FERC last week came down on the side of Phelps Dodge Corp. in acomplex contract dispute with El Paso Natural Gas. It ordered theTexas-based pipeline to either add the delivery points sought byPhelps Dodge, or to show cause within a month why – due tooperational and capacity constraints – it cannot do so.

The Commission’s ruling was in response to a complaint filed inDecember 1997 in which Phelps Dodge asserted that while El Pasoagreed to add the delivery points to service its Texas miningfacility in the wake of a global settlement in 1988, it did acomplete turnabout after a 1995 rate settlement because it realizedit wouldn’t receive any incremental revenue under Phelps Dodge’sexisting agreement if it did so. That’s because the ratesettlement, to which Phelps Dodge’s contract was subject, locked incustomers’ firm transportation rates for more than a 10-year periodin return for El Paso shippers agreeing to underwrite some of thecosts associated with unsubscribed capacity on the pipeline.

Specifically, the contract demand and billing determinants onwhich the settlement rates are based would remain frozen for 10years. Consequently, any increase in a full-requirements customer’sgas usage during that period – such as Phelps Dodge is seeking -would not translate into higher reservation rates for El Paso. Infact, the end result would be a lower unit rate for gas serviceprovided to Phelps Dodge by El Paso.

El Paso’s denial of additional service to Phelps Dodge wasdriven by its after-the-fact realization that honoring suchcontractual commitments following the 1995 settlement would not bein its best financial interest, the refining corporation insisted.El Paso has offered to provide the service to Phelps Dodge’srefining plant in El Paso, TX., but under a separate contract.Phelps Dodge rejected the offer because it says such servicewouldn’t be subject to the rate moratorium of the settlement.

El Paso contends that Phelps Dodge’s contract requires it toadd delivery points only in cases where a customer’s existingfacility hasn’t been previously served – either directly orindirectly – by the pipeline. It noted it currently indirectlyserves the Phelps Dodge’s Texas facility by delivering gas onbehalf of Burlington Resources Trading. But Phelps Dodge counteredthat its contract is with Burlington Resources, not El Paso.

The dispute between the two “turns largely” on theinterpretation of the word “indirectly,” FERC said in its order.The positions advanced by both parties are “plausible,” but “in ourview, …extrinsic evidence supports Phelps Dodge.”

Phelps Dodge “has offered evidence that [certain] language wasadded to its service agreement, as well as to those of othersimilarly situated shippers, to clarify that non-LDC fullrequirements shippers had certain rights to add delivery points,”the order noted [CP98-159].

El Paso questioned FERC’s jurisdiction over the contractdispute, but the Commission begged to differ – particularly sincethe case involved the proper implementation of the terms of a ratesettlement. “It is important that the Commission ensures thatneither El Paso nor its shippers attempt to manipulate the terms ofservice agreements in order to take advantage of or avoid theintended effects of the rate settlement.”

Further, FERC said it was unable to determine whether there wasany merit to El Paso’s claims that it would be unable to providenew service to Phelps Dodge’s Texas facility due to operational andcapacity constraints. If El Paso should decide to show cause why itcan’t add the delivery facilities, the Commission ordered thepipeline to provide the necessary flow information and capacitydata to back up its claim.

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