While El Paso Corp. aimed its complaint at Congress over a FERC law judge decision that it failed to fill its pipeline during the western energy crisis, the pipeline industry association advised FERC it was concerned that the decision, if ratified, could cause other pipelines to operate in an unsafe manner.

El Paso bought full-page ads in the Washington Post and The New York Times last Tuesday to blast FERC Chief Administrative Law Judge Curtis Wagner’s decision that El Paso Natural Gas pipeline exercised market power to drive up gas prices in California from November 2000 to March 2001 (see NGI, Sept. 30). The ads include a letter to Congress by CEO William Wise, who says the ALJ ruling, particularly his conclusion that the El Paso pipeline should have operated at or near maximum allowable operating pressure (MAOP) during the relevant period, will negatively impact pipeline safety and supply reliability across the nation.

“[A] recent initial decision by a [FERC ALJ] would encourage a pipeline operator to place economic and market considerations ahead of safety and reliability factors, a notion we believe to be at odds with Congress’ intent,” Wise said in his letter. He urged Congress to support El Paso in its efforts to get the full Federal Energy Regulatory Commission (FERC) to reject the ALJ’s ruling. El Paso denies it withheld capacity in order to manipulate the California gas market. California utilities, however, claim they were overcharged by as much as $3.3 billion because of the company’s actions.

“Requiring a pipeline to operate at MAOP on a sustained basis without regard to safety, operational, or reliability considerations is akin to requiring all motorists to drive at 65-mile-an-hour at all times, regardless of road and weather conditions,” Wise said. “MAOP is a safety limit, not an operating requirement.”

The Interstate Natural Gas Association of America (INGAA) agreed with El Paso, saying it was “deeply concerned by the policy implications” of the judge’s decision. The ruling in the high-profile complaint case could potentially affect all interstate pipelines, subjecting their operational decisions to the “second-guessing” of regulators and causing a safety hazard.

“INGAA is not attempting to address the factual conclusions that were reached in the El Paso proceeding. We are, however, concerned that the initial decision may be read, unless clarified by the Commission, as creating new legal and regulatory requirements that fundamentally change the standards that pipelines have historically relied upon in the operation of their systems,” wrote INGAA President Jerald V. Halvorsen to FERC Chairman Pat Wood Friday.

The Wagner’s ruling “already is creating uncertainty about what is required of natural gas pipeline operators and will create serious problems for the natural gas industry.” The group urged the Commission to confirm several “basic principles” related to pipelines as part of its final decision on El Paso.

Wagner claimed the pipeline company could have operated its system at MAOP without violating Department of Transportation regulations. In his ruling, Wagner said he sympathized with El Paso for its desire to operate at lower pressures following the Carlsbad, NM, rupture that killed 12 people in August 2000 (see Daily GPI, Aug. 22, 2000; June 21, 2002 ). At the same time, he finds that “El Paso Pipeline was under a duty to maintain its pipeline in a condition that would permit operation at or close to MAOP, if necessary, to meet its certificate obligations.”

Wagner found that El Paso withheld as much as 696 MMcf/d of its total 3.29 Bcf/d of transportation capacity that should have been available to California delivery points. He said that only half of the withheld capacity — 345 MMcf/d — could be accounted for. He estimated 210 MMcf/d of El Paso capacity was unavailable to customers because the pipeline did not operate its system at MAOP.

The judge recommended the Commission initiate “penalty procedures” against El Paso for the “unlawful exercise of market power” in the capacity market in California. He also called on FERC to begin penalty action against El Paso pipeline and its affiliate, El Paso Merchant Energy Co., for a related violation of the agency’s market-affiliate regulations. If FERC should order refunds, some speculate it could cost the energy company billions of dollars.

El Paso’s stock price, which started the week at nearly $9, closed at $6.49 Friday.

In its three-page letter, INGAA urged FERC to confirm the “long-standing presumption of prudence” afforded to pipelines to make their own operational decisions, particularly those relating to system maintenance. Wagner’s initial decision “appears to open pipeline operators to an after the fact second-guessing [by regulators] of the timing of maintenance activities,” it said.

“Creating a rule that needed repairs will be judged [in] hindsight creates an increasingly risky and potentially dangerous operating environment for interstate pipelines. The Commission should make clear in its ruling on the initial decision that the law is not being changed and pipeline operating practices will be granted the deference they have historically received.”

It further asked the Commission to clarify that pipelines are not expected to operate their systems at the MAOP on an average basis or continuous basis, and are not expected to operate at levels above the MAOP at any time. Wagner’s ruling “appears to require a pipeline to operate its system at the MAOP the entire time it is operating. [It] even suggests that pipelines are permitted to routinely operate in excess of the MAOP,” said INGAA, adding that this is “flatly contrary” to the safety standards of the Department of Transportation’s Office of Pipeline Safety.

Safety considerations aside, INGAA contends it is “impossible” for a pipeline to operate at the MAOP at all times, “given the ever constant fluctuation in shipper-nominated activities.”

FERC also needs to confirm that the “responsibilities and obligations” of pipelines are outlined in their tariffs, and that actions consistent with tariffs are considered lawful. The agency “should clarify, for example, that pipelines are only required to accept nominations and schedule capacity in accordance with the terms of their tariffs….”

At the same time, the Commission should recognize the actions of shippers often affect the ability of a pipeline to make use of its certificated capacity, and that pipes cannot be held accountable for shipper actions. “The initial decision appears to require a pipeline to deliver each day its entire certificated capacity,” said INGAA, but it noted there are a “number of valid reasons beyond the control of the pipeline” why this may not be possible, including:

Lastly, INGAA asked FERC to confirm that pipes are not obligated to expand their systems to meet customers’ fluctuating capacity requirements, without first receiving firm commitments from shippers. “Pipelines cannot be expected to build new facilities to compensate for shippers’ ever-changing or growing demands on the system without corresponding capacity commitments by shippers for the new capacity,” it told Wood. “A vague, open-ended and burdensome obligation to build new facilities to meet these changing demands will inhibit capital market investments in the pipeline industry.

Earlier in the week, El Paso announced it was restructuring some of its executive management in order to conform with recently published guidelines from the New York Stock Exchange and stay current with the evolving industry environment. The board of directors for the company announced that it has named Ronald L. Kuehn as lead director for the company. Kuehn, who was formerly chairman, president, and CEO of Sonat before it was merged into El Paso, will consult with management on important matters and will regularly report back to the board.

“Ron’s exceptional experience and expertise will be invaluable to this company as we work to deflect the erroneous conclusion revealed by the Federal Energy Regulatory Commission Administrative Law Judge Curtis Wagner,” said Wise.

In addition, the board also announced that it has elected H. Brent Austin, currently executive vice president and CFO of El Paso, as president and COO. Austin will report to Wise and will be responsible for all non-regulated businesses as well as the financial function of the company. The board added that Ralph Eads will continue to have responsibility for the company’s power, trading, and production businesses, while Gregory G. Jenkins will continue to have responsibility for the company’s petroleum and liquefied natural gas businesses. D. Dwight Scott, presently senior vice president-finance, will be promoted to executive vice president and CFO. All three will report to Austin.

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