Adding to the lengthy and often heated controversy surroundingits contractual relationship with El Paso Natural Gas, Dynegy hassigned up for another 196 MMcf/d of El Paso pipeline capacity,bringing under its control a total of 1.5 Bcf/d of space on thesouthwestern pipeline.

On April 30, El Paso informed FERC it signed two new negotiatedrate agreements, one contract with Dynegy and another with KNEnergy. The Dynegy contract is for backhaul capacity to the WahaHub in West Texas in contrast to its three other contracts for 40%of El Paso’s total forward-haul space to the California border fromreceipt points in the San Juan and Permian basins. Dynegy’s firstthree contracts went into effect in January 1998 and terminate atthe end of this year.

The fourth contract triggered an immediate protest from Exxonand the Joint Parties, a producer group including BurlingtonResources, Marathon Oil Phillips Petroleum and BP Amocosubsidiaries. The producers are concerned that the contract maycontain the “same anticompetitive provisions as the previous threecontracts,” and requested that the Commission order El Paso to filethe new contract and subject it to the results of a pendingrehearing of the entire Dynegy-El Paso case.

According to footnotes in El Paso’s April 30 negotiated rate tarifffiling, the fourth contract with Dynegy appears to have some of thesame components as the other three, including a $0.12/Dth rate and thesame 72% minimum flow commitment for 1999. But since the contract wasnot filed, it’s not clear if it contains some of the other provisionsthat protesters claimed, and FERC agreed, were anticompetitive. It’snot clear if the contracted volume represents an incremental additionto Dynegy’s existing firm space on El Paso, the Joint Partiesnoted. It’s also unclear how El Paso is treating the revenues from thefourth contract, or if the preexisting interruptible (IT) revenuecrediting arrangement applies (see Daily GPIJune 11, 1998).

In prior arguments, the producers and the California PublicUtility Commission (CPUC) charged that certain provisions of theDynegy contracts, particularly an interruptible transportationrevenue sharing provision, were anticompetitive. The IT provisionfreezes El Paso’s monthly IT volume sales at their 1997 sales leveluntil the end of this year when the contract terms end. Dynegyinsisted on the IT provision so that it wouldn’t be “left holdingthe bag” if El Paso decided to sell IT capacity to the same demandthat Dynegy was looking to serve. If El Paso should exceed the ITsales threshold, the agreement calls for the pipeline to adjustdownward NGC’s $70-million payment (for the group of three capacitycontracts). Protesting marketers and producers blamed the ITcrediting mechanism for El Paso’s decision to halt discounting ofCalifornia-bound IT capacity on its system.

Last June, however, FERC ruled that despite the anticompetitivenature of the IT revenue crediting provision the previous threecontracts were not “unduly discriminatory.” The CPUC has filed forrehearing of that order, and FERC has yet to rule on the rehearingrequest. The CPUC claims Dynegy’s’ “hoarding” of El Paso capacityand the IT provision in the Dynegy-El Paso contract are responsiblefor higher California border gas prices compared to the rest of thecountry and decreased competition in the secondary market (seeDaily GPI Feb. 26).

El Paso responded to the rehearing request last week, submittinga lengthy study by Houston-based Lukens Consulting Group thatbasically concludes Dynegy’s control over 40% of El Paso’s capacityto California had nothing to do with higher California borderprices or changes in the basis differential between the San JuanBasin and the California border last year. The study blames the17-cent jump in San Juan-SoCal Border basis in 1998 on increasingCalifornia gas demand and greater competition between producers inCanada and the Rockies for markets in the Midcontinent and Midwest.

Meanwhile, the Joint Parties have lodged another thorn in FERC’sside by submitting a recent decision by D.C. Circuit Court ofAppeals that remanded a FERC order approving El Paso’s last ratesettlement for further review. FERC used the same rationale todecide the rate settlement case as it used in the El Paso-Dynegycase, according to Katherine B. Edwards, attorney for the JointParties. In both cases, FERC said that just because a rate forreleased capacity is much higher than the market rate it does notmean that rate is anticompetitive as long as it is less than theregulated maximum transportation rate charged on the pipeline.

“In this [El Paso-Dynegy] case we had a contract provision [theIT provision] that really had nothing to do with the rates, butit..minimized competition,” said Edwards. “And the FERC said ‘wellwe really don’t have to look at that; we don’t have to look atthese antitrust type of issues or whether competition has beenminimized. All we have to do under the Natural Gas Act is see ifthe rate is just and reasonable, and since these rates are lessthan the maximum rate, that’s where our analysis stops.’ The courtsaid ‘no,’ and the court was right.”

Edwards said she’s concerned FERC may try to delay a decision onthese issues until the Dynegy contracts terminate at the end of theyear. At that point, FERC could rule the issues are moot. “The factthat somebody else could negotiate a contract like this means[FERC] needs to rule on the legality of these contracts. [They]can’t hide behind mootness on this one.”

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