Transwestern Denies Withheld Capacity to Boost Negotiated Deals

A Transwestern Pipeline executive last week dismissed allegations that the pipeline withheld firm transportation capacity for service to California from recourse-rate shippers last winter by arranging substantially more lucrative negotiated-rate deals prior to posting available capacity to its web site.

Mary Kay Miller, vice president of rates and certificates, acknowledged Transwestern may have had discussions and exchanged faxes last January (prior to posting its available capacity) with two shippers -- Sempra Energy and Richardson Products II Ltd. -- that subsequently entered into negotiated-rate transactions for February and March on the pipeline. But she stressed that any requests for capacity by Sempra Energy and Richardson were considered "moot" by the pipeline until after the available operational capacity was posted.

"Even if they would have sent...a fax the day before" the capacity became available, "it would have been irrelevant because there was no capacity posted" at that time, said Miller. Capacity requests that came in prior to Jan. 31, the day that available capacity was posted for February contracts on Transwestern, were "null and void." The only "relevant" ones were those that Transwestern received on or after Jan. 31, she noted.

Miller spent much of last Wednesday on the stand being quizzed by lawyers for FERC and producers about Transwestern's methods for notifying customers about available capacity, the manner in which it chooses winning bids and about its pre-posting contacts with Sempra Energy and Richardson.

It was the first day of the FERC hearing exploring charges that Transwestern exercised market power in awarding negotiated-rate contracts that led to shippers being charged as much as $27/MMBtu last February, far in excess of the pipeline's maximum allowed rate of 38 cents/MMBtu for firm transportation service to the California border (See NGI, July 30). The Commission proceeding last Wednesday focused on the four negotiated-rate contracts of Sempra Energy and Richardson for a total 45,000 MMBtu/d of service on Transwestern during February and March.

Richardson and Sempra "clearly did not have any 'deal' entitling them to the posted capacity before it was posted," Miller said in prepared rebuttal testimony. The two companies "had the right to the capacity only 'after' they submitted their bids, 'after' the posting period ended, 'after' Transwestern determined that no other bids were submitted, and 'after' a contract was agreed upon between Transwestern, Richardson or Sempra," she noted.

Despite claims made by FERC energy industry analyst Barry E. Sullivan to the contrary, "Transwestern did not withhold capacity that otherwise could have been made available under recourse rates in order to make the capacity available under substantially higher negotiated rates," Miller testified.

She noted that even Sempra Energy and Richardson, in response to a data request by Southern California Edison, backed Transwestern's claims. Both companies replied "no" when asked whether "any employee of Transwestern or any Transwestern affiliate ever indicated at any time that Transwestern would not provide the capacity at the maximum tariff rate."

The "capacity at issue was offered on Transwestern's web site at the recourse rate in the exact same manner that all other capacity is offered on Transwestern's web site at the recourse rate; there was no prohibition, restrictions, limitation, condition or suggestion that a potential shipper could not bid for the capacity at the recourse rate; and any potential shipper, including Richardson or Sempra, could have submitted a bid for the capacity at the recourse rate."

FERC's Sullivan contends that Transwestern's motive for allegedly advancing negotiated-rate transactions at the expense of recourse-rate deals was pure profit. Under questioning by Thomas J. Burgess of FERC's OMTR, Miller estimated that Transwestern earned $1.8 million from Sempra Energy's contract in March, $1.3 million from Richardson's March contract, and a "comparable" amount from Richardson's February contract. She noted the pipeline received a "substantially higher" amount as a result of Sempra's February contract arrangement, but she didn't provide an exact figure. FERC's Sullivan estimated the pipeline's profit from the Sempra February contract was more than $5 million.

Sullivan said that much of the profits that wound up in Transwestern's coffers would have gone to Sempra Energy and Richardson if they have been able to acquire the capacity at recourse rates. But Miller countered that the Commission's negotiated-rate policy "does not require a minimum level of profit to shippers or contemplate any hindsight analysis of whether shippers could have gotten a better deal or made more profits."

Furthermore, she said the Transwestern case shouldn't be used to consider changes to the negotiated-rate policy, as Sullivan had suggested. This case "is the wrong forum for such an issue because modifying the negotiated-rate policy should only be done on an industry-wide basis so no pipeline or group of pipeline customers is competitively disadvantaged."

In prepared testimony filed in the case, FERC's Sullivan accused Transwestern of illegally charging shippers market-based rates for firm transportation capacity to the California border earlier this year "under the guise of negotiated rates."

The Commission "has never granted Transwestern the authority to charge market-based rates for interstate natural gas transportation. Nevertheless, in the dysfunctional Southern California natural gas market, and in particular during the recent January 2001 to March 2001 period...Transwestern clearly exercised its market power to arrange negotiated-rate deals before properly posting [its] operationally available capacity on its web site," charged Sullivan, a member of the FERC Office of Markets, Tariffs and Rates' Division of Litigation.

Transwestern discussed potential negotiated-rate transactions with Sempra Energy and Richardson prior to actually posting the available capacity on its web site, Sullivan claims. Because the level of capacity that would be available at the recourse rate is unknown at that stage (before posting), some shippers might be more "willing to enter into negotiated-rate contracts above the recourse rate, in the hope of securing some of the capacity if and when [it] became available," he noted. They "might agree to a negotiated rate...even without receiving additional value or service" because they are "either unsure or concerned that the capacity will not be made available at the recourse rate."

This is tantamount to withholding of capacity on Transwestern, Sullivan charged. "The reason this behavior is problematic is that Transwestern is able to capture part of the price differential" between the California border and the Southwest producing basins "by threatening to withhold the capacity unless the shipper agrees to the negotiated rates."

Although the capacity was posted by Transwestern for one business day and open to all of the pipeline's shippers at maximum recourse rates, "no party other than the shippers (Sempra and Richardson) that actually acquired the capacity [at negotiated rates], bid on this short-term excess firm capacity," Sullivan said.

He said he found this puzzling. "At that time, capacity into southern California was at a premium...Shippers could make extraordinary profits if they could move gas to southern California. Yet, no other shippers bid on this capacity, even at a discounted rate."

If, however, another shipper had submitted a recourse-rate bid for available capacity, Transwestern's Miller said it would have been treated in the same manner as Sempra Energy's and Richardson's negotiated-rate bids. The pipeline would have held a lottery under which it would have "randomly selected the winner," she noted. "Thus, the willingness of Richardson and Sempra to pay a negotiated rate above the recourse rate did not provide them with any preference..."

Sullivan said he found it hard to believe that Sempra Energy and Richardson readily agreed to negotiated-rate transactions, where they came out the losers and Transwestern reaped huge profits. It "is difficult to accept the conclusion that one of these shippers [Sempra] willingly negotiated away a virtually risk-free profit of approximately $5 million, settling instead for a completely risk-free profit of approximately $200,000, while another [Richardson] willingly agreed to forego additional profits of almost $2 million."

If Sempra Energy had acquired the capacity at Transwestern's maximum recourse rate, Sullivan estimated that the company's profits would have been more than $5.2 million, compared to the estimated $210,000 that it received under the negotiated-rate deal. Richardson's profits from the capacity would have been almost double those of last February -- $3.4 million rather than $1.8 million, he said.

Transwestern, on the other hand, received more than $5 million as a result of its contract arrangement with Sempra Energy last February, he calculated, and about $1.8 million from the Richardson contract arrangement.

Transwestern witnesses said Sempra Energy and Richardson agreed to the negotiated-rate deals -- and smaller profits -- to avoid paying demand costs in the event their gas did not flow. But Sullivan called this argument "spurious" since the "contracts were for day-to-day service, with either party able to cancel with two hours notice."

Moreover, he noted that Sempra Energy would have had to pay only $5,700/day under its February contract deal of 15,000 MMBtu/d if the gas had not flowed and Sempra failed to give Transwestern two hours notice. "Clearly, the downside risk was minimal when compared to the potential upside gain."

The price differential between the southern California border and the Southwest producing basins would have had to slip below $1.18 for the negotiated rates to have been a better business deal for Sempra Energy than the recourse rate, Sullivan said. But last January, the price differentials ranged from a low of $5.01 to a high of $9.25, with a ten-day average of $7.36.

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