FERC Sees Merit to Phelps Dodge Complaint
FERC has come down on the side of Phelps Dodge Corp. in a
complex contract dispute with El Paso Natural Gas. In the end, it
has ordered the Texas-based pipeline to either add the delivery
points sought by Phelps Dodge, or to show cause within a month why
- due to operational and capacity constraints on its system - it
The Commission's ruling was in response to a complaint filed in
December 1997 in which Phelps Dodge said El Paso agreed to add the
delivery points to service its Texas mining facility in the wake of
a global settlement in 1988, but then did a complete turnabout
after a 1995 rate settlement because it realized it wouldn't get
any incremental revenue under Phelps Dodge's existing agreement if
it did so. That's because the rate settlement, to which Phelps
Dodge's contract is subject, locked in customers' firm
transportation rates for more than a 10-year period in return for
El Paso shippers agreeing to underwrite some of the costs
associated with unsubscribed capacity on the pipeline.
Specifically, the contract demand and billing determinants on
which the settlement rates are based would remain frozen for 10
years. Consequently, any increase in a full-requirements customer's
gas usage during that period - such as Phelps Dodge is seeking -
would not translate into higher reservation rates for El Paso. In
fact, the end result would be a lower unit rate for gas service
provided to Phelps Dodge by El Paso.
El Paso's denial of additional service to Phelps Dodge was
driven by its after-the-fact realization that honoring such
contractual commitments following the 1995 settlement would not be
in its best financial interest, the refining corporation insisted.
El Paso has offered to provide the service to Phelps Dodge's
refining plant in El Paso, TX., but under a separate contract.
Phelps Dodge rejected the offer because it says such service
wouldn't be subject to the rate moratorium of the settlement.
El Paso contends that Phelps Dodge's agreement requires it to
add delivery points only in cases where an existing facility hasn't
been previously served - either directly or indirectly - by the
pipeline. It noted it currently indirectly serves the Phelps
Dodge's Texas facility by delivering gas on behalf of Burlington
Resources Trading. But Phelps Dodge countered that its contract is
with Burlington Resources, not El Paso.
The dispute between the two "turns largely" on the
interpretation of the word "indirectly," FERC said in its order
[CP98-159]. The positions advanced by both parties are "plausible,"
but "in our view, ...extrinsic evidence supports Phelps Dodge."
Phelps Dodge "has offered evidence that [certain] language was
added to its service agreement, as well as to those of other
similarly situated shippers, to clarify that non-LDC full
requirements shippers had certain rights to add delivery points,"
the order noted.
El Paso questioned whether FERC had jurisdiction over the
contract matter, but the Commission begged to differ - particularly
since the case involves the proper implementation of the terms of a
rate settlement. "It is important that the Commission ensures that
neither El Paso nor its shippers attempt to manipulate the terms of
service agreements in order to take advantage of or avoid the
intended effects of the rate settlement."
Further, FERC said it was unable to determine whether there was
any merit to El Paso's claims that it would be unable to provide
new service to Phelps Dodge's Texas facility due to operational and
capacity constraints on its system. If El Paso should decide to
show cause why it can't add the delivery facilities, the Commission
ordered the pipeline to provide the necessary flow information and
capacity data to back up its claim.
©Copyright 1998 Intelligence Press, Inc. All rights
reserved. The preceding news report may not be republished or
redistributed in whole or in part without prior written consent of
Intelligence Press, Inc.