Last week was an “Excedrin headache” kind of week for KinderMorgan Inc. It began with the company trying to get a Coloradocourt to toss out a Justice Department complaint alleging thataffiliate Natural Gas Pipeline Co. of America (NGPL) failed toobtain the necessary air quality permits for a compressor stationit built in Colorado more than 20 years ago. The complaint, whichJustice brought on behalf of the Environmental Protection Agency,seeks the maximum statutory penalties from the company, which couldsoar into the millions.

Things went downhill after that. Next, Kinder Morgan was orderedto pay a whopping civil penalty of nearly $5.1 million and makerefunds to gas customers, as well as to comply with certaincontract and business restrictions, in a far-reaching stipulationand consent agreement that it signed with the Federal EnergyRegulatory Commission.

The agreement ends a nearly two-year investigation and auditconducted by the Commission’s Enforcement staff and Office ofFinance, Accounting and Operations, respectively, into predecessorKN Energy’s (KNE) “apparent” violations of marketing-affiliatestandards under Order 497, which bars pipes from showing preferenceto their marketing affiliates and from disclosing to marketingaffiliates information obtained from non-affiliated shippers. Italso requires “operating employees” of pipelines and marketingaffiliates to function independently of each other. Kinder Morganinherited the marketing-affiliate problems last year when itacquired KNE, parent of KN Interstate Gas Transmission (KNI) andNGPL.

Kinder Morgan neither admitted nor denied the violations, but itentered 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 ofit will be recoverable through rates..

Kinder Morgan was “pleased” with the settlement because it”resolve[d] another outstanding issue that existed prior to ourmerger 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 effectfinancially on our business, as [Kinder Morgan] has accruedsufficient reserves to cover the matter.”

Nor will any litigation stemming from the Justice Department’scomplaint have a “material adverse effect on our business, cashflow, 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 stateand obtained all of the permits that we believed were required tobuild the Akron facility,” he noted. Kinder Morgan last week fileda “motion to dismiss” the complaint in Colorado Federal DistrictCourt.

While Justice was trying to impose penalties on NGPL, FERC lastweek gave the pipeline a break. The Commission agreed in theconsent order not to assess a suspended $4.42 million civil penaltyagainst NGPL, which helped to soften the blow of the $5.1 millionpenalty. FERC slapped NGPL with an $8.8 million fine in early 1998after an investigation substantiated allegations by AmocoProduction that the pipeline showed preferential treatment to amarketing affiliate, MidCon Gas Services, over non-affiliatedshippers when allocating capacity. At the time, FERC chose tosuspend half of the penalty on the condition that NGPL remainedfree of marketing-affiliate improprieties for two years. Theconsent agreement pointed to numerous marketing-affiliateviolations by Kinder Morgan companies over the two-year period, butstill FERC last week waived half of the fine against NGPL.

In addition to the $5.1 million penalty, Kinder Morgan will berequired to make refunds of $674,428 (including $92,749 ininterest) within the next 60 days to 23 non-affiliated customers aspart of the consent agreement, which was negotiated by the FERCOffice of General Counsel’s Enforcement section. Some of the refundcustomers include Aquila Energy Marketing, Arizona Public Service,Chevron, El Paso Natural Gas, Enron, Dynegy Crude Gathering, LouisDreyfus Natural Gas, Seagull Marketing Services, Sonat Marketing,Teco Gas Marketing, Transok Gas Co. and Texaco Natural Gas. Therefunds also will not be recoverable through rates.

The stipulation and consent agreement applies to the entirefamily of Kinder Morgan companies, including Kinder MorganInterstate Gas Transmission (formerly KNI), KN WattenbergTransmission LLC, NGPL, Kinder Morgan Inc., Kinder Morgan EnergyPartners L.P., and KN WesTex Gas Services, as well as theirsubsidiaries and affiliates.

As part of the settlement with FERC, Kinder Morgan also agreedto implement a very detailed compliance plan, which will remain ineffect for two years. The plan, among other things, calls for thecompany to develop and maintain organizational charts; update thecharts within 10 days of changes involving “operating” employees,officers, directors, supervisory personnel or managers; ban thesharing of officers, board members or employees between pipelinesand marketing affiliates; update its tariff to reflect thesechanges; relocate all marketing-affiliate employees from the sharedfacility in Lakewood, CO, and deny them card-key access (whichKinder Morgan says it has done already); maintain a log of visitsof marketing-affiliate officials to pipeline companies, and viceversa; and perform quarterly checks on its information technologysystem to ensure that marketing affiliates don’t have access toinformation on non-affiliated shippers. Kinder Morgan will provideFERC with progress updates twice a year on how it is complying withthe plan, according to the stipulation and agreement.

For the next two years, Kinder Morgan is barred from enteringinto any new contracts for transportation or storage of natural gaswith existing or new marketing affiliates, or amending existingcontracts to increase the transportation capacity for a marketingaffiliate.

During the next three years, Kinder Morgan further has agreed tonotify FERC’s Enforcement division within 30 days of creating oracquiring any new affiliate to transport or market natural gas ortransportation capacity on its systems, whether the new affiliatebe an “agent, aggregator, shipper or marketer.”

In an attempt to address FERC’s concerns, Kinder Morgan said ithad entered into a definitive agreement to sell to Oneok Inc. itsinterests in marketing-affiliate assets. As part of the sametransaction, it also will sell Westar Transmission Co., CaprockPipeline Co., Buffalo Wallow Pipeline, American Gas Storage L.P.,according to the consent agreement. Two other companies, KN WesTexGas Services and Wildhorse Energy Partners LLC, were excluded fromthe deal since WesTex ceased operating last July and Wildhorse nolonger holds capacity on any pipeline affiliated with KinderMorgan. Kinder Morgan expects to receive more than $400 million forthe sale of assets to Oneok, which is due to close soon, saidspokesman Larry Pierce.

Susan Parker, Rocco Canonica

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