The Great Gas Grab
California sued El Paso for gaming the pipeline. But the blame may lie to the East.
To hear one side tell it, it's the "Great California Gas Grab"-a "thinly disguised effort" to steal pipeline capacity from Texas, New Mexico, and Arizona, and to give it back to California, where it sells at a premium.
Nor does the other side mince words. It claims that gas customers in California "have been suffering, and continue to suffer, ever-increasing financial harm on a daily basis."
Caught in the middle is El Paso Natural Gas, which has taken much of the blame for gas price spikes seen last year in California. Yet, the real fault may lie elsewhere.
CUSTOMERS EAST OF CALIFORNIA REMAIN CAPTIVE TO EL PASO, BUT STILL CARRY CLOUT. Many of these "EOC" customers enjoy firm requirements (FR) service rights, and won't let them go. These FR rights allow them to buy all the pipeline capacity they might need. So they find they can boost gas consumption seemingly without limit, and without paying additional capacity charges. They negotiated a rate freeze in 1996, when new pipeline construction in California glutted the market. They agreed to help El Paso cover the cost of unused capacity that California gas utilities had "turned back," and so won favored treatment from the pipeline. Then the Sun Belt exploded. Arizona gained 40 percent in population just during the 90s; Texas gained 22 percent. Firm gas requirements east of California grew just as fast, but the five-year-old agreement bound El Paso to provide more capacity to meet the need-and at frozen demand charges-even as delivery capacity into California became more constrained.
Last year, the California Public Utilities Commission (PUC) complained to the Federal Energy Regulatory Commission (FERC) that El Paso rigged the game by selling a good chunk of pipeline capacity to its marketing affiliate, El Paso Merchant Energy, L.P. (.) That's the case that you read about in the newspapers. Did El Paso favor its affiliate? What did the executives know, and when did they know it?
Yet a new pair of cases raises more important questions.
On July 13, a gas industry group led by the engaging lawyer Katherine Edwards filed a complaint at the FERC accusing the EOC/FR customers of hogging pipeline capacity without really paying for it, and asking the FERC to convert FR service to contract demand service-the same transportation service available to California customers. Such a remedy would likely curtail El Paso gas deliveries to EOC customers. The Edwards group, known as the "joint complainants," includes the PUC, Pacific Gas & Electric, Southern California Edison, Southern California Gas, BP Energy, Texaco Natural Gas, Coral Energy Resources and Amoco Production Co., among others. (.)
Four days later, the EOC/FR customers fired back. In their own complaint, every bit as convincing, a group of gas shippers from Texas, New Mexico, and Arizona (the TNMA group) defended their gas delivery rights. The TNMA shippers claim El Paso has oversold its system to such a degree that the pipeline can no longer provide reliable service under the terms of the settlement agreement signed five years back. They ask the FERC to force El Paso to expand its system to safeguard gas delivery rights for EOC customers. (.)
THE EASTERN SHIPPERS ASSAIL EL PASO FOR FAILING TO PLAN, BUILD, AND EXPAND THE PIPELINE NETWORK. They offer precise statistics showing per-day decatherm capacities for western flows on El Paso's north and south mainline routes. They seek to prove that the system is now dysfunctional-pushed over the edge by rising demand from gas-fired electric generators in California.
To buttress their case, the TNMA shippers offer a lengthy affidavit from Greg Lander, the pipeline capacity guru now consulting at Skipping Stone. Lander argues that El Paso should have seen it all coming-the changing patterns of trade and the new summer peak to serve gas-fired generation.
"Planning on continuation of load diversity would be problematic and possibly even reckless," says Lander.
Lander and the TNMA shippers add that Canada's new Alliance pipeline changed the game, diverting lower priced Canadian gas from the Pacific Coast to the Midwest, forcing California to rely more on El Paso for its gas needs. Excess gas delivery capacity into California would be "bled off and flow to Chicago," Lander explains. He says the shift transformed El Paso from a swing supplier of capacity to a base load supplier of capacity and gas to California, but Southern California Edison disputes that notion.
"While this was a fairly widely expected consequence of the Alliance project," says Edison, "it simply has not occurred. Since the construction of Alliance, El Paso has continued to be, and remains to this day, the swing pipeline transporting gas into California."
BY CONTRAST, THE CALIFORNIA SHIPPERS CITE EL PASO'S "FR" TARIFFS AS morally unjust and contrary to FERC's current thinking.
"Firm requirements customers can nominate up to the physical capacity of their delivery points even when they do not require this amount for their immediate needs. This 'gaming' provides them with a larger share of the allocations."
Such language strikes a nerve with the eastern shippers. "The complainants seek to demonize the FR shippers ... . If the commission gives in to the requested extortion, it will effectively export the California epidemic to Texas, New Mexico, and Arizona."
Enron sees FR service as the gas industry analogy for the native load preference that has dogged the electric sector. "The upshot of all this is that there is physical capacity available ... but ... shippers are contractually unable to obtain firm capacity ... . Whatever other harm complainants have alleged ... Enron would add to the list the fact that the FR contracts stand as a barrier to open access."
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