The third time was not a charm for full-requirements (FR) shippers on El Paso Natural Gas. After postponing the deadline twice in response to FR customers’ pleas, FERC last Wednesday said the systemwide conversion of FR service to contract demand (CD) service on El Paso will go forward as planned on Sept. 1.

By getting all of the El Paso shippers on the same page with respect to transportation contracts, the Federal Energy Regulatory Commission is hoping that a more equitable system for allocating capacity on the pipeline will emerge, putting an end to a long-standing dispute over capacity between the FR and CD shipper camps.

In finally ordering the conversion to proceed, the Commission stressed that the capacity-allocation plan will meet the current usage needs of El Paso’s existing FR shippers in Arizona, New Mexico and Texas. The FR customers, also known as East of California shippers, will be allocated CD capacity quantities based on their monthly demand over the 12-month period that ended on Aug. 1, 2002, according to the agency orders [RP00-336 et al].

The rehearing orders also call for the capacity from El Paso’s Power-Up Expansion of its Line 2000 (an estimated 320 MMcf/d) to be included among the initial capacity allocated to converting FR shippers. Following the switch in service, FR shippers will no longer be bound to take all of their transportation service from El Paso, but will be free to contract with other pipes.

The conversion to CD service, which initially had been expected to take place Nov. 1, 2002, suffered its most recent setback in April when the Commission put it off until Sept. 1 because El Paso’s settlement with California had not been finalized and it was believed the settlement could have an impact on capacity-allocation issues.

At that time El Paso’s CD shippers, who have been urging the agency for a number of years to make the pipeline an all-CD system, accused the FR shippers of “seizing on that [El Paso settlement] development to seek, yet again, further delay of the contract conversion.” The Commission, they said, should “JUST SAY NO to the…delay tactics and get on with the remedy.”

There has been considerable friction between the two El Paso shipper groups, and FERC is banking on the systemwide contract conversion to CD service to resolve the bickering on the capacity-constrained pipeline. As a result of a 1996 settlement between El Paso and its customers, FR shippers have been allowed almost unfettered access to incremental capacity on El Paso’s system at no additional reservation costs for years, while CD shippers have had to bear the risks of demand charges for all of their capacity, even that which has been subject to pro rata cuts.

Because of the unrestricted access, FR shippers have been able to essentially hijack capacity to serve their markets in the Southwest that was originally intended for CD shippers’ markets in California.

The orders on Wednesday were a big victory for existing CD shippers and El Paso. And while the FR shippers may have lost the war, they scored on a key point. Although the FERC ruling essentially places restrictions on the capacity allocated to the converting shippers, it leaves intact the FR shippers’ cost allocations stemming from the 1996 settlement.

This means converting FR shippers “still [will] pay the same monthly bill for the [remainder of the] 10 years of the settlement, even though the billing allocations have grown substantially over time,” said Chairman Pat Wood at a press briefing following the regular Commission meeting. However, an FR customer will be subject to additional charges for “any incremental [capacity] that they would need beyond and above what they have gotten today” from FERC, he noted.

The apparent “inequality” in El Paso capacity costs “was not what we were after to fix” in the orders, Wood said. The Commission’s objective was to set the right “incentives for the pipeline to expand and to manage its capacity.” He expects the cost inequity to be addressed in El Paso’s next Section 4 rate application, which will be filed after the contracts expire at the end of 2005.

The Commission’s decision was “very narrow, and [was] intended just to restore firm reliable service on El Paso and to remedy the unjust and unreasonable allocations of capacity,” a staff member said. “We concluded it wasn’t necessary to reallocate costs among FR customers to achieve that goal.”

With cases like El Paso, “you know how Solomon [felt],” said Commissioner Nora M. Brownell. “We are bringing some rationality as well as equity to this allocation process” on the El Paso pipeline. “We don’t like to tinker with settlements, but this was a settlement [that] by anyone’s measure was simply unsustainable,” she noted.

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