FERC EXTENDS INVESTIGATION OF NEGOTIATED RATE AGREEMENTS BETWEEN PG&E GAS TRANSMISSION NORTHWEST AND SHIPPERS, LOOKING FOR EVIDENCE OF MARKET MANIPULATION

09/27/2001 
Foster Natural Gas Report 
Page 7 
(c) Copyright 2001, Foster Associates, Inc. 
FERC issued an order in mid-month September that set for hearing certain consolidated proceedings involving several negotiated rate transactions between PG&E Gas Transmission, Northwest Corporation (RP99-518) and various shippers. The Commission believes closer scrutiny is called for because these transactions appear to provide the opportunity to impose rates many multiples in excess of maximum approved tariff rates. 
The Commission had issued a suspension order in each proceeding that, among other things, directed GTN to explain (1) how it had the firm capacity available to move gas under the transactions in these proceedings, and (2) why its entering into the subject negotiated service agreements did not violate regulations and policy regarding firm transportation service and negotiated rate agreements. The new expedited hearing procedures are intended to further explore these matters. Pending the outcome, GTN must revise both its tariff and capacity availability postings to provide for clear identification of operational capacity; and must post and contract operational capacity on each day of its availability (i.e., on a day-to-day basis), unless it can demonstrate such capacity will be available for some longer period of time. 
Questions Same as Those Addressed to Transwestern Earlier 
FERC's concerns in this case are remarkably similar to FTS-1 deals recently arranged by Transwestern Pipeline Co. (RP97-288) that are now the subject of an expedited hearing and investigation. Beginning in January 2001, Transwestern made a series of eight filings implementing FTS-1 negotiated transactions with five shippers. The filings were accepted and suspended, subject to conditions, by orders issued March 2 and 28 and April 27. Staff issued data requests to Transwestern , Sempra and Richardson. In the March 28 order, FERC also directed Transwestern to show cause why its negotiated rate transactions did not violate the regulations. Transwestern answered that the negotiated rate contracts at issue, and any others for that matter, would not have been any less firm or provided a lower quality of service had shippers elected, instead, to pay the recourse rate. Underlying these transactions, Transwestern said, is capacity that becomes available only for a short time. 
In July the Commissioners voted to establish the hearing to further explore Transwestern 's negotiated transactions that tied rates to gas spot market price differentials between the California border and producing basins in New Mexico and West Texas. For service to the border, Sempra Energy Trading Corp., Richardson Products Co., BP Energy Co., Astra Power LLC and Reliant Energy Services elected to pay Transwestern negotiated rates as high as $27/MMBtu compared to a maximum FTS-1 (recourse) rate of 38 cents/MMBtu, excluding surcharges and fuel. 
In Transwestern 's case, the Commission expressed the belief that closer scrutiny of transactions that provide the opportunity to impose rates many multiples in excess of maximum approved tariff rates is necessary: "Did Transwestern withhold capacity that otherwise could have been made available under recourse service in order to make the capacity available under negotiated rate charges at substantially higher rates?" (See REPORT NO. 2346, pp9-10.) 
Background 
Beginning in March 2001, GTN made a series of separate filings pursuant to its rights to implement various negotiated rate transactions under its FTS-1 Rate Schedule with (1) Sempra, (2) Dynegy Marketing and Trade, (3) Reliant Energy Services Canada Ltd., (4) Western Gas Resources (Western), (5) Enserco Energy, Inc., (6) Mirant Americas Energy Marketing, L.P. , (7) BP Energy Co., and (8) CEG Energy Options, Inc.. The filings were accepted and suspended, subject to further proceedings by orders issued on 3/28/01, 5/1/01, 5/31/01, and 6/29/01. The transactions established transportation rates tied to natural gas spot market price differentials between the Northwest Pipeline interconnection at Stanfield, Oregon and the Pacific Gas and Electric Co. and Tuscarora Gas Transmission Co. interconnection at Malin, on the Oregon-California border. 
According to the data collected by FERC, the negotiated rate transactions would yield average daily transportation rates many multiples of the maximum FTS-1 rate (approximately $0.155/MMBtu, Stanfield to Malin), exclusive of surcharges and fuel, based on the publicly reported price differentials at the contract receipt and delivery points during the term of the contracts. The Commission initiated additional review procedures to further explore questions regarding conditions under which operational transportation capacity may be available on the GTN system. 
GTN has already told the Commission that all negotiated rate shippers knew service was available at the recourse rate, but that these shippers chose to structure the pricing of their contracts in this distinct fashion anyway. Further, GTN insists the subject firm capacity was posted as available on the company's website and EBB, consistent with the Commission's regulations. 
Pursuant to the suspension order, FERC received the following information: 
- Sempra clarified that 10,000 MMBtu/d of its 20,000 MMBtu/d total capacity arrangement with GTN was subscribed at the FTS-1 rate. But GTN insists Sempra requested firm backhaul service with the intent of reversing the path. Under the negotiated alternative, Sempra was persuaded it would not have to pay reservation charges on the full MDQ for a secondary, lower priority reverse path service. In its response, Sempra asserted it wanted to use the capacity on a secondary basis and thus chose to negotiate a rate structure that would best reflect its price risk profile to account for the fact that the capacity may not be available every day. Further, Sempra stated that the gas transported was sold into the daily markets at Malin, PG&E's citygate, or the Southern California border market. 
- Dynegy's rationale for choosing a rate formula rather than the FTS-1 recourse rate was to gain additional value from the capacity. GTN had suggested it could enter into a negotiated agreement based on the daily index-to-index spread because the Stanfield-Malin spread, less fuel, did not cover the cost of the FTS-1 recourse rate. Based on GTN's information, Dynegy believed the price spread was expected to widen and thereby would give it "a pricing opportunity." 
- According to Western, it initially sought 20,000 MMBtu/d of capacity at the FTS-1 recourse rate, but GTN's response did not allow for the total volume to be shipped at that rate. Instead, GTN proposed and Western accepted another price option: 10,000 MMBtu/d at the FTS-1 Recourse Rate and 10,000 MMBtu/d at the Negotiated Gas Daily Index Rate. 
- Neither Reliant nor Enserco filed a response to the Commission's 5/1/01 order. 
- Mirant cited three reasons for choosing the monthly index spread rather than the recourse rate: 1) the index spread was easily hedged, 2) at the time the market spread was more desirable, and 3) reduction of market risk. Mirant believed there were no other practical options to move gas from Stanfield to Malin. 
- GTN established four negotiated rate agreements with two different shippers: BP Energy and CEG Energy. The BP Energy agreement was accepted as proposed, but FERC accepted and suspended the CEG Energy agreements subject to refund and further information. Similar to the other parties, CEG Energy stated that it chose a negotiated rate rather than the recourse rate because it believed the index spread was less expensive than the FTS-1 recourse rate. 
FERC Has Serious Concerns 
According to the September 13 order, GTN's negotiated rate transactions under investigation "present several serious concerns." Even with the additional information in hand, the Commission concludes that the filings raise many issues that need to be investigated further. Accordingly, an expedited hearing should explore issues including, but not limited to: whether the transportation capacity was advertised and awarded in an accurate and fair manner consistent with GTN's tariff; whether the rates negotiated by GTN were the product of an exercise of market power (i.e., did GTN withhold capacity that otherwise could have been made available under recourse service just to make the capacity available under negotiated higher rates); why the shippers agreed to these rates when lower recourse rates should have been available; and, lastly, whether the practice of improving a shipper's standing in the scheduling process by selling firm transportation to undesirable primary points so an alternative point can be nominated is discriminatory against interruptible transportation shippers (since the alternative point is also available on a somewhat best-efforts basis). 
Since the negotiated rate transactions also raise concerns regarding GTN's posting procedures and its use of firm service contracts for operational capacity, the Commission also spelled out the need to require GTN to undertake immediately certain measures to identify more clearly the operational capacity available on the GTN system and the period for which such capacity is awarded. 
Finally, the Commission discovered discrepancies between GTN and the other negotiated parties' representations regarding the capacity quantities available at the FTS-1 recourse rate. Specifically, FERC's concerns go to the Sempra and Western rate agreements whereby the parties initially desired 20,000 MMBtu/d at the recourse rate but were provided with a combination of recourse service and a negotiated service. These actions by GTN may reflect the exercise of market power and manipulation of the capacity market, the Commission surmises.




Mark McConnell
Transwestern Pipeline Company
713-345-7896   office
713-822-4862   cell
713-646-2551   fax
mark.mcconnell@enron.com