In a complaint filed at the Federal Energy Regulatory Commission last week, Pan-Alberta Gas (US) Inc. (PAGUS) and Mirant Americas Energy Marketing L.P. accused Enron-affiliated Northern Border Pipeline Co. of trying to “subvert” their rights to match competing third-party bids for pipeline capacity under the right-of-first refusal (ROFR) process.

The two marketers have asked the agency to grant them “preliminary relief” by blocking Northern Border from carrying out the ROFR process for any capacity held by PAGUS on the pipeline until the complaint is resolved. “Northern Border has already initiated the ROFR process with respect to PAGUS’ capacity and PAGUS will be substantially damaged if it is forced to go through that process before the issues raised in this complaint are [settled],” they told the Commission [RP03-16].

The companies are seeking fast-track consideration of the case by the Commission. At stake is PAGUS’ right to match competing bids for the 689,702 MMcf/d of firm capacity that it holds on Northern Border under three contracts, which are due to expire in October 2003. The capacity has been released temporarily to Mirant under an agreement that expires at the end of this month.

Under the ROFR process, which begins when a pipe notifies a shipper of its expiring contract, PAGUS has the option to either extend its contract for a minimum of five years at maximum rates or it can agree to match the best bid of a third party for that capacity up to the maximum rate. But the ROFR process on Northern Border becomes a bit murkier when there are no bids or no acceptable bids from third-party shippers for the capacity, the two marketers said.

If it doesn’t receive any acceptable third-party bids for the capacity, Northern Border has indicated it will give PAGUS 20 business days in which to either extend its contracts at the maximum rate or negotiate an “acceptable alternative extension” of its agreements with the pipeline, PAGUS and Mirant noted. If PAGUS should reject the options, Northern Border has said the capacity will be posted immediately as being “available” upon expiration of the PAGUS contracts, “with no further posting or bidding and with no further matching rights for PAGUS.”

PAGUS and Mirant have called on the Commission to “clarify that if capacity is not awarded during the ROFR process (i.e. when no maximum rate or acceptable discount rate bids are received), the existing shipper’s matching rights will extend through the end of its contract term.” This would give an existing shipper the opportunity to match any acceptable bids that are received between the time the capacity is posted and the expiration of the shipper’s contract or contracts, they said.

“The prospect that capacity that is not awarded in the ROFR process because of the lack of acceptable bids can thereafter be awarded on a long-term basis to a new party with no further bidding or matching rights puts the existing shipper at an obvious competitive disadvantage in negotiations during the ROFR period, and provides the pipeline with unwarranted increased leverage.”

The “nub” of the problem is a revised tariff provision that permits Northern Border to offer uncontracted capacity, which hasn’t received any acceptable bids, on a first-come, first-served basis “for a term longer than one month,” with no further posting or bidding. Prior to the revision last February, the tariff applied only to capacity with a term of “up to one month.”

PAGUS and Mirant have asked FERC to restore the pre-existing one-month term in Northern Border’s tariff. Before it was changed, “capacity could only be awarded under the [tariff] provisions for a maximum of one month. The provision, therefore, functioned reasonably to permit unsubscribed capacity to be sold for short periods when posting and bidding was not practical…It is now a long-term capacity award mechanism that will function unreasonably in conflict with the Commission’s capacity award policies and that is already operating to undermine PAGUS’ ROFR rights,” the companies said.

The revised tariff also gives Northern Border an “unfair advantage” over releasing shippers, who are unable to release capacity at discounted rates without first going through posting and bidding, they noted.

Northern Border’s action “undermines and subverts the ROFR process” in several ways. “First, parties that might otherwise bid for the capacity during the ROFR process are discouraged from doing so because they know that, unless the existing shipper agrees to extend at maximum rates, they will likely have the opportunity to make private deals with Northern Border that are not subject to matching rights or to competitive bidding,” they noted.

Second, “the pipeline is placed in a position to manipulate the capacity awards process by changing its standards as to bid acceptability. During the ROFR process, for instance, the pipeline could reject as unacceptable an offer by the existing shipper to extend its contract at 90% of the maximum rate. Following completion of the process, the pipeline could then accept a bid from a third-party at 80% of the maximum rate with no further posting or bidding and no further matching rights for the existing shipper. There are many reasons why a pipeline might act in that fashion. It might simply wish to discriminate in favor of an affiliate or some other shipper.”

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