energy Regulatory Commission.

The agreement ends a nearly two-year investigation and audit conducted by the Commission's Enforcement staff and Office of Finance, Accounting and Operations, respectively, into predecessor KN Energy's (KNE) "apparent" violations of marketing-affiliate standards under Order 497, which bars pipes from showing preference to their marketing affiliates and from disclosing to marketing affiliates information obtained from non-affiliated shippers. It also requires "operating employees" of pipelines and marketing affiliates to function independently of each other. Kinder Morgan inherited the marketing-affiliate problems last year when it acquired KNE, parent of KN Interstate Gas Transmission (KNI) and NGPL.

Kinder Morgan neither admitted nor denied the violations, but it entered into the agreement nevertheless to avoid any "extended [civil] litigation" or "prolonged regulatory proceedings" at FERC. The company must pay the civil penalty within 30 days, and none of it will be recoverable through rates..

Kinder Morgan was "pleased" with the settlement because it "resolve[d] another outstanding issue that existed prior to our merger with KN Energy," said Kinder Morgan Chairman Richard D. Kinder. Moreover, he stressed the settlement, which "reinforces our 'back-to-basics' strategy," will have "no substantial effect financially on our business, as [Kinder Morgan] has accrued sufficient reserves to cover the matter."

Nor will any litigation stemming from the Justice Department's complaint have a "material adverse effect on our business, cash flow, financial position or results of operations," Kinder said, adding that NGPL denies the allegations made in the complaint. "Prior to beginning construction, we had discussions with the state and obtained all of the permits that we believed were required to build the Akron facility," he noted. Kinder Morgan last week filed a "motion to dismiss" the complaint in Colorado Federal District Court.

While Justice was trying to impose penalties on NGPL, FERC last week gave the pipeline a break. The Commission agreed in the consent order not to assess a suspended $4.42 million civil penalty against NGPL, which helped to soften the blow of the $5.1 million penalty. FERC slapped NGPL with an $8.8 million fine in early 1998 after an investigation substantiated allegations by Amoco Production that the pipeline showed preferential treatment to a marketing affiliate, MidCon Gas Services, over non-affiliated shippers when allocating capacity. At the time, FERC chose to suspend half of the penalty on the condition that NGPL remained free of marketing-affiliate improprieties for two years. The consent agreement pointed to numerous marketing-affiliate violations by Kinder Morgan companies over the two-year period, but still FERC last week waived half of the fine against NGPL.

In addition to the $5.1 million penalty, Kinder Morgan will be required to make refunds of $674,428 (including $92,749 in interest) within the next 60 days to 23 non-affiliated customers as part of the consent agreement, which was negotiated by the FERC Office of General Counsel's Enforcement section. Some of the refund customers include Aquila Energy Marketing, Arizona Public Service, Chevron, El Paso Natural Gas, Enron, Dynegy Crude Gathering, Louis Dreyfus Natural Gas, Seagull Marketing Services, Sonat Marketing, Teco Gas Marketing, Transok Gas Co. and Texaco Natural Gas. The refunds also will not be recoverable through rates.

The stipulation and consent agreement applies to the entire family of Kinder Morgan companies, including Kinder Morgan Interstate Gas Transmission (formerly KNI), KN Wattenberg Transmission LLC, NGPL, Kinder Morgan Inc., Kinder Morgan Energy Partners L.P., and KN WesTex Gas Services, as well as their subsidiaries and affiliates.

As part of the settlement with FERC, Kinder Morgan also agreed to implement a very detailed compliance plan, which will remain in effect for two years. The plan, among other things, calls for the company to develop and maintain organizational charts; update the charts within 10 days of changes involving "operating" employees, officers, directors, supervisory personnel or managers; ban the sharing of officers, board members or employees between pipelines and marketing affiliates; update its tariff to reflect these changes; relocate all marketing-affiliate employees from the shared facility in Lakewood, CO, and deny them card-key access (which Kinder Morgan says it has done already); maintain a log of visits of marketing-affiliate officials to pipeline companies, and vice versa; and perform quarterly checks on its information technology system to ensure that marketing affiliates don't have access to information on non-affiliated shippers. Kinder Morgan will provide FERC with progress updates twice a year on how it is complying with the plan, according to the stipulation and agreement.

For the next two years, Kinder Morgan is barred from entering into any new contracts for transportation or storage of natural gas with existing or new marketing affiliates, or amending existing contracts to increase the transportation capacity for a marketing affiliate.

During the next three years, Kinder Morgan further has agreed to notify FERC's Enforcement division within 30 days of creating or acquiring any new affiliate to transport or market natural gas or transportation capacity on its systems, whether the new affiliate be an "agent, aggregator, shipper or marketer."

In an attempt to address FERC's concerns, Kinder Morgan said it had entered into a definitive agreement to sell to Oneok Inc. its interests in marketing-affiliate assets. As part of the same transaction, it also will sell Westar Transmission Co., Caprock Pipeline Co., Buffalo Wallow Pipeline, American Gas Storage L.P., according to the consent agreement. Two other companies, KN WesTex Gas Services and Wildhorse Energy Partners LLC, were excluded from the deal since WesTex ceased operating last July and Wildhorse no longer holds capacity on any pipeline affiliated with Kinder Morgan. Kinder Morgan expects to receive more than $400 million for the sale of assets to Oneok, which is due to close soon, said spokesman Larry Pierce.

Susan Parker, Rocco Canonica

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