Fearing an end to pipeline competition in California, thestate’s regulators and Indicated Shippers have called on FERC tosummarily reject the three transportation agreements by which EnronNorth America Corp. has contracted for 1.25 Bcf/d of unsubscribedfirm capacity on El Paso Natural Gas.

Approval of these agreements would give Enron Corp., parent ofTranswestern Pipeline and Enron North America, control over all theavailable transportation capacity to the southern Californiaborder, warned Harvey Morris, principal attorney for the CaliforniaPublic Utilities Commission (CPUC), which plans to submit itsprotest today. Between the two pipelines, he estimated Enron willcontrol 2.34 Bcf/d of firm capacity from the San Juan and Permianbasins to California.

For Morris, Enron North America’s contracting of the El Pasocapacity represents a worse threat to the pipeline’s other shippersthan Dynegy Marketing and Trade, who has held the capacity for pasttwo years and whose contract expires Dec. 31. “At least then therewas some Transwestern competition to the Dynegy situation. Now it’sEnron, the owner of Transwestern, who’s stepping into Dynegy’sshoes.”

But “what’s even worse,” he told NGI, is the revenue-sharingprovision in the contracts. It stipulates that “after Enron makes$35 million off of these contracts, it has to share the proceedswith El Paso for 25% of anything beyond $35 million. Soeffectively, Enron and El Paso have become partners in how highthey can jack up the transportation rate differential between theCalifornia border and the Southwest producing basins.”

The two pipeline companies “that have for decades competed witheach other in carrying Southwest supplies to California are nowpartners. We think that’s anticompetitive, and there’s no way FERCshould approve it,” Morris said. He recalled the basis differentialbetween the San Juan Basin spot price and the California bordershot up by 17% during 1998, the first year during which Dynegycontrolled the El Paso capacity into California. This situationcould worsen under Enron, he believes.

“At first blush the El Paso-Enron contracts [do] not appear tocontain the same anticompetitive features of the El Paso-Dynegycontracts,” Indicated Shippers noted, but a “closer review andanalysis” reveals the anticompetitive effects of therevenue-sharing provision (RSP) in El Paso-Enron contracts “are notonly similar” to those of the hotly contested reservation-reductionmechanism (RRM) in the El Paso-Dynegy case, “but areincreased……due to the fact that the contracts are with amarketing affiliate of El Paso’s primary interstate pipelinecompetitor,” Transwestern.

Both the RRM and RSP “operate to provide a disincentive for ElPaso and its competitors to compete against each other, or to takeany other action that will act to drive down the basis differentialthat defines the market value of the capacity,” Indicated Shipperstold FERC in a protest filed on Wednesday [RP97-287-041]. The groupincludes producers Amoco Production, Burlington Resources Oil andGas, Marathon Oil, and Phillips Petroleum, and two marketers -Amoco Energy Trading and Phillips Gas Marketing.

FERC “should reject the tariff filing immediately. TheCommission erred in allowing the El Paso-Dynegy contracts to remainintact for their two-year term after finding that the contractswere anticompetitive. This issue is pending in the [D.C. Court ofAppeals]. That same error should not be repeated here,” theproducers and marketers said.

The CPUC’s attempt to block the Enron-El Paso contracts at theoutset is a little bit unusual for the agency, Morris said, but itlearned its lesson following Dynegy. “When the Dynegy situationfirst hit, we asked for FERC to investigate the matter. We thoughtFERC did a very inadequate job then…..This time around we’reasking for FERC to summarily reject it. It’s hard for an agencylike ours to take such a strong stand right at the beginning, butwe’ve learned too much from two years of suffering under the Dynegysituation. And this is even worse.”

In the event the Commission should reject California’s request,the CPUC has asked that an “anti-hoarding condition” be included inthe contracts, which would require Enron to release unused capacityinto the short-term market at a price higher than what it’s payingEl Paso for the capacity. “They must make a little profit,” Morrisnoted. “We’re confident Enron can’t use the entire 1.2 Bcf/d ofcapacity…..so there’s going to be unused capacity.”

The agency also wants FERC to clarify that the primary deliverypoint for the Block II portion of the capacity (579MMcf/d) isPG&E-Topock in keeping with the terms of the 1996 settlementbetween El Paso and its customers. Morris said he agreed fully withAmoco, Burlington Resources and Southern California Gas (SoCalGas),which accused El Paso of violating the 1996 agreement by allowingDynegy to use SoCalGas-Topock as a primary delivery point for theBlock II capacity last summer. They contend the alleged violationis included in the Enron contracts.

He also noted the CPUC will challenge the ability of Enron tocall back Block II capacity after it already had been recalled byEl Paso shippers to serve Pacific Gas and Electric (PG&E)customers in northern California. Last July, FERC granted Dynegythe right to do this under its contracts with El Paso. But Morriscontends the decision violates the 1996 settlement under whichPG&E paid $54 million to preserve the right of the pipeline’sshippers to recall the Block II capacity to serve end-users in itsservice territory.

The CPUC also intends to challenge the Commission’s decisionthat would enable Enron to “just sit on the capacity,” therebywithholding idle Block II capacity from the market. IndicatedShippers also contend the Enron contracts violate the Block IIcapacity provisions of the 1996 rate case, as well as “exacerbate”the primary firm delivery point capacity-allocation issues that arepending before FERC now.

The CPUC accused El Paso of “deliberately” filing the Enroncontracts at FERC just before the holidays to avoid controversy.The pipeline “is trying to sneak one of the most controversialthings ever past FERC right before Christmas so that protests wouldbe minimized,” said Morris. “They did this with the Dynegycontracts two years ago. They have a pattern of filing right at thelast minute, making it harder for people to protest and harder forFERC to stop it from going into effect.”

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