In a refreshing twist last week, El Paso Natural Gas contract demand (CD) shippers began stepping up to the plate to offer to turn back their unused capacity in an attempt to ease the way for FERC’s planned conversion of full requirements (FR) service to CD service on the pipeline.

Members of the Southern California Generation Coalition (SCGC), which hold about 284 MMcf/d of annual CD rights to El Paso capacity, said they had approximately 91 MMcf/d of capacity available to be turned back for the summer period, and 224 MMcf/d available for the winter period. They further indicated that Southern California Gas could have as much as 210 MMcf/d of capacity for turnbacks.

Houston-based Dynegy Marketing and Trade said it was willing to relinquish 56,418 MMBtu/d “in order to obtain a clear picture of what additional capacity is needed…to convert FR customers to a contract demand that will accommodate their peak usage.”

Burlington Resources, a CD shipper on El Paso, made the first gesture during a FERC conference last month that addressed staff’s proposal to convert the pipeline’s controversial FR service to CD service. It offered to turn back 89,340 Dth/d of capacity to the California border to help ease the long-running capacity crunch on El Paso. In addition, El Paso at the time announced plans to expand its Line 2000 by 320 MMcf/d by the end of 2003.

In offering the capacity, a Burlington official noted that “the basis differential from the producing regions to the California border right now…[was] insufficient to satisfy or cover the costs of the maximum rates on El Paso to hold the capacity.” He proposed that all CD shippers on El Paso be allowed a one-time turnback of capacity. FERC, in response, asked CD shippers to provide estimates of firm capacity available to be turned back.

“The amount of capacity that may be available for turnback to satisfy the CD needs of converted FR shippers may equal or exceed the roughly 500 MMcf/d that El Paso indicated it may need” to carry out the conversion, said the SCGC group in comments filed at FERC last Tuesday [RP00-336-002].

“Some may argue that the Commission should reject the turnback proposal because it might result in a potential revenue loss to El Paso…However, the Commission should not be persuaded by this argument. El Paso helped to create the current problem by failing to provide the firm service that it agreed to provide. It would be far less fair to make the CD customers continue to pay for service that they do not receive” as a result of the pipeline’s practice of over-contracting, the group noted.

California regulators were in the minority on this issue. They urged the Federal Energy Regulatory Commission not to allow shippers to turn back capacity with primary delivery rights at the state border. Such action would be a violation of the 1996 settlement between El Paso and its customers, and would set California up for more severe firm capacity shortages in future years, the California Public Utilities Commission (CPUC) told FERC.

“California should not have to lessen its firm capacity over El Paso as part of a solution to El Paso’s failure to deliver certificated amounts to [the state],” the CPUC said. If the Commission should decide otherwise and allow capacity turnbacks, the California agency requested that California customers/shippers be given the first right to re-purchase any capacity “utilizing the same primary delivery points.”

The CPUC “anticipates that some customers and shippers in California…may have the need and financial wherewithal to purchase such turned-back capacity, and ought to have the opportunity to retain such historically-dedicated California capacity before it gets permanently released to the general El Paso system.”

The CPUC said it favored the FERC staff’s proposal to end the controversial FR service, which has given customers located in Arizona, New Mexico and Texas almost unlimited access to El Paso firm transportation capacity over the years without the cost of additional demand charges, often at the expense of the pipeline’s CD shippers. CD shippers complained that their capacity routinely was diverted to the east-of-California (EOC) customers to meet the expanding gas demand of power plants in the Southwest, rather than to the intended California markets.

But while the CPUC called Burlington’s offer of turned-back capacity and El Paso’s expansion “meaningful responses” to FERC staff’s proposal, it warned that any reduction in firm capacity to the California border would “markedly” increase the odds of the state revisiting the energy shortages of the winter of 2000-2001. The CPUC cautioned the Commission not to be fooled by the “momentary lull in demand” in California.

“California must not find itself again in the situation that existed at the end of 2000/start of 2001, with a need for at least the entire 3,290 MMcf/d of capacity” on El Paso to the California border, “but no ability to get it even with skyrocketing prices,” the agency said.

The SCGC group, Dynegy, Coral Energy Resources LP and other shippers uniformly opposed the FERC staff’s recommendation to increase the supply pools on the El Paso system to 20 from six. “SCGC believes that the existing structure of six pooling areas should be retained because it provides for more liquidity within the pools. With fewer, larger pools, there is more gas volume within each pool and greater flexibility in trading.”

Dynegy noted that “El Paso has shown no correlation between the move to 20 pools and greater scheduling certainty.” Moreover, the pipeline has not demonstrated actual capacity constraints within the existing six pooling areas that would warrant a move to 20 pools, it said.

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