thanks Blair, we've been following the FR debate very closely.

Last week FERC staff recommended to the full commission that the FR contracts be converted to CD contracts, in effect abrogating a huge chunk of the original 1996 El Paso settlement.  The indicated shippers last year did file a Section 5 complaint against El Paso, accusing the pipeline of over selling its capacity.  This debate has been one of the biggest hindrances in getting shippers to commit to the Sun Devil project.

 -----Original Message-----
From: 	Lichtenwalter, Blair  
Sent:	Thursday, March 21, 2002 2:33 PM
To:	Lokey, Teb; Kilmer III, Robert; Gadd, Eric; Harris, Steven; Hyatt, Kevin
Subject:	El Paso Full Requirements Customers


You may know this, but I thought I'd pass it on since it was mostly new to me.

El Paso has two types of firm customers, which are CD (contract demand) and FR (full requirements) customers. FR customers are allowed to schedule an amount up to their full meter capacity as long as capacity is available. However, FR customers pay El Paso a fixed reservation charge and  volumes exceeding FR quantities are billed El Paso's usage rate. FR customer loads have increased rapidly in the last few years as growth in the states east of California has surged. With these increased loads the FR customers have been getting a tremendous deal since they pay only the usage charge on incremental volumes exceeding their FR quantities. FR customers argue that they are entitled to this benefit since they bargained for it in EL Paso's last rate proceeding. El Paso's last settlement was similar to TW's in that customers agreed to certain benefits in exchange for paying higher rates to resolve capacity turnback issues. The FR customer's good deal is a problem because 1) FR customer's increased volumes have led to capacity prorations making it more difficult for other shippers to get cheaper San Juan gas, 2) these prorations in conjunction with the scheduling cycles make it difficult for shippers to get scheduled, 3) El Paso has no financial incentive to expand because the FR customers will use the capacity and pay only the usage rate, and 4) the FR customers ability to take gas has prevented El Paso from offering services such as park and loan and storage service that other customers want. Absent FERC action, FR customers will retain the benefits of the settlement until El Paso's next rate case in 2006.

The Commission is threatening to initiate a Section 5 proceeding to address capacity allocation issues on El Paso and has directed Staff to convene a technical conference next month to address these issues (see March 18, 2002 Inside FERC).  The conference probably won't occur until at least late April because El Paso is bogged down in their market abuse proceeding.