FERC last week clarified that the controversial “rate reductionmechanism” (RRM) in the capacity contract between Dynegy Marketingand Trade and El Paso Natural Gas is “not an unlawful practice orcontract” under the Natural Gas Act. Commissioner William Massey,however, issued a blistering attack not only against the RRM, butthe entire El Paso-Dynegy transaction.

El Paso sought the clarification after the Commission ruled onrehearing in late July the RRM was anti-competitive, but not undulydiscriminatory. The latest decision is a hollow victory of sortsfor El Paso, given that it only applies to the RRM in thenegotiated contract between El Paso and Dynegy, which expires onDec. 31. If El Paso should work out another mega-negotiated dealfor unsubscribed capacity on its system, which it hopes to do, thepipeline would have to fight the RRM battle all over again.

The decision was an outright defeat for Joint Parties, a groupof natural gas marketers and producers, who had asked theCommission to declare the hotly disputed RRM unlawful under the NGAin all circumstances.

The finding “applies only in the context of this [Dynegy-ElPaso] transaction. The Commission does not reach the question ofwhether an RRM or similar provision must be prohibited in anyfuture contracts. The legitimacy of such a provision must beassessed in the context in which it arises, and is not ripe fordecision now,” the order said [RP-287-037].

Aside from the sheer magnitude of Dynegy’s 1.3 Bcf/d contractwith El Paso, producers and marketers have been most troubled bythe RRM in the agreement, which requires El Paso to credit toDynegy revenues generated from its sales of interruptible capacitythat exceed an historical threshold. The net effect of theprovision, El Paso shippers complained, has been to limit IT salesby El Paso, and to increase the delivered price for firmtransportation to California.

In a significant move, Commissioner Massey, who had approved theDynegy-El Paso transaction previously, dissented this time around.He characterized the RRM as a “covenant not to compete withDynegy’s capacity.” The latest order “recognizes once again thatthe RRM is anti-competitive but approves it nonetheless, eventhough its admitted purpose is ‘to protect Dynegy against thepossible loss of customers,'” he noted.

“I have had a growing concern that we are straining too hard toapprove this transaction despite its admittedly anti-competitivefeatures…..Although I voted for the prior orders in this case, Iam now of the view that the Commission should strongly disfavortransactions of this nature.”

Joint Shippers sought rehearing/clarification on a number ofother issues – mostly having to do with the recall rights of Dynegyand other El Paso shippers to Block II capacity to serve northernCalifornia – but their requests were flatly denied. Massey stronglydisagreed with the FERC majority’s decision not to provide arequested clarification that would bar Dynegy from recalling acompetitor’s Block II capacity in the event it had unused capacity.

“As I sort through the rather Byzantine maze of agreements…..Iam struck by the inherent unfairness of allowing Dynegy to recallcapacity ‘for its own use,’ including capacity that is being usedby a competitor, when Dynegy has unused capacity of its own,” hesaid. “Dynegy’s ability to recall capacity already recalled by ElPaso for the benefit of Dynegy’s competitors, particularly whenDynegy holds one-third of El Paso’s total capacity, poses greatpotential for the misuse of market power.”

In the order, the Commission explained why it has approved theDynegy-El Paso contract, which has been the target of ongoingcontroversy for two years. It “did so based on the specific factorspresent in this case, which involved the turnback of an unusuallylarge amount of firm capacity on the El Paso system, the verylimited demand for that capacity that resulted, the Commission’scurrent policy that neither pipelines nor firm shippers arerequired to discount their capacity, and the Commission’s findingof no adverse impact on the California market.”

But FERC said there was “no assurance the same result wouldobtain if Commission policy were to change or the economiccircumstances of the pipeline were different. Thus, while theCommission affirms that the conclusions reached in this case werecorrect at the time they were adopted, this does not mean that thesame conclusions would apply in the future.”

Susan Parker

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