In a stunning announcement late yesterday, El Paso Natural Gassaid it had reached a “mutual agreement” with Enron North AmericaCorp. to terminate the $38 million negotiated mega-deal for 1.2Bcf/d of capacity that the marketer had entered into in December.The negotiated arrangement covers three separate capacityagreements.

The decision to release Enron from the three capacity agreementswas somewhat puzzling, given that Enron last week had asked to be letout of only one contract – the famed Block II agreement (614 MMcf/d) -due to the restrictions that FERC had placed on the delivery rights ofthe capacity. In a Jan. 27 letter, Enron notified El Paso of itsintent to exit the Block II contract, but the letter didn’t indicatethat it wanted to terminate the Blocks I and III contracts. See DailyGPI, Feb. 3)

“They asked for it [to be released] and we agreed to it. It wasa mutual agreement,” said El Paso spokesman Mel Scott. The capacityagreements will be terminated on Jan. 31. Afterward, El Paso saidit will hold open season from Feb. 7 to Feb. 14 for the capacity.

“It is unfortunate that the recent FERC order modified thecapacity rights in a way that will not allow the capacity to servethe purpose that Enron North America originally intended when theyoutbid the prearranged transactions. In the interest of fairnessand good customer relations, we have agreed to release them fromthe contracts,” said John W. Somerhalder II, president of El PasoEnergy’s Pipeline Group.

El Paso Natural Gas has asked FERC to reconsider the mid-Januaryorder that essentially has reduced the commercial value of theBlock II firm transportation capacity that Enron had agreed toacquire. With the collapse of its contract deal with Enron, itcouldn’t be immediately determined whether El Paso will continue topursue rehearing.

El Paso is seeking rehearing after being rebuffed by FERC in itsrequest to stay the provision in the order restricting deliveryrights of Block II capacity.

The pipeline is seeking a reversal of a decision in which FERCsaid El Paso’s 1996 turned-back capacity settlement bars El Pasofrom marketing Block II capacity on a primary basis to any deliverypoint other than the one at Pacific Gas & Electric-Topock, AZ.That ruling stripped the Block II capacity of primary deliveryaccess to the Southern California Gas-Topock delivery point, whichis the most sought-after by shippers of San Juan Basin gas.

It was a major blow to El Paso and Enron, which had contractedfor the Block II capacity in December on the condition that itwould have primary delivery access to the Southern Californiamarket..

Without a favorable decision on rehearing, “the result may wellbe a diminution of the value of Block II capacity,” El Paso toldFERC. “Without question, Enron, as a new shipper on the capacity”and future holders of that capacity “will suffer a disadvantage inthe market….”

El Paso contends the Commission’s ruling, if unchanged, wouldthwart the intent of the 1996 settlement, which called for thepipeline and its customers to share the risks of unsubscribedcapacity on El Paso’s system, and for El Paso to share a portion ofthe revenues it received from re-marketing the capacity.

“An essential element in El Paso’s ability to maximize therevenues it agreed to share with its firm customers was the abilityto market the 614 MMcf/d of Block II capacity on a primary basis todelivery points other than PG&E-Topock,” the pipeline noted.Stripping El Paso of delivery-point flexibility for Block IIcapacity “will have a serious adverse impact on [its] ability togenerate the maximum possible revenues for its capacity and therebyrecover the costs it and its customers would otherwise have toabsorb.”

El Paso further said the Commission’s decision was at odds witha 1998 order addressing whether the pipeline could re-marketcapacity turned back by PG&E to the SoCal-Topock delivery pointon a primary basis. Since the 1996 settlement was silent on whetherEl Paso could re-market the capacity to delivery points other thanPG&E-Topock, the Commission reasoned the settlement didn’tpreclude El Paso from selling the capacity at SoCal-Topock.

“That ruling established the proper interpretation of the 1996settlement. Now, the Commission has re-interpreted that sameprovision in a manner that is completely contrary to its previousruling. The Commission provides no explanation as to how these tworulings can be reconciled or, alternatively, why it has changed itsmind….”

El Paso said it was also seeking rehearing because it “cannotfind any evidence” in the mid-January order that the Commission”even read, much less considered” its response as to the “properinterpretation” of the1996 settlement.

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