PGE/ FERC article ,
 FERC EXTENDS INVESTIGATION OF NEGOTIATED RATE AGREEMENTS BETWEEN PG&E GAS T=
RANSMISSION NORTHWEST AND SHIPPERS, LOOKING FOR EVIDENCE OF MARKET MANIPULA=
TION

09/27/2001=20
Foster Natural Gas Report=20
Page 7=20
(c) Copyright 2001, Foster Associates, Inc.=20
FERC issued an order in mid-month September that set for hearing certain co=
nsolidated proceedings involving several negotiated rate transactions betwe=
en PG&E Gas Transmission, Northwest Corporation (RP99-518) and various ship=
pers. The Commission believes closer scrutiny is called for because these t=
ransactions appear to provide the opportunity to impose rates many multiple=
s in excess of maximum approved tariff rates.=20
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 ava=
ilable to move gas under the transactions in these proceedings, and (2) why=
 its entering into the subject negotiated service agreements did not violat=
e regulations and policy regarding firm transportation service and negotiat=
ed rate agreements. The new expedited hearing procedures are intended to fu=
rther explore these matters. Pending the outcome, GTN must revise both its =
tariff and capacity availability postings to provide for clear identificati=
on 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 c=
an demonstrate such capacity will be available for some longer period of ti=
me.=20
Questions Same as Those Addressed to Transwestern Earlier=20
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, Trans=
western made a series of eight filings implementing FTS-1 negotiated transa=
ctions 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 orde=
r, FERC also directed Transwestern to show cause why its negotiated rate tr=
ansactions did not violate the regulations. Transwestern answered that the =
negotiated rate contracts at issue, and any others for that matter, would n=
ot have been any less firm or provided a lower quality of service had shipp=
ers elected, instead, to pay the recourse rate. Underlying these transactio=
ns, Transwestern said, is capacity that becomes available only for a short =
time.=20
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 $2=
7/MMBtu compared to a maximum FTS-1 (recourse) rate of 38 cents/MMBtu, excl=
uding surcharges and fuel.=20
In Transwestern 's case, the Commission expressed the belief that closer sc=
rutiny of transactions that provide the opportunity to impose rates many mu=
ltiples in excess of maximum approved tariff rates is necessary: "Did Trans=
western withhold capacity that otherwise could have been made available und=
er recourse service in order to make the capacity available under negotiate=
d rate charges at substantially higher rates?" (See REPORT NO. 2346, pp9-10=
.)=20
Background=20
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) Relian=
t Energy Services Canada Ltd., (4) Western Gas Resources (Western), (5) Ens=
erco Energy, Inc., (6) Mirant Americas Energy Marketing, L.P. , (7) BP Ener=
gy Co., and (8) CEG Energy Options, Inc.. The filings were accepted and sus=
pended, 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 ti=
ed to natural gas spot market price differentials between the Northwest Pip=
eline interconnection at Stanfield, Oregon and the Pacific Gas and Electric=
 Co. and Tuscarora Gas Transmission Co. interconnection at Malin, on the Or=
egon-California border.=20
According to the data collected by FERC, the negotiated rate transactions w=
ould 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 qu=
estions regarding conditions under which operational transportation capacit=
y may be available on the GTN system.=20
GTN has already told the Commission that all negotiated rate shippers knew =
service was available at the recourse rate, but that these shippers chose t=
o 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=
.=20
Pursuant to the suspension order, FERC received the following information:=
=20
- 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 Sem=
pra 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 re=
verse path service. In its response, Sempra asserted it wanted to use the c=
apacity on a secondary basis and thus chose to negotiate a rate structure t=
hat 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 th=
e gas transported was sold into the daily markets at Malin, PG&E's citygate=
, or the Southern California border market.=20
- Dynegy's rationale for choosing a rate formula rather than the FTS-1 reco=
urse 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-ind=
ex 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 believe=
d the price spread was expected to widen and thereby would give it "a prici=
ng opportunity."=20
- According to Western, it initially sought 20,000 MMBtu/d of capacity at t=
he FTS-1 recourse rate, but GTN's response did not allow for the total volu=
me to be shipped at that rate. Instead, GTN proposed and Western accepted a=
nother price option: 10,000 MMBtu/d at the FTS-1 Recourse Rate and 10,000 M=
MBtu/d at the Negotiated Gas Daily Index Rate.=20
- Neither Reliant nor Enserco filed a response to the Commission's 5/1/01 o=
rder.=20
- Mirant cited three reasons for choosing the monthly index spread rather t=
han the recourse rate: 1) the index spread was easily hedged, 2) at the tim=
e the market spread was more desirable, and 3) reduction of market risk. Mi=
rant believed there were no other practical options to move gas from Stanfi=
eld to Malin.=20
- GTN established four negotiated rate agreements with two different shippe=
rs: BP Energy and CEG Energy. The BP Energy agreement was accepted as propo=
sed, but FERC accepted and suspended the CEG Energy agreements subject to r=
efund and further information. Similar to the other parties, CEG Energy sta=
ted that it chose a negotiated rate rather than the recourse rate because i=
t believed the index spread was less expensive than the FTS-1 recourse rate=
.=20
FERC Has Serious Concerns=20
According to the September 13 order, GTN's negotiated rate transactions und=
er investigation "present several serious concerns." Even with the addition=
al information in hand, the Commission concludes that the filings raise man=
y issues that need to be investigated further. Accordingly, an expedited he=
aring should explore issues including, but not limited to: whether the tran=
sportation capacity was advertised and awarded in an accurate and fair mann=
er consistent with GTN's tariff; whether the rates negotiated by GTN were t=
he product of an exercise of market power (i.e., did GTN withhold capacity =
that otherwise could have been made available under recourse service just t=
o make the capacity available under negotiated higher rates); why the shipp=
ers agreed to these rates when lower recourse rates should have been availa=
ble; and, lastly, whether the practice of improving a shipper's standing in=
 the scheduling process by selling firm transportation to undesirable prima=
ry points so an alternative point can be nominated is discriminatory agains=
t interruptible transportation shippers (since the alternative point is als=
o available on a somewhat best-efforts basis).=20
Since the negotiated rate transactions also raise concerns regarding GTN's =
posting procedures and its use of firm service contracts for operational ca=
pacity, the Commission also spelled out the need to require GTN to undertak=
e immediately certain measures to identify more clearly the operational cap=
acity available on the GTN system and the period for which such capacity is=
 awarded.=20
Finally, the Commission discovered discrepancies between GTN and the other =
negotiated parties' representations regarding the capacity quantities avail=
able at the FTS-1 recourse rate. Specifically, FERC's concerns go to the Se=
mpra and Western rate agreements whereby the parties initially desired 20,0=
00 MMBtu/d at the recourse rate but were provided with a combination of rec=
ourse service and a negotiated service. These actions by GTN may reflect th=
e exercise of market power and manipulation of the capacity market, the Com=
mission surmises.




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