The D.C. Circuit Court of Appeals has remanded an orderapproving the El Paso Natural Gas rate settlement for furtherreview, citing as its reason FERC’s refusal to give SouthernCalifornia Edison (Edison) the opportunity to challenge theagreement based on its status as an indirect customer of thepipeline.

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

The court decision “vindicates what Edison has contended fromthe beginning of this proceeding – and that is that the El Pasosettlement needs to be evaluated with the kind of searching inquirythat it has not yet had. This decision gives the Commission theopportunity to consider the significant issues that Edison raisedin the context of that settlement,” said Kevin Lipson, a WashingtonD.C. attorney for Edison.

In short, the appellate ruling “casts considerable uncertaintyabout the continued viability of the El Paso settlement,” he noted.

But Richard Green, a D.C. attorney for El Paso, sharplydisagreed. “I don’t know why it should [undo]” the settlement. “Ithink our assumption [is]…we will have to have some moreproceedings at the Commission, but I think following that we’ll bein a position for the Commission to be able to approve thesettlement again,” he told NGI.

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

In the settlement proceeding, Edison argued that in its role asan indirect purchaser of El Paso capacity from Southern CaliforniaGas (SoCalGas), it had the right to challenge the rate thatSoCalGas, a consenting party to the settlement, would agree tounder the settlement. The Commission dismissed the Californiautility’s argument, however, and approved the settlement asuncontested. In doing so, FERC denied Edison the chance to besevered from the settlement as a contesting party based on its roleas an indirect customer, which prevented it from pursuing itsobjections at a hearing before an administrative law judge (ALJ).

The court reversed the Commission for refusing to sever Edisonas an indirect customer, saying this action failed to meet bothcourt and FERC precedent. It specifically cited a 1990 courtdecision 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 materialfact that Edison has raised; or 3) make a determination thatSoCalGas had the same interests of Edison and, therefore, wasprotecting Edison’s interests when it agreed to the settlement.

As to the severance option, Lipson thinks that will be “verydifficult to do” since the “dollars that are allocated to Edisonfrom SoCalGas on an indirect basis” fall under the jurisdiction ofthe California Public Utilities Commission, not FERC. On the latterpoint, the court said that the Commission’s attempt to show thatSoCalGas’s interests were “congruent” with Edison’s was “tooconfused to pass muster.” If options one and three are eliminated,that would leave the Commission with no other choice than tore-open the settlement proceeding.

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

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

FERC’s action was largely in response to industry criticism ofan October order in which it remanded a contested rate settlementinvolving Trailblazer Pipeline to the presiding ALJ for furtherreview in light of “substantial objections” raised by AmocoProduction. To avoid having to rule on the merits and possiblyjeopardize the settlement, it chose to send the agreement back soparties 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 foundthat the Commission did not give sufficient consideration to theinterests of the contesting parties, even if the settlement hadwide support and there was only one or very few contestingparties.” Both the El Paso and Trailblazer rate settlements havehad wide support from customers, with few contesting parties.

Last week’s order reviewed several FERC-approved contestedsettlements that the courts were not “receptive” to, including ElPaso. “The court remanded the El Paso case to us because we had notapplied the right standards in ruling on that contestedsettlement,” a FERC staffer said, adding that in Trailblazer “we’velaid out what we understand the right standards to be for theindustry.”

The Trailblazer order also addressed, among other things, theissue of severance. Specifically, it said severance was”problematic” for indirect customers since their rates are passedthrough by a direct customer which may have agreed to thesettlement. If the indirect customer is allowed to litigate itsconcerns it also will affect the rates of settling customers.

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

Susan Parker

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