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Dynegy-El Paso Contracts Get FERC Nod

Dynegy-El Paso Contracts Get FERC Nod

Dynegy Corp., formerly Natural Gas Clearinghouse, and El Paso Natural Gas won a clear victory last week over competing shippers and the California Public Utilities Commission (CPUC) when FERC ratified with only minor changes the three contracts signed by Dynegy to lease 1.3 Bcf/d of capacity on El Paso.

The rehearing order issued by the Federal Energy Regulatory Commission shot down claims by gas producers, marketers and the CPUC that the contracts were anticompetitive and unduly discriminatory, giving Dynegy control of a large portion of El Paso firm capacity and resulting in higher California border prices. Specifically, the producers and others took issue with an interruptible (IT) revenue crediting mechanism in the contracts, which they contend significantly reduced competition between El Paso's IT and the firm capacity held by Dynegy. A state source doubted FERC's ruling would be the last word on the subject. The Federal Trade Commission reportedly is eyeing the contracts, too.

The fact that the contracts make use of the large amount of unsubscribed capacity on El Paso's system and that the rates being charged to shippers are "well below" El Paso's maximum rate ceiling "outweigh any concerns that the transaction is unduly discriminatory or anticompetitive," the order said [RP97-287-010]. "The Commission, therefore, concludes that the [contracts are] not unduly discriminatory or anticompetitive."

The protesters argued that the contracts restrained competition in the secondary market and, as such, violated antitrust laws and should be considered within that context. The Commission denied their request, saying it was "not charged with administering or enforcing the antitrust laws." It conceded the protesters' competitive concerns had some merit within the framework of Order 636. But the key question was whether those concerns "[rose] to the level of unduly discriminatory behavior," the order noted.

In the end, the Commission concluded that the Dynegy-El Paso transaction, specifically the IT crediting provision, "while it is anticompetitive because it reduces El Paso's incentives to compete, it does not result in an unduly discriminatory situation in the gas transportation market to California." The IT crediting provision at issue has been the subject of controversy because it calls for El Paso to adjust downward Dynegy's $70-million payment for the 1.3 Bcf/d of capacity if the pipeline should exceed its 1997 level of monthly IT volume sales over the next two years. Producers and marketers blamed the IT crediting mechanism for El Paso's decision to halt discounting of westbound IT capacity earlier this year.

The Commission conceded the IT crediting mechanism "reduces El Paso's incentives to discount its IT and to compete as a gas transporter" with Dynegy. However, without it, Dynegy would never have agreed to enter into the contracts with El Paso, and the pipeline's situation would be "materially worse."

Moreover, FERC pointed out that while transportation rates from the San Juan and Permian basins to California have risen since Jan. 1, 1998, when the Dynegy-El Paso contracts became effective, they are still "well below" the maximum rates on both El Paso and Transwestern Pipeline. In addition, the California gas sales market is forecasted to show "little or no growth" while the contracts are in effect, making it "unlikely that the market for firm transportation will be so constrained as a result of either [the contracts or the IT revenue crediting mechanism] that undue discrimination will result during the balance of the two-year contract terms," the order noted.

No Demonstrated Injury

Given these factors and the fact that El Paso is not required to offer capacity at less than its maximum rate, protesters have "no grounds to complain" that elements of the contracts are unduly discriminatory or inconsistent with the public interest, FERC said. "The protesters have not demonstrated injury to themselves as [Dynegy's] competitors or [to] the public that warrants relief under the just and reasonable standard..."

The Commission, however, ordered El Paso and Dynegy to amend the contracts so that the IT crediting mechanism "will never apply in any month in which [Dynegy] flows sufficient volumes to meet its monthly minimum pay obligation under the contracts at issue."

The CPUC and Pacific Gas and Electric (PG&ampE) won a mixed decision on the recallability of the Block II portion (644 MMcf/d) of the capacity that El Paso sold to Dynegy. The two argued that the awarding of the Block II capacity violated the terms of El Paso's 1996 settlement with its customers. As part of the agreement, PG&ampE paid $58 million to preserve access for northern California customers to San Juan Basin gas.

The Commission ruled that shippers located in northern California couldn't recall the Block II capacity simply because it wasn't being used by Dynegy. "The fact that [Dynegy] may at times not actually use the capacity does not diminish the rights of other shippers under the 1996 settlement; this occurred because they did not acquire the Block II capacity when it was available," the Commission order said. However, it added the transportation capacity would become recallable in the event that Dynegy used it to serve customers outside of PG&ampE's service territory.

FERC said it wanted the recall provisions associated with the Block II capacity to be implemented in a fair manner to both Dynegy and the recalling shipper. "Since the recall feature is effective only in periods of constrained firm transportation demand in northern California, the Commission believes that the recall feature should be exercised only if firm capacity is not available for a shipper to northern California on El Paso or on any other pipeline available to the shipper," it said. "If such capacity is not available, the shipper may request Block II capacity either from [Dynegy] or from El Paso..."

FERC said "the recall should be exercised only if [Dynegy] declines to release Block II capacity that it is not using for service to California on terms acceptable to the shipper requesting the release." If this occurs, "the shipper may demand that El Paso recall the Block II capacity at a rate acceptable to both parties."

FERC also dismissed arguments that the posting of the three contracts as a single transaction, rather than separately, amounted to an illegal tying arrangement. It rejected protesters' claims that the 72-hour notice given for interested parties to review the transaction was insufficient. Given the "numerous opportunities to purchase the capacity at issue, a complaint that the notice may have been unclear, or the response period too short, rings hollow," the order said, adding that the posting conformed to the Gas Industry Standards Board's requirements.

Susan Parker

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