The controversy over the terms and conditions of the contractsgiving Natural Gas Clearinghouse a large bite of the westboundtransportation capacity on El Paso Natural Gas – capacity that wasdestined to be turned back to the pipeline at the end of last year- is expected to take center stage at FERC next week. Marketers andproducers say they plan to make a case that the contracts areanticompetitive and contain illegal negotiated terms andconditions, and are responsible for the run-up in transportationrates on El Paso’s system to the California border.
At a technical conference scheduled for Tuesday, they plan toargue the three short-term contracts (two years), which give theHouston-based marketer control of 1.3 Bcf/d on El Paso even thoughit will only be required to pay for half of that in 1998, combinedwith an apparent unwillingness on El Paso’s part to discountinterruptible transportation have significantly driven up thewestbound rates from the Permian and San Juan basins to California.
Although NGC has cornered 39% of the 3.3 Bcf/d transportation onEl Paso, it “is not making any of their capacity available toanyone” in the secondary market, said Kevin Lipson, a WashingtonD.C. attorney for Southern California Edison, which is worriedabout the effects of a tight capacity market on the emerging,competitive electricity market in California. The availability ofwestbound capacity has been further aggravated by El Paso’sreluctance to discount IT, which Lipson and others blame on the NGCcontracts. The contracts require El Paso, after it reaches acertain threshold each month, to either split or completely turnover – sources are unclear on this point – its IT revenues to NGC,according to marketers and producers. “What that means is El Pasohas no incentive to compete using IT transportation with NGC’s firmrights on El Paso because after they cross a certain thresholdlevel they just got to turn the money over to NGC by adjustingdownward their rate,” remarked one market observer, who requestedanonymity.
“It appears to us that…there’s no reason for El Paso to moveany IT greater than the threshold amount,” agreed a marketingcompetitor of NGC’s. Although the marketer believes El Paso’sreported reluctance to discount IT is “probably related” to the ITrevenue crediting provision in NGC’s contracts, it wants to keep anopen mind until “we get more information about how much IT, if any,El Paso is moving at the maximum rate.”
In rebuttal remarks, NGC said its two-year capacity-release dealwith El Paso was only one factor affecting the marketplace, and”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 market,including the seasonable demand for gas in the state; the Jan. 1changes to Southern California Gas’ (SoCal Gas) imbalance policypending 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 Pacific Gas Transmission.
“NGC owns gas and sells gas, and it owns generation. If itdrives up the border price of gas, it also drives up the price ofelectricity,” both of which would be to its benefit, Lipson noted.In rehearing requests of FERC’s Jan. 23rd order, which put the NGCcontracts into effect pending the outcome of the technicalconference, several marketers and producers urged the Commission tovoid the anticompetitive and illicit provisions of the contracts,or in the alternative, to defer their effectiveness “until therehas been a complete analysis and further order from theCommission.” The contracts should then be “delinked and reposted”for competitive bid so that all interested parties will have thechance to acquire capacity on “fair and unequivocal terms.”
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