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

The rehearing order issued by the Federal Energy RegulatoryCommission shot down claims by gas producers, marketers and theCPUC that the contracts were anticompetitive and undulydiscriminatory, giving Dynegy control of a large portion of El Pasofirm capacity and resulting in higher California border prices.Specifically, the producers and others took issue with aninterruptible (IT) revenue crediting mechanism in the contracts,which they contend significantly reduced competition between ElPaso’s IT and the firm capacity held by Dynegy. A state sourcedoubted FERC’s ruling would be the last word on the subject. TheFederal Trade Commission reportedly is eyeing the contracts, too.

The fact that the contracts make use of the large amount ofunsubscribed capacity on El Paso’s system and that the rates beingcharged to shippers are “well below” El Paso’s maximum rate ceiling”outweigh any concerns that the transaction is undulydiscriminatory or anticompetitive,” the order said [RP97-287-010].”The Commission, therefore, concludes that the [contracts are] notunduly discriminatory or anticompetitive.”

The protesters argued that the contracts restrained competitionin the secondary market and, as such, violated antitrust laws andshould be considered within that context. The Commission deniedtheir request, saying it was “not charged with administering orenforcing the antitrust laws.” It conceded the protesters’competitive concerns had some merit within the framework of Order636. But the key question was whether those concerns “[rose] to thelevel of unduly discriminatory behavior,” the order noted.

In the end, the Commission concluded that the Dynegy-El Pasotransaction, specifically the IT crediting provision, “while it isanticompetitive because it reduces El Paso’s incentives to compete,it does not result in an unduly discriminatory situation in the gastransportation market to California.” The IT crediting provision atissue has been the subject of controversy because it calls for ElPaso to adjust downward Dynegy’s $70-million payment for the 1.3Bcf/d of capacity if the pipeline should exceed its 1997 level ofmonthly IT volume sales over the next two years. Producers andmarketers blamed the IT crediting mechanism for El Paso’s decisionto halt discounting of westbound IT capacity earlier this year.

The Commission conceded the IT crediting mechanism “reduces ElPaso’s incentives to discount its IT and to compete as a gastransporter” with Dynegy. However, without it, Dynegy would neverhave agreed to enter into the contracts with El Paso, and thepipeline’s situation would be “materially worse.”

Moreover, FERC pointed out that while transportation rates fromthe San Juan and Permian basins to California have risen since Jan.1, 1998, when the Dynegy-El Paso contracts became effective, theyare still “well below” the maximum rates on both El Paso andTranswestern Pipeline. In addition, the California gas sales marketis forecasted to show “little or no growth” while the contracts arein effect, making it “unlikely that the market for firmtransportation will be so constrained as a result of either [thecontracts or the IT revenue crediting mechanism] that unduediscrimination will result during the balance of the two-yearcontract terms,” the order noted.

No Demonstrated Injury

Given these factors and the fact that El Paso is not required tooffer capacity at less than its maximum rate, protesters have “nogrounds to complain” that elements of the contracts are undulydiscriminatory 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 reliefunder the just and reasonable standard…”

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

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

The Commission ruled that shippers located in northernCalifornia couldn’t recall the Block II capacity simply because itwasn’t being used by Dynegy. “The fact that [Dynegy] may at timesnot actually use the capacity does not diminish the rights of othershippers under the 1996 settlement; this occurred because they didnot acquire the Block II capacity when it was available,” theCommission order said. However, it added the transportationcapacity would become recallable in the event that Dynegy used itto serve customers outside of PG&ampE’s service territory.

FERC said it wanted the recall provisions associated with theBlock II capacity to be implemented in a fair manner to both Dynegyand the recalling shipper. “Since the recall feature is effectiveonly in periods of constrained firm transportation demand innorthern California, the Commission believes that the recallfeature should be exercised only if firm capacity is not availablefor a shipper to northern California on El Paso or on any otherpipeline available to the shipper,” it said. “If such capacity isnot available, the shipper may request Block II capacity eitherfrom [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 forservice to California on terms acceptable to the shipper requestingthe release.” If this occurs, “the shipper may demand that El Pasorecall the Block II capacity at a rate acceptable to both parties.”

FERC also dismissed arguments that the posting of the threecontracts as a single transaction, rather than separately, amountedto an illegal tying arrangement. It rejected protesters’ claimsthat the 72-hour notice given for interested parties to review thetransaction was insufficient. Given the “numerous opportunities topurchase the capacity at issue, a complaint that the notice mayhave been unclear, or the response period too short, rings hollow,”the order said, adding that the posting conformed to the GasIndustry Standards Board’s requirements.

Susan Parker

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