Amoco Production, Amoco Energy Trading, Dynegy and Marathon Oilhave filed a protest at FERC charging Koch Gateway withdiscrimination and violation of affiliate rules. The four shipperssaid the pipeline and its affiliate, Koch Energy Trading (KET),have been speculating on price spreads between market points andthe Henry Hub using Koch’s gas parking and lending (PAL) service.

Under the PAL service, in which the pipeline essentially is usedas short-term storage, Koch Gateway receives 80-90% of the parkingcustomer’s profits on index-based spreads. Koch has been providingthe service for more than a year. It often involves significantquantities of gas. The more recent agreements the pipeline signedwith its affiliate last fall, for example, called for various largepackages of the affiliate’s gas (totaling more than 345,000MMBtu/d) to be parked on the pipe for the month of February 2000and returned in portions during March, April and May. The affiliatepays an option fee of between 1 cent and 5 cents plus 90% of anyprofits won using the service.

The service has been designed “to permit KET to buy and selloffsetting futures contracts in order to profit on any spreaddifference,” the shippers explained to FERC. “Supposedly, KET wouldnot exercise its option for the parking service unless it hasentered into contracts resulting in a positive spread differentialfor KET.”

“While this type of arrangement between affiliates may makeeconomic sense where 100% of the profits all go to the same parentcorporation, as applied to non-affiliated marketers, this approachis clearly unduly discriminatory and preferential,” the fourshippers said.

According to the shippers, Koch Gateway shifted to a 90%profit-sharing requirement “only after Dynegy contacted Koch andrequested the same deal as KET… Although Dynegy believes the 80%figure was overly rich for the pipeline, hedging/trading profitswere possible at these levels. The shift to 90% simply underscoredthe fact that this type of parking arrangement is only available toKoch’s marketing affiliate.”

The shippers also told FERC that Koch unfairly waited fourmonths to inform the Commission of its transactions. They claim thereason was to prevent others from requesting the same service whileit was particularly valuable.

“…Koch and KET combined could make substantial sums on thesedeals by trading on Nymex futures in advance of the arrangement’seffective date,” they told FERC. “For example, when the Jan. 14,1999 agreement was entered into, Nymex gas prices for November 1999and April 2000 were fairly flat. Under that agreement, KET had 9 «months (January until Nov. 1) to enter into futures contracts wherethe November 1999 Nymex…..price was trading at a price lower thanthe April 2000 commodity futures price. (KET could lock in pricingspreads by entering into one contract to buy gas to be parked inNovember 1999 and a separate contract to sell gas in April 2000when the parked gas is returned). In addition, KET could enter intothese types of futures contracts each time the spread moved,thereby multiplying its profits…

“Furthermore, KET has had the unique opportunity to tie up morethan half of the capacity moving into the Henry Hub for the monthof November 1999,” they added. “Koch’s physical design capacity atthe Henry Hub is about 300,000 MMBtu/d and KET has the option toinject up to 166,667 MMBtu/d for the month of November. This factoralone provides KET with an unfair competitive advantage over itscompetitors on Koch’s system, and in combination with the factorsdescribed above, devastates the ability of any shipper to competewith KET on Koch’s system…

“This overt gaming of the Commission’s market affiliateregulations is utterly and completely contrary to principles ofopen and nondiscriminatory access.”

The shippers urged the Commission to reject all negotiatedagreements between Koch Gateway Pipeline and its marketingaffiliate. If FERC does not do this, it should at least require thepipeline to post all agreements on its electronic bulletin board atthe time they are entered into and require Koch to offer the samebasic deal to non-affiliated shippers.

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