Many of the “incendiary” allegations arising from Natural GasClearinghouse’s (NGC) acquisition of 1.3 Bcf/d of firmtransportation capacity from El Paso Natural Gas – that thecontracted amount far exceeded NGC’s market needs, that NGC hasacquired monopoly control over pipeline capacity into California,that California border prices have shot up as a result, and thatthe contracts contain a “covenant” whereby NGC and El Paso haveagreed not to compete – have generated a lot of smoke, but no realfire, the Houston-based gas marketer says.

Although “loathe to disclose its competitive strategies,” NGCrevealed for the first time why it sought such a huge amount ofpipeline capacity from El Paso. Specifically, it said it bought thecapacity to serve: its historical markets in California (on average1 Bcf/d), which includes serving the refineries of one of its majorshareholders, Chevron; its newly acquired El Segundo and Long Beachgeneration facilities (400,000 Dth/d peak); the elevenco-generation facilities acquired from affiliate Destec, asexisting gas supply contracts expire or are renegotiated; powergeneration facilities it is considering acquiring or building inthe future; retail (mainly industrial) markets it will compete foronce access is permitted; and load growth and new customers (i.e.generation units divested by California investor-owned utilities inthe future).

NGC doesn’t believe that competing producers and marketers, whohave protested its acquisition of the El Paso capacity, are allthat interested in the capacity itself. Yet, it said, they don’twant NGC to have it under its thumb either. This plainly wasevident when NGC put up 40% of its San Juan-to-California capacityfor release earlier this month, but had no takers. “They complainthat NGC has not posted the capacity for release, yet they do notbid for it or even inquire about negotiating when NGC capitulatesand puts a portion out for release,” the marketer said in commentsrecently filed at FERC [RP97-287-010].

NGC also defended itself against charges that the interruptiblecrediting mechanism in the NGC-El Paso contracts amounted to a”covenant not to compete.” The mechansim in the contracts freezesEl Paso’s monthly IT volume sales at their 1997 sales level for thenext two years. NGC insisted on this proviso to dissuade El Pasofrom selling IT capacity to the same demand that NGC intends toserve with the 1.3 Bcf/d of firm capacity that it picked up from ElPaso late last year. 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 andproducers blame the IT crediting mechanism for El Paso’s decisionto halt discounting of California-bound IT capacity on its system.

Although that mechanism does “limit NGC’s downside risk shouldEl Paso suddenly ramp up its IT marketing efforts,” it “clearlydoes not limit El Paso’s marketing efforts,” the marketer said.Indeed, “as the value of IT rises in the marketplace, El Paso hasgreater and greater incentives to market IT, even at a discount.And, should the price rise to the maximum lawful rate, El Paso hasan obligation to sell any capacity that any shipper, NGC or others,is not using, thereby establishing an absolute cap on the prices oftransportation.”

Protesters also “make much of the rise in basis differentialssince this contract went into effect. They ignore, however, thefact that gas prices at the California border have actually droppedsince the contract took effect and are roughly half of what theywere a year ago,” NGC noted. It cited several reasons for thechange in differentials, such as the fact that Pacific Gas &Electric (PG&E) is no longer dumping capacity onto the releasemarket and artificially driving down prices.

Likewise, NGC dismissed claims that it, with the acquisition ofa large chunk of El Paso’s capacity, now has monopoly control overCalifornia-bound pipeline capacity. “There are other pipelines -Kern River/Mojave, Transwestern and PGT, in addition to in-stateproduction – 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 hasused [at a minimum] a 50% marker for the transfer of monopolypower, so there can be no argument that El Paso transferredmonopoly power to NGC.”

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