Controversial arrangements between pipelines and marketers -similar to the one awarding Dynegy Marketing and Trade sole controlof 1.3 Bcf/d of the remaining unsubscribed capacity on El PasoNatural Gas – could proliferate if FERC should uncap prices in theshort-term capacity market without first ensuring that adequatesafeguards are in place for pipeline customers, Californiaregulators warned.

“The Dynegy situation illustrates how easy it was for a pipelineor unregulated marketer to artificially inflate transportationrates and California border prices for an entire year. And if suchartificial increases are possible in the California market with 1Bcf/d to 2 Bcf/d of excess interstate pipeline market, it would beeven easier for pipelines or marketers to artificially increaseprices in markets that have less excess pipeline capacity,” theCalifornia Public Utilities Commission (CPUC) said in supplementalcomments on the notice of proposed rulemaking (NOPR) and notice ofinquiry (NOI).

The CPUC has blamed Dynegy for driving up prices for firmtransportation between the southwestern producing basins and theCalifornia border, both in the primary and secondary capacitymarkets, by withholding El Paso capacity from shippers, and alsofor causing increases in natural gas prices at the Californiaborder. Citing the gas marketer’s influence, the regulators notedSouthern California Gas managed to get 33%-89% of the as-billedrate (ABR) for releases of short-term capacity in 1998 – the firstyear of the Dynegy-El Paso contract. “This [was] a far cry from therange of 3% to 39% of the ABR which the California LDCs receivedfor capacity releases prior to the Dynegy-El Paso contracts.” Itrepresented a 200%-300% increase in the capacity-release rates, butstill was below the rate cap. If FERC should abandon the priceceiling, it would erase “the only protection that presently existsfor ratepayers.”

The CPUC said FERC’s proposed mandatory daily auction ofshort-term capacity could “theoretically” prevent potential marketabuses in an uncapped market, but in the end it questions whetheran auction would be workable.

El Paso quickly responded to the CPUC’s remarks, insisting thatgas prices at the California/Arizona border decreased in 1998 andthat other factors – aside from the Dynegy contract – wereresponsible for the increase in the basis differentials between thesouthwestern producing basins and the California/Arizona borderduring that year.

The pipeline contends the average price of natural gas at theborder fell 10% to $2.24 in 1998 from $2.50 for the previous year.And while it agrees the basis differentials between theCalifornia/Arizona border and southwestern producing basins were”generally higher” in 1998, El Paso says the CPUC “ignores the factthat basis differentials have fallen sharply since early December1998, to the point where basis differentials throughout the monthof January 1999 were approximately equal to the differentials thatexisted in late 1997.”

It further noted that “several factors wholly unrelated to theDynegy contract” – such as reduced demand in the Midwest andweather-induced demand increases in the California market – were”substantial factors” accounting for the rise in basisdifferentials during 1998.

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