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Court Ruling May Cast Shadow Over El Paso Settlement

Court Ruling May Cast Shadow Over El Paso Settlement

The D.C. Circuit Court of Appeals has remanded an order approving the El Paso Natural Gas rate settlement for further review, citing as its reason FERC's refusal to give Southern California Edison (Edison) the opportunity to challenge the agreement based on its status as an indirect customer of the pipeline.

The ruling was seen by some as a major blow to the 1997 settlement, which spelled out a formula for El Paso and its customers to share the costs for the huge amount of turned-back capacity anticipated on the pipeline. Edison led an effort to block the settlement by offering a counter-proposal of its own, but was defeated in the end.

The court decision "vindicates what Edison has contended from the beginning of this proceeding - and that is that the El Paso settlement needs to be evaluated with the kind of searching inquiry that it has not yet had. This decision gives the Commission the opportunity to consider the significant issues that Edison raised in the context of that settlement," said Kevin Lipson, a Washington D.C. attorney for Edison.

In short, the appellate ruling "casts considerable uncertainty about the continued viability of the El Paso settlement," he noted.

But Richard Green, a D.C. attorney for El Paso, sharply disagreed. "I don't know why it should [undo]" the settlement. "I think our assumption [is]...we will have to have some more proceedings at the Commission, but I think following that we'll be in a position for the Commission to be able to approve the settlement again," he told NGI.

The El Paso settlement, which has a term of 10 years, calls for customers to absorb 35% of the fixed costs of unsubscribed capacity over the first eight years of the agreement - $254.8 million - while the pipeline would be at risk for the remaining 65% during that period. Beginning in 2004, El Paso will assume full burden for all of the unsubscribed capacity on its system. The amount of capacity expected to be turned back to El Paso was put at 1.6 Bcf/d, or about one-third of the total capacity on its system.

In the settlement proceeding, Edison argued that in its role as an indirect purchaser of El Paso capacity from Southern California Gas (SoCalGas), it had the right to challenge the rate that SoCalGas, a consenting party to the settlement, would agree to under the settlement. The Commission dismissed the California utility's argument, however, and approved the settlement as uncontested. In doing so, FERC denied Edison the chance to be severed from the settlement as a contesting party based on its role as an indirect customer, which prevented it from pursuing its objections at a hearing before an administrative law judge (ALJ).

The court reversed the Commission for refusing to sever Edison as an indirect customer, saying this action failed to meet both court and FERC precedent. It specifically cited a 1990 court decision involving Tejas Power. And it gave FERC three choices: 1) appropriately sever Edison as an indirect customer of El Paso; 2) review the settlement in light of the general issues of material fact that Edison has raised; or 3) make a determination that SoCalGas had the same interests of Edison and, therefore, was protecting Edison's interests when it agreed to the settlement.

As to the severance option, Lipson thinks that will be "very difficult to do" since the "dollars that are allocated to Edison from SoCalGas on an indirect basis" fall under the jurisdiction of the California Public Utilities Commission, not FERC. On the latter point, the court said that the Commission's attempt to show that SoCalGas's interests were "congruent" with Edison's was "too confused to pass muster." If options one and three are eliminated, that would leave the Commission with no other choice than to re-open the settlement proceeding.

Although FERC refused to sever Edison as an indirect customer in the settlement, it did sever the California utility in its role as a direct purchaser of capacity from El Paso. Edison has much more money at stake in its role as an indirect customer, Lipson said.

In the wake of the court ruling remanding the El Paso rate settlement, the Commission last week in an unrelated case clarified the standards and procedures that it follows in settlement cases where contested issues are raised.

FERC's action was largely in response to industry criticism of an October order in which it remanded a contested rate settlement involving Trailblazer Pipeline to the presiding ALJ for further review in light of "substantial objections" raised by Amoco Production. To avoid having to rule on the merits and possibly jeopardize the settlement, it chose to send the agreement back so parties could resolve the contested issues.

FERC rejected rehearing requests last week [RP97-408-004], pointing out it has been reversed in cases "where the court found that the Commission did not give sufficient consideration to the interests of the contesting parties, even if the settlement had wide support and there was only one or very few contesting parties." Both the El Paso and Trailblazer rate settlements have had wide support from customers, with few contesting parties.

Last week's order reviewed several FERC-approved contested settlements that the courts were not "receptive" to, including El Paso. "The court remanded the El Paso case to us because we had not applied the right standards in ruling on that contested settlement," a FERC staffer said, adding that in Trailblazer "we've laid out what we understand the right standards to be for the industry."

The Trailblazer order also addressed, among other things, the issue of severance. Specifically, it said severance was "problematic" for indirect customers since their rates are passed through by a direct customer which may have agreed to the settlement. If the indirect customer is allowed to litigate its concerns it also will affect the rates of settling customers.

The order suggested it might be easier for the Commission to carry this out in the future if parties proposing a settlement were to include a method for severing a contesting indirect customer, which "fully protects its interests."

Susan Parker

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