There’s no denying that El Paso Natural Gas has a bad habit ofattracting controversy, but its latest move seems a bit moremasochistic than usual.

First it was with Dynegy that the pipeline bravely stepped outinto a two-year hailstorm of protests by signing a deal in late1997 for one-third of its firm transportation capacity to theCalifornia border. El Paso shippers, California regulators andothers claimed it was anti-competitive because it put so muchcapacity in the hands of one company and included certain terms andconditions not available to others. FERC ended up making some minormodifications and admitted some aspects were anticompetitive.

Then in January of this year, Enron decided to mount thewhipping post with the pipeline. It suffered a serious blow fromFERC that forced the cancellation of a one-year, $38 millioncontract. Following shipper protests FERC altered the deliverypoint rights so Enron did not have as much primary access to primeCalifornia markets.

Now in a bizarre twist, El Paso’s own affiliate, El Paso MerchantEnergy, wants to take a turn. On Tuesday, the company signed a new$38.5 million contract for 1.3 Bcf/d of firm capacity to theCalifornia border over a 15-month term (see Daily GPI, Feb. 16).

“I expect there will be some creative interventions,” said ElPaso Merchant Energy President Greg Jenkins, downplaying the levelof scrutiny the deal is likely to attract. “But it’s just a simple,clean deal,” he said.

Jenkins said the capacity was fully open to the marketplace andthe contract has no special revenue sharing components orcontroversial receipt point rights in contrast to the Enron andDynegy deals. “We probably would not have signed up” had there beenany unusual features to the transaction, he added.

El Paso Natural Gas President Pat Shelton said the pipeline hasnothing to hide with this one. “Number one, we saw Order 497. Thiswas open bidding,” she said in an interview with NGI. “This isreally the fifth time that this capacity has been available sinceSeptember. The first time it was available we had it posted inSeptember under right of first refusal. We got a right of firstrefusal [response from Dynegy]. Then we posted it again as aprearranged deal. People had the right to bid it up, and then weposted it yet again in an open season. This time it happened to beour affiliate who was the highest bidder, but it could have beenanybody else. People have had many opportunities to bid on thiscapacity. We were very flexible. People could get all of it or partof it.” She noted that 25 bids were received. However, only onebid, El Paso Merchant Energy’s, was for the entire package.

“We felt we wanted just a plain-Jane simple deal, allowing asmany people as possible to participate, and that’s what we did. Weare done. There’s nothing to file [with FERC], but as a courtesy weare going to put this out there where people can read it on ourbulletin board.”

And plenty of people certainly will read it. When the deal wasfirst announced Tuesday El Paso’s EBB server was bogged down withInternet traffic.

Despite its intention to stay away from Washington regulators onthis one, its shippers seem unwilling to let that happen.

“Leaving aside the affiliate issues for the moment, which Ithink are tremendous issues, very problematic issues, the morefundamental question is who’s capacity are they selling,” saidKatherine Edwards, a Washington, D.C. based attorney who representslarge producers and some of El Paso’s largest shippers. Edwardssaid recent engineering data El Paso filed in another complaintdocket shows the pipeline “has in fact oversold its firm mainlinecapacity.”

“I don’t think they should be selling any of this capacity. It’sclear there’s not 1.2 Bcf/d available,” said Edwards.

The pipeline affiliation of the new customer is “veryproblematic,” she added, “especially given the Commission’s gasrule issued last week that removes the price cap in the secondarymarket. If a pipeline affiliate buys up all the pipeline capacityand they are not regulated, then you are basically going back to apre-436 period, a bundled world with bundled sales andtransportation in the gray market and no regulation at all. Thefiling requirements are essential. Anytime you have a third of thepipeline capacity in the hands of an affiliate…you’ve got a realpotential for collaboration and collusion between the marketingaffiliate and the pipeline and all kinds of market-power abuse.”Edwards said her clients have not yet decided how to tackle thisissue, but given the urgency of the matter — the contract iseffective March 1 — and the history, it seems like a decisionwill be made quite soon.

Given the intense scrutiny this transaction is likely to trigger,it’s no small wonder why El Paso Merchant Energy would be so eager tostep into the limelight. It paid about the same amount as Enron forthe capacity despite FERC’s changes to the delivery point rights (seeDaily GPI, Feb. 4). While El PasoMerchant Energy paid about half what Enron had paid for Block IIcapacity (6.5 cents/Dth/day in reservation charges, compared to 12.6cents), it actually paid more for capacity under Blocks I and III (4cents compared to Enron’s 1 cent for Block I and 14.1 cents comparedto Enron’s 12.6 cents/Dth/d for Block III). Jenkins said it’s becauseof the timing and the changes taking place in California’s powermarket.

“In the analysis we have done, we’ve gotten a pretty goodunderstanding of the fundamentals that are affecting the naturalgas market not just into California but also into Mexico. Thatcombined with what we see coming with the [1.25 Bcf/d] AlliancePipeline [to Chicago from British Columbia] entering the equation,gives us the confidence that not only is the demand in Californiagoing to grow but the clockwise shift in gas supply that we havebeen talking about — and I think the industry now recognizes —is going to manifest itself during the term of this contract. Wefeel that is going to have a significant impact on the value ofthis such that we are going to be in a very good position that weare going to take advantage of it.”

Jenkins noted El Paso Merchant Energy, formerly El Paso EnergyMarketing, was not “prepared to take this risk in the past. But ourphysical sales volume has gone from about 3 Bcf/d three years agoto 7-8 Bcf/d today. The volume on the financial side of ourbusiness, the amount of long-term transactions, has gone up, I’mquite confident to say, 10-fold. We have many more long-datedcontracts for supplies, long-dated contracts for market, long-datedtransportation agreements on other pipes. We’re a very activephysical player in the California generation market with our ownrecently acquired plants, but we also are serving others.”

He also noted that there are some significant changes takingplace in the power market that El Paso intends to exploit in thecoming months. “Essentially what we’re saying is the way theplayers are going to be operating the power plants and the way thatwe are going to operating the power plants in and around Californiais going to require a lot more variability of contracting and a lotmore variability of takes and deliveries. We think we areparticularly good at understanding the value of the changing load,”said Jenkins.

El Paso Merchant Energy has about 1,000 MW of generation inCalifornia today, but Jenkins said the company intends to doublethat “during the tenure of this contract.”

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