“The fact that Dynegy and Amoco are parties to this protest is not surprisingbecause both have a long-standing practice of raising affiliate abuse issuesevery time an opportunity presents itself. The mantra of affiliate abuseby these parties has become very tiresome,” the pipeline told FERC, addingits answer would prove them wrong.

The dispute involves several PAL contracts Koch signed with its affiliate,Koch Energy Trading (KET) last fall.

The PAL services operate like short-term storage, where customers paya 1- to 5-cent fee that gives them the option to store a certain amountof gas on the pipeline for a specified period. The service is used to takeadvantage of arbitrage opportunities in the futures market – which happensto be tied to the Henry Hub delivery point on Koch’s pipeline system. Thepipeline requires a large percentage of the profits if the service is utilized.

The contracts in question were filed with FERC a day prior to becomingeffective Feb.1. They called for various large packages of KET’s gas (totalingmore than 345,000 MMBtu/d) to be parked on the pipe for the month of February2000 and returned in portions during March, April and May. KET agreed topay the option price and 90% of any profits made from the service.

The protesters claim the negotiated PAL agreements are an example ofhow Koch and its marketing affiliate, KET, violated Commission rules byworking together to speculate on futures price spreads. But Koch respondedthat such a suggestion merely shows how little the marketers understandabout the pipeline business.

“Koch is not speculating on anything when it enters into these transactions,”the pipeline said. “Rather Koch is hedging its naturally long position,i.e., the pricing of the unsubscribed capacity on the asset it owns, byestablishing a price for its services… [Furthermore] the Commission permitsinterstate pipelines to sell services using an index- or formula-basedrate, provided those contracts are executed as negotiated rate transactions.”

Koch also explained that the PAL service is the lowest scheduled interruptibleservice on its pipeline and is bumped by all others. Protesters’ claimsthat “KET has unique opportunity to tie up more than half of the capacitymoving into the Henry Hub for the month of November 1999” and had “an unfaircompetitive advantage over its competitors on Koch’s system” are unfounded.If Koch “engaged in the nefarious activity referenced above, why wouldit select the service with the lowest scheduling priority on its system?

“These agreements did not preclude other customers from bumping KETand securing this capacity on either a firm or interruptible basis,” thepipeline added.

The protesters also charged the pipeline raised its revenue sharingrequirement for the PAL service to 90% from 80% when Dynegy requested thesame service KET received (see NGI, Feb. 21).

But Koch Gateway denied any wrongdoing, saying it received 90% of theprofits in more than 40% of the PAL transactions done last year.

In addition, the protesters said Koch violated Commission rules whenit waited several months to file its agreements with KET and filed themone day prior to the effective date.

“There is simply no evidence supporting the claim that Koch withheldthese transactions from the marketplace or discriminated against anyone,”Koch said, urging the Commission to reject the protests.

Rocco Canonica

©Copyright 2000 Intelligence Press, Inc. All rights reserved.The preceding news report may not be republished or redistributed in wholeor in part without prior written consent of Intelligence Press, Inc.