Battle Over El Paso Capacity Escalates

Natural Gas Clearinghouse (NGC) defended its large purchase of long-term El Paso Natural Gas capacity as necessary to its substantial and growing California markets last week at the same time critics labeled its recent offer to sell off some of the capacity a "hollow gesture."

The California Public Utilities Commission (CPUC) called NGC's posting of 40% of the 1.3 Bcf/d it has contracted on El Paso a "thinly veiled attempt to appear that it is not hoarding the Block II capacity from shippers who intend to serve the northern California market...." The marketer intentionally set a high minimum bid and imposed "onerous" terms and conditions "to ensure that no shipper would ever bid for it," the CPUC said.

Meanwhile, NGC insisted the protesters, mainly competing marketers and producers, "are crying and crying loudly" because they no longer are the beneficiaries of the "fire-sale release prices" that they have grown accustomed to over the years in the California market [RP97-287-010]. "They cry because NGC...agreed to buy that capacity at a price that is greater than they were willing to offer."

Ever since the El Paso-NGC capacity deal went into effect in January, competing shippers on the El Paso system have been clamoring for NGC to release some of that capacity. But when it did so earlier this month, offering the entire Block II capacity of 593,122 Dth/d, the silence was deafening.

That's because NGC set a bid price that was nearly triple what it paid El Paso for the capacity, according to Michael J. Harris of Reed Consulting Group. In an affidavit submitted to FERC on behalf of a group of producers and marketers, Harris said the minimum demand bid price established by NGC of $0.346 Dth/d was 288% more than the 12 cents Dth/d that it paid El Paso three months earlier.

Further, the posting required shippers to bid for the entire amount of capacity, with a 95% take-or-pay requirement, for either the month of April 1998 or the entire term of May 1, 1998 to Jan. 1, 2000. "NGC is fully aware that no shipper would need or ever bid for this entire amount of capacity with a 95% TOP. Indeed, NGC itself only was willing to bid for this capacity if it had no greater than a 50% TOP in 1998 and a 72% TOP in 1999," the CPUC said. It also "knew full well that no shipper would bid $0.35 Dth/d under NGC's capacity release offer."

But NGC said it didn't receive a single inquiry from shippers asking if it was willing to release a smaller amount or lower its price. Furthermore, it said industry hasn't shown any interest in the 45,000 Dth/d of California-bound firm capacity that El Paso posted recently. The capacity was turned back by Amoco, one of the loudest and sharpest critics of the El Paso-NGC deal.

"That none of the complaining parties...has taken NGC up on its offer makes it crystal clear what they want, and it is not the capacity for which NGC has committed to pay $70 million. Rather, the complaining parties want deeply discounted capacity for which they do not have to make a substantial up-front commitment. They have no entitlement to this," NGC told FERC.

Harris said the bid price established by NGC was far in excess of the average minimum bids achieved for capacity releases on El Paso during 1997. He noted the average minimum bid then was $0.092 Dth/d, which makes NGC's asking price about 370% greater.

Additional "evidence of the uneconomic nature of the posting is found by comparing NGC's minimum bid with the basis differential between the San Juan Basin and the California Border," Harris said. He estimated NGC's minimum demand bid ($0.346 Dth/d) and the variable costs to transport on El Paso (about 12 cents Dth/d) combined were almost 23 cents greater than the historical basis differential of 24 cents Dth/d during 1997. "Under normal circumstances, a shipper will only acquire released El Paso capacity if the minimum demand bid rate plus commodity and fuel charges is less than, or equal to, the San Juan-California basis differential."

His affidavit was given on behalf of Amoco, Burlington Resources, Marathon Oil and Phillips Petroleum, which have asked FERC to set aside the El Paso-NGC contracts and order El Paso to re-post the capacity for competitive bidding.

The marketers and producers reported the San Juan-California border basis differentials for the February-March-April period of 1998 have more than doubled since last year. So far this year, basis differentials have been 35 cents (February), 33 cents (March) and 31 cents (April), up considerably from 17 cents, 15 cents and 16 cents, respectively, in 1997. "The spreads are getting wider, suggesting that the injury to the marketplace will only get worse with the passage of time," Amoco and the others contend. "This is evidence of actual harm that has occurred..."

The marketers/producers, as well as the CPUC, have asked FERC to investigate the alleged anticompetitive nature of the El Paso-NGC contracts. "The magnitude of the amount of capacity in these contracts (approximately 1.3 Bcf/d) in conjunction with NGC's signing up for more than 40% of [Southern California Gas'] capacity available year-long for capacity releases, strongly indicates that NGC was taking firm capacity off the market in order to deprive its competitors of discounts on southwestern interstate pipelines serving California similar to the discount [it] enjoyed," the CPUC said. It also insists the El Paso-NGC deal violates El Paso's rate settlement.

NGC Outlines Demand

Responding to the "incendiary" allegations, NGC revealed for the first time why it purchased such a large amount of pipeline capacity. Specifically, it said it bought the capacity to serve its historical markets in California (on average 1 Bcf/d), which includes the refineries of one of its major shareholders, Chevron; its newly acquired El Segundo and Long Beach generation facilities (400,000 Dth/d peak); the 11 cogeneration facilities acquired from affiliate Destec, as existing gas supply contracts expire or are renegotiated; power generation facilities it is considering acquiring or building in the future; retail (mainly industrial) markets it will compete for once access is permitted; and load growth and new customers (i.e. generation units divested by California investor-owned utilities in the future).

"NGC bought the capacity to use it, not to sit on it as alleged by the parties in this case," it told the Commission. NGC said it didn't buy capacity for the purpose of reselling it. "This doesn't mean NGC won't release capacity; NGC just doesn't buy the capacity with the intent of doing so." If it wanted to be in the business of selling capacity, it would consider buying a pipeline.

The marketer acknowledged it "has been conservative in determining what, if anything, it will voluntarily release...NGC is still feeling out what its ultimate demand and market are going to be" in the wake of electric restructuring, its acquisition of the El Segundo and Long Beach generation facilities, and the closings of other divested generation facilities.

NGC also defended itself against charges that the interruptible revenue crediting mechanism in the NGC-El Paso contracts amounted to a "covenant not to compete." The provision freezes El Paso's monthly IT volume sales at their 1997 sales level for the next two years. NGC insisted on it so that it wouldn't be "left holding the bag" if El Paso decided to sell IT capacity to the same demand that NGC was looking to serve. If El Paso should exceed that IT threshold, the agreement calls for the pipeline to adjust downward NGC's $70-million payment for the capacity. Protesting marketers and producers blame the IT crediting mechanism for El Paso's decision to halt discounting of California-bound IT capacity on its system [See related story, page 7].

Although that mechanism does "limit NGC's downside risk should El Paso suddenly ramp up its IT marketing efforts," it "clearly does not limit El Paso's marketing efforts," the marketer said. Indeed, "as the value of IT rises in the marketplace, El Paso has greater and greater incentives to market IT, even at a discount. And, should the price rise to the maximum lawful rate, El Paso has an obligation to sell any capacity that any shipper, NGC or others, is not using, thereby establishing an absolute cap on the prices of transportation."

Protesters also "make much of the rise in basis differentials" since early this year, but they ignore the fact that gas prices at the California border "have actually dropped since the contract took effect and are roughly half of what they were a year ago," NGC noted. It cited several reasons for the change in basis differential, such as PG&ampE no longer dumping capacity onto the release market and artificially driving down prices, and El Paso implementing a new, more restrictive pooling scheme on its system that gives shippers an incentive to use transportation contracts directly rather than pools. The impact, if any, of NGC's ownership of El Paso capacity on overall prices for transportation capacity and/or natural gas in the Southwest is "speculative at best."

Likewise, NGC dismissed claims that it now has monopoly control over California-bound pipeline capacity. "There are other pipelines - Kern River/Mojave, Transwestern and PGT, in addition to in-state production - that are sources of supply for the California market," it said, adding that its rights on these lines - including El Paso - amount to only about 20% of the capacity. "...[A]ntitrust law has used [at a minimum] a 50% marker for the transfer of monopoly power, so there can be no argument that El Paso transferred monopoly power to NGC."

Lost in the entire debate is the beneficial nature of the NGC-El Paso deal for northern California customers, the marketer said. Without it, El Paso and its customers would have been burdened with the costs associated with the capacity that PG&ampE had planned to turn back late last year. "Instead of the ratepayers of northern California taking on $120 million in demand charges per year for unnecessary capacity (and subsidizing artificially cheap released capacity,) NGC is taking the risk, without any captive customers on which to impose that risk."

Susan Parker

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