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CPUC: El Paso's Agreement Limits Available Capacity

CPUC: El Paso's Agreement Limits Available Capacity

California regulators and Pacific Gas and Electric (PG&ampE) 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&ampE 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&ampE 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&ampE's service territory.

The California Public Utilities Commission (CPUC) and PG&ampE 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&ampE and its ratepayers in return for recall rights that are an "illusion."

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 settlement.

"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&ampE 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 protested.

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&ampE'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&ampE'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&ampE 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 recall."

Susan Parker

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