After seven technical conferences and four alternative dispute-assisted settlement conferences addressing the capacity allocation problems on El Paso Natural Gas, FERC Chairman Pat Wood told the pipeline, its customers and state regulators last week that “we kind of need to close this baby out.” El Paso President Patricia Shelton agreed, adding “it’s getting ugly.”

Wood admonished state regulatory officials for knocking FERC staff’s proposal to convert full requirements (FR) service on El Paso to contract demand (CD) service, rather than offering alternative solutions. “If these are the attitudes that your customers represent, I don’t know whether I want to sit around for the next two panels,” he said to regulatory representatives from Arizona and California last Tuesday.

“…[T]his attitude that I’m hearing today doesn’t evince a real willingness to look for that solution to fix things. Pointing the blame is a game that we’re quite frankly tired of [at the Commission], and I would like to have it fixed…We have to fix the problems, not just kick them around for seven conferences.”

In response, Chairman William A. Mundell of the Arizona Corporation Commission (ACC) pledged to “work my darndest…with the company [El Paso] and the other states to help solve the problem.”

These remarks came during a public conference Tuesday on staff’s proposal to put an end to the controversial FR service, which has given customers located in Arizona, New Mexico and Texas almost unlimited access to El Paso firm transportation capacity over the years without the cost of additional demand charges, often at the expense of the pipeline’s CD shippers. CD shippers complained that their capacity often was diverted to the east-of-California customers to meet the expanding gas demand of power plants in the Southwest, rather than to the intended California markets.

Not surprisingly, El Paso and the CD customers came out in support of the FERC staff’s proposal, while the FR customers — the ones that would be most affected — were mostly opposed to it.

El Paso’s Shelton said she agreed with FERC staff that the pipeline’s 1996 settlement with customers should be kept intact to the “maximum extent possible;” that the conversion of FR customers to CD service be based on either the higher of customer billing determinants (BDs) as specified in the 1996 settlement, or the system’s “coincidental” peak of Dec. 12, 2001; and that small-capacity customers under El Paso’s F2 rate schedule should remain FR customers.

If the “basic elements” of the staff proposal are adopted, the pipeline would be able to perform at a level of 5.4 Bcf/d “without [pro-rata] interruption, except for those [instances] associated with maintenance and force majeure,” Shelton said at the conference.

She estimated that El Paso could handle 90% of that capacity, and that the remaining 10% could be accommodated through “sculpting,” turned-back capacity and a proposed “power-up” of Line 2000 (the former All American Pipeline that was converted from oil to natural gas).

Shelton announced last Tuesday that El Paso plans to add 320,000 Dth/d of capacity on Line 2000. She said the mostly compression expansion could be in service in 24 months. This would be done “out of our own pocket” for now, she noted, adding that El Paso, however, will want assurances it will be able to recover the costs during its next rate case in 2006.

This comes on top of El Paso’s previous decision not to remove or abandon about 230,000 Dth/d of compression capacity on its system, Shelton said. The pipeline did that “on our own dime” as well.

Even a representative from the California Public Utilities Commission (CPUC), which routinely has been very critical of El Paso, acknowledged that the pipeline’s proposal to put “more pipe in the ground” was a step toward solving the capacity-allocation woes.

Shelton called on the Commission to issue an order in support of the staff’s proposal, which she said would then allow El Paso to begin settlement discussions with its customers. “We’re not here to impose anything on anybody,” she said, adding that El Paso simply wanted to offer a start to a settlement process.

But FR customers argued that the staff’s proposal — which essentially would abrogate their existing capacity contracts with El Paso — would violate the “sanctity” of the 1996 settlement, which they said the Commission should enforce. They noted that they made multi-million dollar business decisions based on that settlement remaining whole. The FR customers further warned that staff’s proposal could lead to electricity blackouts this summer in the Southwest, given that power generation facilities in the region are greatly dependent on natural gas.

But shouldn’t “we be able to…put costs on people that are making the pipeline too full?” asked Wood. When the 1996 settlement expires in 2006, “I think that would be appropriate,” said the ACC’s Mundell, but not before then. FR customers in Arizona, New Mexico and Texas should have to “belly up to the bar” in 2006, but for now “we’ve already paid our…share of dollars” under the settlement. “From our perspective, we paid for the use of that pipeline through the end of the settlement term.”

If the Commission should decide to adopt staff’s proposal, Mundell asked FERC to “give us [Arizona] time to deal with the future” before implementing it. He noted that applications already have been filed at the Commission to construct additional gas lines in the state, as well as storage facilities.

As potential alternatives to the staff proposal, James F. Moriarty, who represented FR shippers at the conference, recommended that FERC look at no-fee exchanges or backhauls on the El Paso system, identifying Topock, Ehrenberg and other downstream points for delivery. He and other officials also suggested that El Paso hold an open season for capacity on its system. “It is our understanding that one or two large CD customers are willing to turn back capacity.” Lastly, he proposed that El Paso explore “seasonalization” to optimize capacity utilitization on its pipeline.

If more capacity still is needed to meet customer needs, the Commission should require El Paso to expand its pipeline, Moriarty noted, adding that FR shippers would agree to rolling in the costs in the next rate case.

He argued that staff’s proposal went against FERC’s duty under the Natural Gas Act to protect captive shippers; Supreme Court opinions that say contract abrogation “is not to happen except under very unusual circumstances;” and a recent Commission order upholding the “sanctity of contracts.”

Just prior to the FERC conference, four Republican Senate leaders sent a letter to Wood expressing their concern over the staff proposal to convert FR service on El Paso to CD service. This action “threatens to seriously undermine the ability of utilities” in the Southwest to provide “affordable and reliable electric service” to their customers, according to the letter from an impressive line-up of senators, including Sens. Pete Domenici of New Mexico, John Kyl of Arizona, Don Nickles of Oklahoma and Larry E. Craig of Idaho.

“We are concerned with what appears to be an undue willingness by [the] Commission staff to upset contracts, settlements and understandings in order to accommodate the interests of California at the expense of the interests of other western states,” the four lawmakers said. While the FERC staff’s proposal “will strike particularly hard at consumers in Arizona and New Mexico…the precedent set by this action should concern other states as well.”

There “may be serious questions about the legality of the proposed contract abrogation,” they told Wood in their April 11 letter. Moreover, “we are informed that there may be serious flaws in the staff’s methodology, such as failing to account for the fact that these [gas] supplies are most needed in the summer peaking season, while basing the proposed allocations on a single winter day’s use.”

Lastly, the staff’s proposal raises “compelling considerations of equity, fairness and a balancing of interests among the various customers of the pipeline, ” the senators said. “We request that you and your fellow commissioners carefully review this action before embarking on a path that may jeopardize the reliability and affordability of electric service in our states.”

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