Natural Gas Clearinghouse (NGC) defended its large purchase oflong-term El Paso Natural Gas capacity as necessary to itssubstantial and growing California markets last week at the sametime critics labeled its recent offer to sell off some of thecapacity a “hollow gesture.”

The California Public Utilities Commission (CPUC) called NGC’sposting 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 BlockII capacity from shippers who intend to serve the northernCalifornia market….” The marketer intentionally set a highminimum bid and imposed “onerous” terms and conditions “to ensurethat no shipper would ever bid for it,” the CPUC said.

Meanwhile, NGC insisted the protesters, mainly competingmarketers and producers, “are crying and crying loudly” becausethey no longer are the beneficiaries of the “fire-sale releaseprices” that they have grown accustomed to over the years in theCalifornia market [RP97-287-010]. “They cry because NGC…agreed tobuy that capacity at a price that is greater than they were willingto offer.”

Ever since the El Paso-NGC capacity deal went into effect inJanuary, competing shippers on the El Paso system have beenclamoring for NGC to release some of that capacity. But when it didso earlier this month, offering the entire Block II capacity of593,122 Dth/d, the silence was deafening.

That’s because NGC set a bid price that was nearly triple whatit paid El Paso for the capacity, according to Michael J. Harris of Reed Consulting Group. In an affidavit submitted to FERC onbehalf of a group of producers and marketers, Harris said theminimum demand bid price established by NGC of $0.346 Dth/d was288% more than the 12 cents Dth/d that it paid El Paso three monthsearlier.

Further, the posting required shippers to bid for the entireamount of capacity, with a 95% take-or-pay requirement, for eitherthe 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 bidfor this entire amount of capacity with a 95% TOP. Indeed, NGCitself only was willing to bid for this capacity if it had nogreater than a 50% TOP in 1998 and a 72% TOP in 1999,” the CPUCsaid. It also “knew full well that no shipper would bid $0.35 Dth/dunder NGC’s capacity release offer.”

But NGC said it didn’t receive a single inquiry from shippersasking if it was willing to release a smaller amount or lower itsprice. Furthermore, it said industry hasn’t shown any interest inthe 45,000 Dth/d of California-bound firm capacity that El Pasoposted recently. The capacity was turned back by Amoco, one of theloudest and sharpest critics of the El Paso-NGC deal.

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

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

Additional “evidence of the uneconomic nature of the posting isfound by comparing NGC’s minimum bid with the basis differentialbetween the San Juan Basin and the California Border,” Harris said.He estimated NGC’s minimum demand bid ($0.346 Dth/d) and thevariable costs to transport on El Paso (about 12 cents Dth/d)combined were almost 23 cents greater than the historical basisdifferential of 24 cents Dth/d during 1997. “Under normalcircumstances, a shipper will only acquire released El Pasocapacity if the minimum demand bid rate plus commodity and fuelcharges is less than, or equal to, the San Juan-California basisdifferential.”

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

The marketers and producers reported the San Juan-Californiaborder basis differentials for the February-March-April period of1998 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 and16 cents, respectively, in 1997. “The spreads are getting wider,suggesting that the injury to the marketplace will only get worsewith the passage of time,” Amoco and the others contend. “This isevidence of actual harm that has occurred…”

The marketers/producers, as well as the CPUC, have asked FERC toinvestigate the alleged anticompetitive nature of the El Paso-NGCcontracts. “The magnitude of the amount of capacity in thesecontracts (approximately 1.3 Bcf/d) in conjunction with NGC’ssigning up for more than 40% of [Southern California Gas’] capacityavailable year-long for capacity releases, strongly indicates thatNGC was taking firm capacity off the market in order to deprive itscompetitors of discounts on southwestern interstate pipelinesserving California similar to the discount [it] enjoyed,” the CPUCsaid. It also insists the El Paso-NGC deal violates El Paso’s ratesettlement.

NGC Outlines Demand

Responding to the “incendiary” allegations, NGC revealed for thefirst time why it purchased such a large amount of pipelinecapacity. Specifically, it said it bought the capacity to serve itshistorical markets in California (on average 1 Bcf/d), whichincludes 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 fromaffiliate Destec, as existing gas supply contracts expire or arerenegotiated; power generation facilities it is consideringacquiring or building in the future; retail (mainly industrial)markets it will compete for once access is permitted; and loadgrowth and new customers (i.e. generation units divested byCalifornia investor-owned utilities in the future).

“NGC bought the capacity to use it, not to sit on it as allegedby the parties in this case,” it told the Commission. NGC said itdidn’t buy capacity for the purpose of reselling it. “This doesn’tmean NGC won’t release capacity; NGC just doesn’t buy the capacitywith the intent of doing so.” If it wanted to be in the business ofselling capacity, it would consider buying a pipeline.

The marketer acknowledged it “has been conservative indetermining what, if anything, it will voluntarily release…NGC isstill feeling out what its ultimate demand and market are going tobe” in the wake of electric restructuring, its acquisition of theEl Segundo and Long Beach generation facilities, and the closingsof other divested generation facilities.

NGC also defended itself against charges that the interruptiblerevenue crediting mechanism in the NGC-El Paso contracts amountedto a “covenant not to compete.” The provision freezes El Paso’smonthly IT volume sales at their 1997 sales level for the next twoyears. NGC insisted on it so that it wouldn’t be “left holding thebag” if El Paso decided to sell IT capacity to the same demand thatNGC was looking to serve. If El Paso should exceed that ITthreshold, the agreement calls for the pipeline to adjust downwardNGC’s $70-million payment for the capacity. Protesting marketersand producers blame the IT crediting mechanism for El Paso’sdecision to halt discounting of California-bound IT capacity on itssystem [See related story, page 7].

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

Protesters also “make much of the rise in basis differentials”since early this year, but they ignore the fact that gas prices atthe California border “have actually dropped since the contracttook effect and are roughly half of what they were a year ago,” NGCnoted. It cited several reasons for the change in basisdifferential, such as PG&ampE no longer dumping capacity onto therelease market and artificially driving down prices, and El Pasoimplementing a new, more restrictive pooling scheme on its systemthat gives shippers an incentive to use transportation contractsdirectly rather than pools. The impact, if any, of NGC’s ownershipof El Paso capacity onoverall prices for transportation capacityand/or natural gas in the Southwest is “speculative at best.”

Likewise, NGC dismissed claims that it now has monopoly controlover California-bound pipeline capacity. “There are other pipelines- Kern River/Mojave, Transwestern and PGT, in addition to in-stateproduction – 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 hasused [at a minimum] a 50% marker for the transfer of monopolypower, so there can be no argument that El Paso transferredmonopoly power to NGC.”

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

Susan Parker

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