California regulators and Pacific Gas and Electric (PG&ampE)last week protested a letter agreement between El Paso Natural Gasand Dynegy Marketing and Trade that they claim would completelydeprive northern California-bound shippers of the right to recall alarge portion of Block II capacity on the El Paso system, enablingDynegy – which now owns the rights to the capacity – to keep itentirely off the market for the remainder of this year and 1999.

They contend the letter agreement contradicts a June 11th orderin which FERC approvedDynegy’s three contracts for 1.3 Bcf/d ofcapacity on El Paso subject to modifications, and a 1997 settlementbetween El Paso and its customers addressing the problem ofturned-back capacity. Under the settlement, PG&ampE paid $58.4million to preserve the Block II capacity (614 MMcf/d) to provideshippers serving northern California access to the San Juan Basin.

But El Paso sold the capacity for two years to Dynegy, formerlyNatural Gas Clearinghouse (NGC), last year as part of the 1.3 Bcf/dcontract deal, prompting PG&ampE and state regulators to argue thatthe Houston marketer intended to keep the capacity off the marketin order to drive up California border prices. They insist theDynegy-El Paso contracts themselves, and now the letter agreement,directly violate the terms of the 1997 settlement with respect totheir recall rights on the Block II capacity.

In a mixed decision on the issue in June, FERC ruled thatshippers serving northern California couldn’t recall the Block IIcapacity simply because it wasn’t being used by Dynegy. However,the Commission added the firm transportation capacity would becomerecallable in the event that Dynegy used it to serve customersoutside of PG&ampE’s service territory.

The California Public Utilities Commission (CPUC) and PG&ampEhave taken issue with how El Paso and Dynegy have interpreted theJune order in their letter agreement. “What FERC meant was ifthey’re [Dynegy] using the capacity some of the time, but it’s idleat other times, that’s the nature of firm capacity and that’s notsubject to recall” by northern California shippers, said HarveyMorris, principal attorney at the CPUC. But, the FERC decision didnot give Dynegy the “unilateral right” to withold the availabilityof that Block II capacity from northern California shippers for theentire term of its contract with El Paso. “We don’t think that FERCgave them [Dynegy] the right to simply not serve northernCalifornia at all in two years or prevent anyone else from usingBlock II [capacity] to serve northern California.”

El Paso Exploiting Ambiguity

Morris conceded FERC’s June 11th ruling on recall rights had “alot of ambiguity,” with some parts of it seeming to favor ElPaso-Dynegy and others favoring the northern California shippers.In the letter order, which was filed on June 25, “El Paso exploitedevery ambiguity in their favor. But there were other things in theFERC order that went our way. And so we’re asking FERC to clarifythat El Paso shouldn’t ignore the parts of the order that went ourway on the recall issue,” he told NGI.

El Paso dismissed any notion that it may have misinterpretedthe Commission’s June ruling on the recall rights. “We feel that ElPaso Natural Gas and Dynegy properly implemented the order with theamendments we filed at the Commission,” said Russ Roberts, aspokesman for El Paso Energy, parent of the pipeline.

The El Paso-Dynegy letter agreement was submitted in compliancewith the June order, which required the two companies to amendcertain provisions in their contracts – including those addressingthe issue of recall rights. In that agreement, El Paso “went to themaximum to make sure the recall provision can never be utilized” bynorthern California shippers, Morris said. If El Paso’s position isupheld at FERC, it would mean the pipeline took $58.4 million fromPG&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 recallrights] that we got in the El Paso settlement,” he noted, addingthat the CPUC was challenging the El Paso-Dynegy letter agreementon this basis. It also plans to seek rehearing of the June ordertoday, specifically asking FERC to clarify that its intention wasnot to amend the 1997 El Paso settlement, and that El Paso “waswrong to take things out of context.”

But “if FERC is really modifying the settlement in the Juneorder, it’s going to send a bad signal that people should neversettle because it can all of the sudden be undone,” Morris said.”It’s also illegal under Section 5 of the Natural Gas Act. TheCommission can’t unilaterally without following these [Section 5]procedures just outright modify what was previously done” insettlement.

“We’re trying to give the FERC the benefit of the doubt” thatamending the settlement was not its intention since there was “goodlanguage” in the June order that acknowledged the recall rights ofnorthern California shippers, he noted.

Allocate Recall Capacity

The dispute over the recall rights has an easy solution, Morrisbelieves. “Let’s come up with some objective way to maximize forthem [Dynegy] how much Block II capacity we can realisticallyexpect they are going to use to serve northern California by addingthe maximum amount they’ve actually used during the past sixmonths, and also give them the benefit of the doubt if they haveany new contractual arrangements. That amount is what FERC shouldtell El Paso and [Dynegy] to go back and put in their new letteragreement as not being subject to recall. Everything else…wouldbe subject to recall.”

He conceded the CPUC didn’t know how much of the Block II firmcapacity, if any, that Dynegy has used for northern Californiasince the start of the year. He proposes that Dynegy be required todisclose that amount to the CPUC and FERC under a confidentialarrangement to protect the proprietary nature of the information.Morris believes the information should be at Dynegy’s fingertipssince “we’re already six months into the two-year contract, or over25% 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 beexercised when there is any firm capacity available on El Paso orany other pipeline to northern California.” This is an”unreasonable restriction,” it said. PG&ampE agreed, noting therewas no such provision in the 1996 settlement requiring it to showthe unavailability of capacity on other pipelines as a condition torecalling Block II capacity. Also, El Paso “has given itself theright” to be final arbiter of whether a rate is ‘acceptable’ toeffect the recall of Block II capacity, the state commissionprotested.

Lastly, the CPUC contends El Paso and Dynegy went far beyondanything that was required by the June order when they “decidedamongst themselves that El Paso will only honor the recallprovisions of its FERC-approved tariff if the shipper, serving anend-user in PG&ampE’s service territory, has provided to El Paso a’sworn statement'” showing: 1) the shipper has requested firmcapacity from all other pipelines and shippers serving PG&ampE’sservice territory and has been denied; 2) Dynegy has denied theshipper’s request for release of capacity; 3) El Paso has refusedthe shipper’s request; and 4) the capacity to be recalled is not inexcess of the end-user’s needs.

Complying with this is “impossible. No one knows exactly who allthe firm shippers are on the PGT, El Paso, Transwestern and KernRiver systems at any given time. Not even PG&ampE would know that,”said Morris. “They aren’t going to allow any recall to happen. ElPaso just totally butchered any notion that there would be arecall.”

Susan Parker

©Copyright 1998 Intelligence Press, Inc. All rightsreserved. The preceding news report may not be republished orredistributed in whole or in part without prior written consent ofIntelligence Press, Inc.