CPUC: El Paso's Agreement Limits Available Capacity
California regulators and Pacific Gas and Electric (PG&E)
last week protested a letter agreement between El Paso Natural Gas
and Dynegy Marketing and Trade that they claim would completely
deprive northern California-bound shippers of the right to recall a
large portion of Block II capacity on the El Paso system, enabling
Dynegy - which now owns the rights to the capacity - to keep it
entirely off the market for the remainder of this year and 1999.
They contend the letter agreement contradicts a June 11th order
in which FERC approved Dynegy's three contracts for 1.3 Bcf/d of
capacity on El Paso subject to modifications, and a 1997 settlement
between El Paso and its customers addressing the problem of
turned-back capacity. Under the settlement, PG&E paid $58.4
million to preserve the Block II capacity (614 MMcf/d) to provide
shippers serving northern California access to the San Juan Basin.
But El Paso sold the capacity for two years to Dynegy, formerly
Natural Gas Clearinghouse (NGC), last year as part of the 1.3 Bcf/d
contract deal, prompting PG&E and state regulators to argue that
the Houston marketer intended to keep the capacity off the market
in order to drive up California border prices. They insist the
Dynegy-El Paso contracts themselves, and now the letter agreement,
directly violate the terms of the 1997 settlement with respect to
their recall rights on the Block II capacity.
In a mixed decision on the issue in June, FERC ruled that
shippers serving northern California couldn't recall the Block II
capacity simply because it wasn't being used by Dynegy. However,
the Commission added the firm transportation capacity would become
recallable in the event that Dynegy used it to serve customers
outside of PG&E's service territory.
The California Public Utilities Commission (CPUC) and PG&E
have taken issue with how El Paso and Dynegy have interpreted the
June order in their letter agreement. "What FERC meant was if
they're [Dynegy] using the capacity some of the time, but it's idle
at other times, that's the nature of firm capacity and that's not
subject to recall" by northern California shippers, said Harvey
Morris, principal attorney at the CPUC. But, the FERC decision did
not give Dynegy the "unilateral right" to withold the availability
of that Block II capacity from northern California shippers for the
entire term of its contract with El Paso. "We don't think that FERC
gave them [Dynegy] the right to simply not serve northern
California at all in two years or prevent anyone else from using
Block II [capacity] to serve northern California."
El Paso Exploiting Ambiguity
Morris conceded FERC's June 11th ruling on recall rights had "a
lot of ambiguity," with some parts of it seeming to favor El
Paso-Dynegy and others favoring the northern California shippers.
In the letter order, which was filed on June 25, "El Paso exploited
every ambiguity in their favor. But there were other things in the
FERC order that went our way. And so we're asking FERC to clarify
that El Paso shouldn't ignore the parts of the order that went our
way on the recall issue," he told NGI.
El Paso dismissed any notion that it may have misinterpreted
the Commission's June ruling on the recall rights. "We feel that El
Paso Natural Gas and Dynegy properly implemented the order with the
amendments we filed at the Commission," said Russ Roberts, a
spokesman for El Paso Energy, parent of the pipeline.
The El Paso-Dynegy letter agreement was submitted in compliance
with the June order, which required the two companies to amend
certain provisions in their contracts - including those addressing
the issue of recall rights. In that agreement, El Paso "went to the
maximum to make sure the recall provision can never be utilized" by
northern California shippers, Morris said. If El Paso's position is
upheld at FERC, it would mean the pipeline took $58.4 million from
PG&E and its ratepayers in return for recall rights that are an
But Morris doesn't think this was what the Commission intended.
"We thought FERC was trying to give us the benefit [of recall
rights] that we got in the El Paso settlement," he noted, adding
that the CPUC was challenging the El Paso-Dynegy letter agreement
on this basis. It also plans to seek rehearing of the June order
today, specifically asking FERC to clarify that its intention was
not to amend the 1997 El Paso settlement, and that El Paso "was
wrong to take things out of context."
But "if FERC is really modifying the settlement in the June
order, it's going to send a bad signal that people should never
settle because it can all of the sudden be undone," Morris said.
"It's also illegal under Section 5 of the Natural Gas Act. The
Commission can't unilaterally without following these [Section 5]
procedures just outright modify what was previously done" in
"We're trying to give the FERC the benefit of the doubt" that
amending the settlement was not its intention since there was "good
language" in the June order that acknowledged the recall rights of
northern California shippers, he noted.
Allocate Recall Capacity
The dispute over the recall rights has an easy solution, Morris
believes. "Let's come up with some objective way to maximize for
them [Dynegy] how much Block II capacity we can realistically
expect they are going to use to serve northern California by adding
the maximum amount they've actually used during the past six
months, and also give them the benefit of the doubt if they have
any new contractual arrangements. That amount is what FERC should
tell El Paso and [Dynegy] to go back and put in their new letter
agreement as not being subject to recall. Everything else...would
be subject to recall."
He conceded the CPUC didn't know how much of the Block II firm
capacity, if any, that Dynegy has used for northern California
since the start of the year. He proposes that Dynegy be required to
disclose that amount to the CPUC and FERC under a confidential
arrangement to protect the proprietary nature of the information.
Morris believes the information should be at Dynegy's fingertips
since "we're already six months into the two-year contract, or over
25% of the time period."
Elsewhere in the letter agreement, the CPUC also took issue with
"attempts to limit the recall feature such that it cannot be
exercised when there is any firm capacity available on El Paso or
any other pipeline to northern California." This is an
"unreasonable restriction," it said. PG&E agreed, noting there
was no such provision in the 1996 settlement requiring it to show
the unavailability of capacity on other pipelines as a condition to
recalling Block II capacity. Also, El Paso "has given itself the
right" to be final arbiter of whether a rate is 'acceptable' to
effect the recall of Block II capacity, the state commission
Lastly, the CPUC contends El Paso and Dynegy went far beyond
anything that was required by the June order when they "decided
amongst themselves that El Paso will only honor the recall
provisions of its FERC-approved tariff if the shipper, serving an
end-user in PG&E's service territory, has provided to El Paso a
'sworn statement'" showing: 1) the shipper has requested firm
capacity from all other pipelines and shippers serving PG&E's
service territory and has been denied; 2) Dynegy has denied the
shipper's request for release of capacity; 3) El Paso has refused
the shipper's request; and 4) the capacity to be recalled is not in
excess of the end-user's needs.
Complying with this is "impossible. No one knows exactly who all
the firm shippers are on the PGT, El Paso, Transwestern and Kern
River systems at any given time. Not even PG&E would know that,"
said Morris. "They aren't going to allow any recall to happen. El
Paso just totally butchered any notion that there would be a