Frustrated by the inability of El Paso Natural Gas and itsshippers to resolve the capacity-allocation problems on thepipeline, FERC yesterday unveiled its own “multi-step” solutionthat requires El Paso to make a one-time assignment of primary firmcapacity rights based on shipper elections to alleviate thecongestion surrounding gas shipments to the Southern CaliforniaGas/Topock point and the other three Topock points.

The Commission believes its plan will put an end to thescheduling difficulties, uncertainties and pro-rata curtailments onEl Paso that have dogged shippers transporting gas to theCalifornia market through SoCal/Topock, the prime delivery pointfor San Juan Basin gas. “[W]ith this method, firm shippers willtruly have firm service” to California, said Commissioner WilliamMassey. FERC’s remedy is “unlikely to satisfy all parties,” addedCommissioner Linda Breathitt, but it is fair.

“As a result of the assignment process required by this order,while the firm delivery point capacity that each shipper currentlyhas at the Topock points will be reduced, each shipper will beguaranteed that it can nominate up to its assigned amount on anyday at any Topock delivery point without a daily pro-rata reductionabsent force majeure or unusual circumstances,” the Commissionassured shippers in the order, which was in response to thecomplaint brought by Amoco Production, Amoco Energy Trading Corp.and Burlington Resources Oil & Gas more than a year ago[RP99-507].

The immediate reaction from the market to the Commission’scapacity plan was positive, with some predicting it would reducevolatility at the southern California border. A California traderwith a large Houston-based marketing company believes it will bringfairness to pricing there.

Right now there are three sellers to every one buyer atSoCal/Topock because San Juan producers are over-nominating gas tothe West in an effort to move more of their production down thepipeline, the trader said. The FERC order will help to even out thescales — with one seller for each buyer. On balance, this likelywill be bullish for SoCal/Topock prices and bearish forPG&E/Topock prices, he believes. Another western trader agreedwith that appraisal but suggested the ultimate effect of pricing atthe border will be determined by the willingness on the part ofCanadian producers to continue to accept lower netbacks than SanJuan Basin producers.

In addition to acting on the Amoco complaint, FERC yesterdaydecided to put on hold a related complaint brought by KN MarketingL.P. that accused El Paso of overbooking firm capacity on the eastend of its system. FERC “would like to examine the results andimpact of the allocation method imposed [in Amoco] before ittackles broader and more complicated system-wide issues,” the ordernoted [RP139].

While the Amoco complaint primarily focused on El Paso’spractice of overbooking firm capacity for delivery to SoCal/Topock,the FERC order noted the situation could “apply equally to anydelivery point” on El Paso’s system. It directed the pipeline tonotify the Commission within 15 days of the order of other deliverypoints where shippers’ primary firm rights exceed the designcapacity of a particular point, resulting in daily pro-rationing ofcapacity.

At SoCal/Topock, El Paso has awarded contracts giving shippersthe ability to nominate about 1.555 Bcf/d of firm capacity to thedelivery point, which FERC acknowledged is the “most economicallydesirable” point into California from the El Paso system at thistime. The problem, however, is that the design capacity ofSoCal/Topock is only 540 MMcf/d. Trying to squeeze nearly triplethe capacity into SoCal/Topock has led to sharp capacitycurtailments over the past couple of years, shippers complained,and heavy financial losses.

In an effort to stop this controversial practice of overbooking,the Commission said it will require the pipeline to begin assigningcapacity at SoCal/Topock to each shipper with firm delivery rightsbased on a one-time election by the shippers.

In the first step of FERC’s new capacity-assignment plan, firmshippers — who have rights to the Topock delivery points inaggregate, but not to a specific Topock point(s) — must choosehow their delivery point rights are to be distributed among theindividual Topock delivery points. For example, if a firm shipperhas rights to 100 units at Topock, it can designate all 100 unitsto the SoCal/Topock delivery point, or 25 units to each of the fourTopock points, the order said. Firm shippers are required to submittheir selections to El Paso within 14 days of the order. Withinfive days of the shippers’ selections, FERC has directed El Paso tofile a report listing each shipper’s name, contract quantities atTopock, and how the shipper wants its rights to be distributedamong the four Topock points.

Shippers with rights at specific Topock points, such as Block IIrights or Southwest Gas’ rights at Southwest/Topock, are prohibitedfrom changing their specific point rights, and, therefore, will notparticipate in the first step, the order said.

In the second step, El Paso would add up all of the firmshippers’ rights at each Topock delivery point. This would includethe selections made by shippers in step one and the rights of otherfirm shippers at specific Topock points. The pipeline then wouldcalculate for each firm shipper at each point the percentage that ashipper has of the total contract rights at that point. Using thesepercentages El Paso would divvy up the “available physicalcapacity” at each Topock point.

The Commission directed El Paso to make the calculations anddistribute them to the affected firm shippers and FERC within sevendays after step one of the allocation process is completed.

In step three, assuming all delivery point rights haven’t beenfully assigned and there still is available capacity at the Topockpoints, firm shippers on El Paso would have the opportunity totransfer their delivery point rights to a Topock point that isn’tfully subscribed or to other delivery points, the order noted.

The Commission directed El Paso to assign this availablecapacity “proportionally.” If three shippers were vying for 30units available at Mojave/Topock, each would receive a portion ofthe available capacity based on the percentage that the shipper hasremaining of his total units that were eligible for transfer at thestart. “Thus, the shipper with 50 units would get 50% of theremaining 30 units, that is, 15 units.” This process would continueuntil each shipper’s full contract amounts are exhausted, the ordernoted. Within 14 days after step two is completed, El Paso has beenordered to submit revised calculations that incorporate thecapacity transfers to both shippers and the Commission.

FERC further noted that its new capacity-assignment processwould extend to the capacity-release market. “[T]o the extent thata firm shipper does not use its full rights at any Topock deliverypoint on any day, it will have the ability to release such rights.Thus, the replacement shipper will also have the ability to usethat Topock capacity without experiencing pro-rata reductions.”

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