Calling for a rejection of four negotiated parking and lending (PAL) agreements between Koch Gateway and its affiliate Koch Energy Trading (KET), Dynegy and Amoco filed some suggestions May 5 on how FERC might fix the Order 497 problems that allowed the pipeline to allegedly engage in such affiliate preferences.

In March, FERC accepted and suspended the four PAL agreements subject to refund and the outcome of a technical conference, which was held last month. The Commission scheduled the conference to explore what it called “serious concerns” raised by Dynegy, Amoco and Marathon Oil.

Of course, Koch denies any wrong doing, saying instead that Dynegy simply wants to have access to the lucrative PAL services and exclude KET. “As the Commission examines these transactions, it must remember that there is nothing inherently illegal or improper about Koch transacting business with KET. The fact that Koch transacts business with its marketing affiliate should not form the basis of a protest or Commission inquiry, yet that is exactly what Koch is facing in this proceeding,” Koch told FERC last week.

However, Exxon Mobil agreed the protesting parties presented a “substantial basis for their position that option PAL arrangements between Koch and KET constitute abusive conduct between affiliates. The Commission should act to remedy this abuse.”

Affiliate abuse has become a hot topic in Washington lately. Mark R. Haskell, co-managing partner of Brunenkant & Haskell LLP, which represents producers and independent marketers (see NGI, May 8), gave a speech two weeks ago on the issue at the annual meeting of the Energy Bar Association in Washington, D.C. Haskell said that FERC’s marketing affiliate rules, which hinge on the hope that pipeline owners will police themselves, have been about as effective as a wolf guarding the hen house.

In Koch’s case, Dynegy and Amoco claim, the wolf has had more than its fill of hens. While they admit the data provided at the technical conference was insufficient to completely document abuse, Dynegy and Amoco claim there is sufficient information to indicate that Koch’s contracts show a clear preference for its affiliate and should be disallowed. The marketers charged that KET received a preference over non-affiliated shippers when negotiating and entering PAL deals (see NGI, Feb. 21, 28 and March 13) . The service operates like short-term storage where the marketer pays an option fee to use the service and agrees to a percentage of the profits if the services is utilized. They also urged FERC to make changes to its standards of conduct and to the penalties for such abuse.

“We use [the word] ‘preference’ rather than ‘abuse,’ which means they are violating the rules. In our opinion, we have a lot of situations here where the rules aren’t being violated, but the rules simply aren’t working,” said Dynegy Attorney Ed Ross in an interview with NGI. “Our filing addresses a lot of those issues and makes recommendations on how we deal with affiliate issues. It’s all fairly timely. We are hearing feedback from folks on FERC’s staff that they are very interested in these issues right now.

“I think the convergence within FERC of the gas and power people has brought to light issues in each group for the other. In the past they didn’t communicate a lot with one another….. Also it’s right on the heels of the Kinder Morgan problem [in which FERC fined KMI for affiliate abuses]. Right behind Kinder Morgan there was a serious protest launched by the California Public Utilities Commission against El Paso for what they now call the El Paso-El Paso contract [in which El Paso Merchant Energy took control of 1.3 Bcf/d of capacity on its affiliated pipeline, El Paso Natural Gas].” That case is still pending. “It brings to light the fact that there are things affiliates can do that no one else can,” said Ross.

As evidence, the protesters note that while Amoco and Dynegy did use the PAL service quite frequently the frequency and especially the volumes do not come close to numbers put up by KET. Amoco and Dynegy accounted for 34 (3.3%) and 46 (4.5%) PAL contracts, respectively, since the service was offered (out of a total of 1,024 contracts). The gas quantities associated with Amoco’s and Dynegy’s contracts amount to less than 1% each of the quantity of total PAL service. KET, however, performed 317 (31%) of the PAL transactions, and accounted for a “staggering 61%” of the quantity of total PAL service.

“To Dynegy’s and Amoco’s knowledge, no marketer has held a percentage of service on a major pipeline close to that level. Further, Dynegy’s and Amoco’s combined PAL quantities for the reported period were 4.6 Bcf; KET’s PAL quantities for the same period exceeded 176 Bcf. KET’s average contract quantity exceeded 550,000 MMBtu. By contrast, Dynegy’s averaged 64,000 MMBtu. Once again, these statistics are evidence of affiliate abuse and preference and should be explored further by the Commission.

“…..[H]ow can an affiliate hold 60% of any service on its home pipeline without triggering an inquiry by the Commission?” the protesters asked.

They also claim that Koch deliberately did not provide sufficient notice of its PAL agreements with its affiliate, which violates Commission rules. Furthermore, they argue that it does not matter what premium KET pays because it always results in a profit for the parent company of the pipeline and its marketing affiliate.

“A non-affiliate will never be similarly situated with an affiliate on a home pipeline. The gas business is long overdue for a remedy to rectify this inequity. Dynegy and Amoco request that the Commission review its current Standards of Conduct to close this loophole so future affiliate preference is not able to continue unfettered. At a minimum, the Commission should adopt measures to prevent this type of conduct on the Koch system.”

The changes proposed by Dynegy and Amoco range from the radical to the minimal but are designed to prevent affiliate preferences in the future and to simplify (or eliminate) monitoring of reported data for violations by affiliates, the companies said. The Commission should do one of the following:

Require the divestiture of all affiliate-held capacity and services on the affiliated (home) pipeline to the extent that the pipeline is found by the Commission to have favored its affiliate;

Prohibit marketing affiliates from transacting with their home pipelines to the extent the home pipeline has been found to have favored the marketing affiliate, but allow these affiliates to hold capacity on the home pipeline so long as it is acquired in the secondary market in an arm’s length transaction; or

Require bidding for all transactions in which affiliates are attempting to acquire services for a period of 45 days or more, and implement a revenue crediting mechanism that requires an affiliate to refund to shippers (i) the premium paid for home pipeline services above the next highest non-affiliate bid, and (ii) the discount received below the next lowest non-affiliate bid for similar service.

Additionally, the Commission should adopt an evaluation procedure that would automatically trigger an audit if an affiliated marketer transacts a significant amount of business on its home pipeline.

“What we’re trying to do is level the playing field,” said Ross. “That has always been our goal. We don’t have a vested interest, or a position that we are going to benefit from by making these changes. But what we see occurring is very little policing and very little ability to actually catch affiliates of pipelines doing anything that violates the rules. We want to get rid of those incentives that pipelines have to do business with their affiliates.” Rocco Canonica

OK Producer Accuses NGPL, Affiliates of Gathering Abuses

An independent producer has accused Natural Gas Pipeline Company of America (NGPL) and a number of former affiliate companies of concocting and carrying out an elaborate scheme that enabled the pipeline to collect fees for gathering that were above the rate allowed by its tariff.

In a Section 5 complaint filed at FERC last week, Chesapeake Panhandle L.P. alleged NGPL and its then-affiliates devised unlawful arrangements so NGPL could “achieve indirectly what [it] could not achieve directly — the collection of a ‘gathering fee’ that often exceeded the maximum gathering rate NGPL was authorized to charge,” as well as the “collection of a fuel rate for NGPL-provided gathering services that was not authorized in the NGPL tariff.”

The Oklahoma City-based producer said it was adversely affected by these arrangements between NGPL and its then-affiliates between March 1998 and December 1999. During that time, it produced and sold gas to certain affiliates from wells located in Moore and Carson Counties in Texas.

In addition to NGPL, others cited in the complaint included then-affiliates MidCon Gas Products Corp. and MidCon Gas Services Corp., which are now owned by ONEOK Inc., as well as former parent, KN Energy, and current parent, Kinder Morgan Inc. (KMI). KMI acquired KN Energy last October.

“This case offers a textbook example of an abuse of interstate pipeline affiliate relationships,” Chesapeake Panhandle told the Commission [RP00-275]. In a nutshell, “NGPL and its affiliates negotiated various contractual arrangements among themselves that permitted one non-regulated member of NGPL’s corporate family to charge and collect from another [affiliate] rates for gathering services that were, in fact, furnished by NGPL in connection with [its] jurisdictional transportation service. In so doing, the NGPL [affiliates] contractually provided for the collection of charges for gathering services provided by NGPL which NGPL itself could not lawfully collect.”

NGPL and the affiliates “abused their affiliate relationships in order to circumvent the Commission’s jurisdictional authority to regulate gathering rates charged in connection with jurisdictional transportation,” said Chesapeake Panhandle.

To the best of its knowledge, “no other entity other than NGPL has ever performed any substantial physical activities associated with the gathering services for which Chesapeake Panhandle has been charged by NGPL affiliates,” it noted. MidCon Gas Services charged Chesapeake Panhandle a monthly “gathering fee” of $345,000 plus a $0.07/MMBtu variable charge to “offset” charges NGPL imposed on its affiliates for gathering services.

“The combination of this fixed charge and variable charge…..often exceeded the maximum NGPL gathering rate” allowed for NGPL to gather gas from the “West Panhandle Wells” in Moore and Carson Counties, TX, where Chesapeake Panhandle produced gas.

Susan Parker

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