Attempting to allay the concerns of gas marketers and producers,El Paso Natural Gas last week said its decision to halt discountingof interruptible transportation capacity earlier this year was notin any way tied to its controversial contracts with Natural GasClearinghouse (NGC), but rather was owing to its new status as”swing supplier” for California-bound capacity.

“…[O]ur general view is that the other pipelines to Californiafill up before El Paso does,” making El Paso the swing supplier fortransportation capacity to California and increasing its ability tocommand full freight for its IT, said A.W. “Al” Clark, vicepresident of marketing and operations control. “As the swingsupplier…we [are] providing the marginal unit of transportation.If everybody else was full, that marginal unit of transportationcould command a price in the marketplace that was equal to our fulltariff rate. We [are] the last one that you could move anytransportation across so we charged the full IT rate.”

At a FERC technical conference called to closely examine the ElPaso-NGC contracts, some shippers had a difficult time swallowingEl Paso’s account. “We’ve had multiple conversations” with acustomer representative at El Paso about discounting IT toCalifornia, “and [his] response to that was there would be nodiscounts of IT on El Paso because of the IT credit mechanismwithin the NGC contracts,” a shipper told Clark.

“I’m not going to get into a he-said, she-said discussion withyou. I’m telling you that I set the policy for El Paso Natural Gas,and our policy is no discounting at this time and it’s based on theanalysis I just gave,” Clark countered. “We haven’t seen any basisyet that suggests to us that we [ought to be] offeringinterruptible transportation for anything less than the full rate.”He reminded shippers repeatedly that El Paso was under noregulatory obligation to sell its IT capacity at a discount off themaximum rate.

Marketers and producers, particularly those operating out of thePermian and San Juan basins, are concerned about a provision in thethree NGC contracts that freezes El Paso’s monthly IT volume salesat their 1997 level for the next two years. NGC “insisted” onputting the clause in the contracts so that it wouldn’t be “leftholding the bag” if the pipeline sold IT capacity to the samedemand that NGC was looking to serve with the 1.3 Bcf/d of firmcapacity that it picked up from El Paso late last year. If El Pasoshould exceed that IT threshold, the contracts call for thepipeline to adjust downward NGC’s $70-million payment for thecapacity. Marketers and producers blame the IT crediting mechanismfor El Paso’s decision to halt discounting of westbound ITcapacity, a move which they claim has artificially inflatedtransportation prices to the California border.

Without such a contract provision, “it was clear to me – I wasthe principal negotiator for El Paso on this deal with NGC – thatNGC would not do a deal” to relieve El Paso of the firm capacitythat was destined to be turned back to it at the end of last year,Clark noted. “I want to make it abundantly clear that thisprovision does not preserve for NGC any profit opportunity. All itdoes is it reduces their obligation to pay reservation chargesshould [the] market served by El Paso increase at NGC’s expense.”FERC has accepted the tariff sheets for the NGC contracts, whichwent into effect Jan. 1, subject to the outcome of the technicalconference.

Clark stressed that El Paso would not be turning over anyrevenues to NGC in the event the pipeline exceeds the frozen levelfor IT volume sales. Rather, NGC’s reservation rate would be merelyadjusted downward. Attorneys insisted he was splitting hairs overthe issue. “As another one of your firm customers, we’reindifferent [as] to whether you write us a check or whether wewrite you a smaller one,” remarked one lawyer.

Clark further dismissed suggestions that the NGC contracts wouldsomehow hurt El Paso’s settlement with its customers, which callsfor a 65%-35% sharing of revenues. “There’s no loss of revenue” forsharing. In fact, “the customers will have more money with the NGCdeal than they will without [it].” But, “not as much as they wouldhave if the IT revenue crediting was not a part of the contracts,”shot back Kathy Edwards, attorney for Indicated Shippers. “No, no,”shouted Clark, rising to his feet and shaking his hands. “Thepremise of your observation is wrong. That is what this whole thingboils down to.”

In the end, Clark said, “our capacity is there and available foranybody who wants to move it [at] a full fare…rate. If you don’tlike it because you can’t get cheap transportation on us, I’msorry. That’s what the rate is.”

Edwards called El Paso’s negotiated rate deal with NGC “bold,”but also added that it was “illegal.” Chad King, president of AmocoEnergy and Trading, remarked that no matter how much “perfume youput on it, it doesn’t turn it into a pretty girl.”

Susan Parker

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