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FERC Sees Merit to Phelps Dodge Complaint

July 27, 1998
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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 can't comply.

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.

Susan Parker

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ISSN © 2577-9877 | ISSN © 1532-1266
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