El Paso Natural Gas conceded Wednesday it discontinueddiscounting interruptible transportation early this year, but saidits action was primarily due to its new status as “swing supplier”of California-bound transportation – a position that it says givesit free reign to charge maximum IT rates.

“Our policy is no discounting at this time” on IT because of ElPaso’s status as swing supplier from the Permian and San Juanbasins to the California border, said A. W. “Al” Clark, vicepresident of marketing and operations control for the pipeline. “Wehaven’t seen anything yet to suggest we ought to be offering IT atanything less than a maximum rate.” He estimated El Paso moved3,560 MMBtus of maximum-priced IT between Jan. 1 and Feb. 25.

But marketers and producers, which serve the California market,found it difficult to swallow El Paso’s explanation for why ithalted discounting. During a technical conference at FERC, theypointed to El Paso’s controversial contracts with Natural GasClearinghouse (NGC), which gives the marketer control of 1.3 Bcf/dthat was to be turned back to the pipeline at the end of last year,as the real culprit. The contracts require El Paso to furnish NGCwith rate relief if the pipeline’s IT sales exceed a certainthreshold level. This, marketers and producers contend, hasstripped El Paso of any incentive to use its IT to compete againstNGC’s firm rights on the pipeline, causing a run-up in capacityprices on El Paso.

“I was told multiple times by El Paso representatives” that thepipeline’s $70-million deal with NGC, which went into effect onJan. 1, was the reason it quit discounting California-bound ITtransportation, a shipper told Clark. Clark responded, “if youdon’t like it, I’m sorry.”

Clark said NGC insisted on inserting the IT revenue creditingprovision in the contracts. Under the provision, NGC agreed to pay$28 million in 1998 and $42 million in 1999 “but only on thecondition that it not be left holding the bag to pay those amountsin full in the event El Paso otherwise sold IT to the same demandthat NGC was looking to serve” with the firm capacity on El Paso,he said. “It is important to note…that this provision does notpreserve for NGC any profit opportunity; [it] only reduces itsobligation to pay reservation charges should the market served byEl Paso IT increase at NGC’s expense.”

Kathy Edwards, the attorney for Indicated Shippers, called ElPaso’s transaction with NGC “bold,” but also added that it was”illegal.” Chad King, president of Amoco Energy and Trading, saidhe didn’t care how much “perfume you put on it, it doesn’t turn itinto a pretty girl.”

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