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FERC Prescribes Remedy for El Paso Allocation Woes

FERC Prescribes Remedy for El Paso Allocation Woes

Disappointed at the inability of El Paso Natural Gas and its shippers to cure the capacity-allocation ills on the pipeline on their own, FERC last week prescribed its own antidote that requires El Paso to assign firm capacity at the four Topock delivery points based on a "one-time election" in which the shippers will decide how much of their contract delivery rights to designate to each point

The Commission believes its decision, which had been more than a year in coming, will put an end to the existing congested traffic at the Southern California Gas/Topock delivery point, as well as ward off any potential congestion at the other three Topock points on the Arizona-California border that feed into Mojave Pipeline, Pacific Gas and Electric and Southwest Gas Corp.

FERC seeks to re-distribute the firm delivery rights of El Paso shippers to more evenly match the design capacity of each Topock point. In short, less gas will go through SoCal/Topock, which is the "most economically desirable delivery point" into California from El Paso at this time, and more gas will be diverted to the other three Topock points. Currently, El Paso shippers have firm primary rights under their contracts to nominate 1.555 Bcf/d of capacity to the SoCal/Topock delivery point, which is nearly three times the design capacity of the delivery point (540 MMcf/d) and represents 68% of the combined design capacity of all four Topock points.

This lopsided allocation of capacity has led to endless scheduling difficulties, uncertainties and pro-rata curtailments on El Paso for shippers transporting gas to the California market through SoCal/Topock, the key delivery point for San Juan Basin gas (See NGI, Nov. 15, 1999). It also has exacerbated pricing problems as shippers scramble for other supplies when their volumes are cut. Recent shipper reports showed average cuts from their allotted volumes running 48-66%. (see NGI, Sept. 25)

Chairman James Hoecker likened the situation to the overbooking of flight reservations by airlines this summer. "It's clear that overbooking capacity works even less well [on] pipelines than it does on airlines."

With FERC's new allocation plan for El Paso, "firm shippers will truly have firm service" to California, said Commissioner William Massey. The Commission's remedy is "unlikely to satisfy all parties," conceded Commissioner Linda Breathitt, but she believes it's fair.

"As a result of the assignment process required by this order, while the firm delivery point capacity that each shipper currently has at the Topock points will be reduced, each shipper will be guaranteed that it can nominate up to its assigned amount on any day at any Topock delivery point without a daily pro-rata reduction absent force majeure or unusual circumstances," the Commission assured shippers in the order, which responded to the complaint brought by Amoco Production, Amoco Energy Trading Corp. and Burlington Resources Oil & Gas more than a year ago [RP99-507].

The immediate reaction from the market to the Commission's capacity plan was positive, with some predicting it would help to reduce volatility at the southern California border. A California trader with a large Houston-based marketing company believes it will bring fairness to pricing at the border.

Right now there are three sellers to every one buyer at SoCal/Topock because San Juan producers are over-nominating gas to the West in an effort to move more of their production down the lateral, the trader said. The FERC order will help to even the scale - with one seller for each buyer. On balance, this will likely be bullish for SoCal/Topock prices and bearish for PG&E/Topock prices, he noted. Another western trader agreed with the appraisal but went on to suggest that the ultimate effect of pricing at the border will be determined by the willingness on the part of Canadian producers to continue to accept lower netbacks than San Juan Basin producers.

In related action, FERC put on hold a complaint brought by KN Marketing L.P. that accused El Paso of overbooking firm capacity on the east end of its system as well. FERC "would like to examine the results and impact of the allocation method imposed [in Amoco] before it tackles broader and more complicated system-wide issues," the order noted [RP139].

While the Amoco complaint primarily focused on El Paso's practice of overbooking firm capacity for delivery to SoCal/Topock at the California border, the FERC order noted its capacity-allocation remedy would "apply equally to any delivery point" on El Paso's system. If the remedy were geared solely to SoCal/Topock, El Paso shippers then would likely nominate their remaining firm capacity entitlements to the "next most economically desirable delivery point" on the pipeline's system, "which effectively could create the same problem at that point," it said.

FERC directed the pipeline to notify it within 15 days whether shippers' primary firm rights exceed the design capacity of any other delivery points on El Paso, prompting the need for daily pro-rationing of capacity.

The Commission's plan for re-distributing shippers' contract delivery rights at the Topock points entails three steps, and imposes specific deadlines on El Paso and its shippers. FERC noted its allocation plan would not result in the abrogation of existing firm shipper contracts, given that the contracts don't guarantee specific delivery points.

In the first step, firm shippers --- who have rights to the Topock delivery points in aggregate, but not to a specific Topock point(s) --- must choose how they want their delivery point rights to be distributed among the individual Topock points. For example, if a firm shipper has rights to 100 units at Topock, it can designate all 100 units to the SoCal/Topock delivery point, or 25 units to each of the four Topock points, the order said. Firm shippers are required to submit their selections to El Paso within 14 days of the order. El Paso then must file a report five days later listing each shipper's name, contract quantities at Topock, and how the shipper wants its rights to be distributed among the four Topock points.

Shippers with rights guaranteeing specific Topock points, such as Block II rights or Southwest Gas' rights at Southwest/Topock, cannot change their specific point rights, and, therefore, will not participate in the first step, the order said. Other shippers, such as SoCal or its customers, will have to decide between Ehrenburg and Topock as a delivery point, it noted.

In the second step, El Paso will add up all of the firm shippers' rights at each Topock delivery point. This will include the selections made by shippers in step one and the rights of other firm shippers at specific Topock points. The pipeline then will estimate the percentage of total contract rights that each shipper has at each delivery point. Based on these percentages, El Paso would divvy up the "available physical capacity" at each Topock point.

The Commission directed El Paso to make the calculations and forward them to affected firm shippers and FERC within seven days after step one of the allocation process is completed. The report must contain the available physical capacity at each Topock point, the name of each shipper and the percentage of the available capacity it will receive, how the percentage was derived, and an estimate of the capacity still available at each point.

In step three, assuming all delivery point rights haven't been fully assigned and there remains available capacity at the Topock points, firm shippers on El Paso will have the opportunity to transfer their delivery point rights to a Topock point that isn't fully subscribed or to other delivery points, the order noted.

The Commission directed El Paso to assign this available capacity "proportionally." The order cited an example in which three separate shippers seek to transfer 50, 25 and 25 units (a total of 100 units) of their respective delivery point rights to Mojave/Topock, where only 30 units are available. Under FERC's plan, the shipper with 50 units - which is half of the combined 100 units to be transferred - would be entitled to 50% of the 30 units, or 15 units, at Mojave/Topock. This would leave the shipper with 35 units available for transfer to an alternate point. This process would continue until each shipper's full contract amount is exhausted, the order noted. Within 14 days after step two is completed, El Paso has been ordered to submit revised calculations that incorporate the capacity transfers to both shippers and the Commission.

FERC further noted that its new capacity-assignment process would extend to the capacity-release market. ".[T]o the extent that a firm shipper does not use its full rights at any Topock delivery point on any day, it will have the ability to release such rights. Thus, the replacement shipper will also have the ability to use that Topock capacity without experiencing pro-rata reductions."

Susan Parker

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