The unfolding controversy over the contracts giving Natural GasClearinghouse (NGC) a large bite of the westbound transportationcapacity on El Paso Natural Gas – capacity that was destined to beturned back to the pipeline at the end of last year – is expectedto take center stage at FERC this week. Marketers and producers saythey plan to make a case that the contracts are anticompetitive andcontain illegal negotiated terms and conditions, and are at faultfor the run-up in transportation rates on El Paso’s system to theCalifornia border.

At a technical conference scheduled for Tuesday, they plan toargue that NGC’s three short-term contracts (two years), which givethe Houston-based marketer control of 1.3 Bcf/d on El Paso eventhough it will only be required to pay for half of that in 1998,combined with an apparently waning interest by El Paso indiscounting interruptible transportation (IT) have significantlydriven up the pipeline’s capacity rates from the Permian and SanJuan basins to California over the past two months. These togetherhave furnished NGC with the ability to “manipulate the value” offirm capacity on El Paso, marketers and producers complain.

Although NGC has cornered 39% of the 3.3 Bcf/d transportation onEl Paso, which gives it a 60% share of all the unsubscribed firmcapacity in the Southwest, it “is not making any of their capacityavailable to anyone” in the secondary market, said Kevin J. Lipson,a Washington D.C. attorney for Southern California Edison, which isworried about the effects of an artificially tight capacity marketon the emerging, competitive electricity market in California. Theavailability of westbound capacity has been further aggravated byEl Paso’s reluctance to discount IT, which Lipson and others blameon the NGC contracts. The contracts require El Paso, after itreaches a certain threshold each month, to either split orcompletely turn over – sources are unclear on this point – its ITrevenues to NGC, according to marketers and producers.

This has stripped El Paso of any incentive to compete using ITtransportation with NGC’s firm rights on El Paso because after itcrosses a certain threshold level it just has to turn the moneyover to NGC, market observers said.

In rebuttal remarks, NGC said its two-year capacity-release dealwith El Paso was only one factor affecting the marketplace, andthat “it’s impossible to assess the extent, if any, which it [has]impacted gas prices in western U.S. markets.” Although it normallyrefrains from commenting on “short-term fluctuations” in commodityprices, the marketer outlined a number of factors – other than itscontracts – that could be influencing the California capacitymarket, including the seasonal demand for gas in the state; theJan. 1 changes to Southern California Gas’ (SoCal Gas) imbalancepolicy pending electric retail access in California; prices in theMid-Continent, Texas intrastate and Rocky Mountain markets; and thetransportation rates charged by other pipelines – TranswesternPipeline, Kern River and PG&ampE Gas Transmission-Northwest,formerly Pacific Gas Transmission.

Likewise, El Paso dismissed the attacks on its deal with NGC.”We have every confidence FERC will sustain these contracts,” ElPaso President Richard Baish told NGI. “We feel the deal is solid.We did everything within the FERC order. Everyone had an equalopportunity to bid.” However, he declined to respond to reportsthat the El Paso, TX-based pipeline has cut back on its discountingof IT capacity.

“We certainly haven’t done any kind of exhaustive analysis” -such as comparing degree days this year to last year and storagelevels – to determine whether any market factors aside from the NGCcontracts could be contributing to the pricing aberrations forcapacity to the California border, a marketing source said. Heconceded such an analysis would be required to reach a “fullydefensible conclusion” that the NGC contracts are at fault.

The price and access to capacity can have an impact on both thegas and electric markets. “NGC owns gas and sells gas, and it ownsgeneration [Destec]. If it drives up the border price of gas, italso drives up the price of electricity,” giving itself the edgeover competitors in both markets in California, Lipson noted. Thisscenario “certainly” raises a number of market power issues thatFERC needs to address, he said.

Sources are at odds over the extent of the price increase inwestbound capacity on El Paso since Jan. 1, when the NGC contractswent into effect. One estimated the differential between El Pasotransportation prices at the California border and prices in theSan Juan and Permian basins was at an “all-time high” of 35-40cents in January, while another put it in the range of 25 cents.Both agreed the differential dropped slightly in February, butstill there are concerns that the level was “artificially high.”

Feeling the greatest pinch from the higher prices are marketersthat purchase gas from the Permian and San Juan basins fortransportation to the California market, and the producers in thosetwo areas. Since 1993, when excess westbound capacity firstappeared, they have managed to obtain sharply discounted firmcapacity on the secondary market or discounted IT transportation, amarket observer noted. That was until NGC picked up the unwanted ElPaso capacity in the three contracts, and reportedly a small amountof transportation space from SoCal Gas. Since then,California-bound producers and marketers have faced a whole newball game.Susan Parker

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