El Paso's Proposed Service to Pinnacle West Knocked

A proposal by El Paso Natural Gas to build a new delivery point and associated lateral facilities to provide "full requirements" service of 410 MMcf/d to a new generation plant destined for the Arizona market has been met by a barrage of criticism from existing producer- and utility-shippers on the pipeline.

Indicated Shippers, which includes seven major producers, Pacific Gas and Electric and Southwest Gas Corp. contend the service would further constrain an already capacity-tight El Paso system, and would give Pinnacle West Energy Corp., which is seeking the capacity for its proposed Redhawk Power Plant, a competitive rate advantage over existing customers on the pipeline [CP01-90].

Specifically, the producers and utilities object to El Paso's proposal to assign the full-requirements contract (66,042 MMBtu/d) of Arizona Public Service Co. to affiliate Pinnacle West Energy, as well as grant a "huge increase" in the contract amount in order to serve Pinnacle's proposed 2,120 MW, gas-fired generation facility in Maricopa County, AZ, that is due to go into service on June 1, 2002. Both Arizona Public Service and Pinnacle West Energy are subsidiaries of Pinnacle West Capital Corp.

El Paso also proposes to add a second new delivery point to provide 210 MMcf/d of natural gas service to a proposed Duke Energy generation plant, to be located near the Pinnacle West facility, but this only drew the concern of Southwest Gas.

In a protest filed April 13, the producers asked the Commission to reject the Pinnacle "full-requirements" contract as not being in the "public interest," and order the company to negotiate a "specified" contract demand under a new contract, and pay demand charges on that basis. But before negotiating a new contract, they said El Paso should be required to expand its system and demonstrate that it can serve this incremental demand for Pinnacle and that it has eliminated scheduling cuts for existing firm shippers on its system. PG&E and Southwest Gas, who were concerned about degradation of service to existing El Paso customers as well, made similar requests.

Indicated Shippers and PG&E noted that they were all for pipeline expansions and new generation projects in the West that don't adversely affect pipeline service to existing customers. But "El Paso's proposed increase in full-requirements service to Pinnacle --- to a level that appears to be nearly six times more than the billing determinants for which Pinnacle will pay a demand charge --- does not meet those conditions," the producers told FERC.

Under El Paso's application, the producers claim that Pinnacle would get a "free ride" since it would only have to pay a straight fixed variable commodity charge of about $0.02 MMBtu (plus fuel) for all of the volumes in excess of the billing determinants of 66,042 MMBtu/d specified in the current contract with Arizona Public Service, to which it would be assigned. For the volumes at or below the 66,042 MMBtu/d level, Pinnacle would pay a demand charge of about $0.30/MMBtu.

PG&E objected to proposed service to Pinnacle West on this score as well. "Pinnacle West, like any other similarly situated merchant generator, should be required to pay reservation charges for every unit of firm service to which it subscribes," it told the Commission.

Moreover, "there are no limits to nominations under the contract and Pinnacle would be able to nominate volumes from all receipt points, including the capacity-constrained San Juan Basin (where gas prices are typically less than the other supply basins to El Paso). This results in a huge, and discriminatory, competitive advantage for the new Redhawk Power Plant...," the Indicated Shippers argued.

It is "highly questionable whether the capacity is available to provide the additional requirements under the Pinnacle contract," not to mention the additional demand related to other [Arizona Public Service] expansions projects," such as the 530 MW, gas-fired West Phoenix plant to be completed in the summer of 2003, and a 120 MW facility to be completed this summer, the producers said. The two plants would require an additional 100-150 MMcf/d of natural gas from El Paso's system, they noted.

"Adding additional demand to the capacity-constrained El Paso system will exacerbate even more the chronic scheduling cuts of firm nominations that are continuing to occur on El Paso at all portions of its system. These scheduling cuts must be resolved before El Paso should be permitted to sell any additional firm capacity," the producers said.

Duke Energy is planning to build a 1,000 MW, gas-fired generation facility near the Redhawk Power Plant, but Indicated Shippers said they didn't oppose this since Duke will obtain its gas supplies from bundled gas suppliers, new capacity postings and the capacity-release market. "The proposed service to Duke is not a full-requirements service and, as such, does not raise the same concerns regarding detrimental impacts on existing customers..." Duke's Arlington Valley Power Plant, which would demand about 210 MMcf/d of gas, also is scheduled to go into service on June 1, 2002.

Unlike Indicated Shippers, however, Southwest Gas was equally as concerned about El Paso's proposal for 210 MMcf/d of gas service to the Duke Energy facility --- the arrangements for which "do not appear to be well established," it said. Together, the Duke Energy and Pinnacle West Energy generation plants "will draw upon 620 MMcf/d of South System mainline capacity," the gas distributor noted. "Even assuming that Pinnacle and Duke have legitimate transportation rights, their use of 620 MMcf/d of mainline capacity could impact the rights of other customers."

Southwest Gas believes the Commission should only authorize the projects provided that El Paso can continue to meet its existing service obligations, including full-requirements service obligations to other customers, after the new lateral facilities go into operation.

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