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ElPaso Rate Hike Closely Watched

From July-August 2006 Energy Biz magazine

are watching to see whether interstate natural gas
pipelines file for higher rates, following the lead of El
Paso Natural Gas, which was granted its first new
rates in 10 years. Those rates include new, premium
hourly balancing rates, meant to ensure El Paso
has adequate capacity online to take care of the
peak, hourly needs of utilities in Texas, New Mexico,
Arizona and to a lesser extent, California. The rates
went into effect June 1.
John Shelk, president and CEO of the Electric
Power Supply Association, says the FERC decision
to grant El Paso a menu of new premium rates for
firm hourly service “sends a pretty strong signal to
other pipelines.” He adds, “Our folks outside the
Southwest and California have expressed concern
that the new rates granted to El Paso by FERC
could be interpreted as a generic policy shift.”
Melissa Lauderdale, director of industry legal
affairs for the Edison Electric Institute, says, “The
imposition of hourly balancing rates on generators
across the country could have a significant impact
across the United States.” She worries that FERC’s
approval of the new rates was based on input from
the commission’s natural gas staff only, without input
from the electricity staff, although she doesn’t know
that to be the fact. “Nothing in the Order suggests they
delved into the impact on the electricity generation
market,” she states, referring to the March 23 Order
granting the new rates.
A number of utilities and even El Paso have asked
for a rehearing of some of the issues in FERC’s Order.
While east of California generators are concerned
about gas price hikes, Pacific Gas & Electric, one of
two major electric utilities in California, is concerned
about “a new wrinkle” in the FERC Order which
could allow El Paso to charge a discount-rate shipper
such as PG&E the maximum tariff rate applicable to
its primary delivery point when the shipper seeks to
deliver gas at an alternate upstream delivery point.
Catherine E. Palazarri, vice president of rates and
regulatory affairs at El Paso, explains that her company
largely based its service structure on tariffs previously
approved by FERC for the Gulfstream and Portland
pipelines serving Florida and Maine, respectively.
“Those are states where about 80 percent of gas consumption
is used to produce electricity,” she explains.
“We are not plowing new ground.”
While the major issue, on a national level, is
whether the El Paso rates open the door to pipeline
rate hikes around the country, there is no question that
electricity rates in Texas, New Mexico and Arizona are
on their way up. In a nutshell, El Paso will be offering
four levels of new premium rates — three-, eight-, 12-
and 16-hour — which utilities can contract for above
and beyond their 24-hour ratable service. The new
premium rates allow El Paso to charge more when a
utility’s “take” of gas is over eight hours as opposed to
16 hours, for example. It costs El Paso more to deliver
a utility all of its gas within an eight-hour window than
it does within a 24-hour window. More pipeline volume
is required, up to 300 percent more volume, for an
eight-hour take compared to a 24-hour take. Palazarri
says FERC has approved premium rates where the
rate differential between eight- and 24-hour service is
300 percent. In El Paso’s case, the rate differential
is only about 65 percent. The difference between
12- and 24-hour is about 30 percent.
Palazarri acknowledges that utility customers east
of California have argued that these new rates, which
many electric generators may be forced to swallow,
represent a fairly significant rate increase. “We don’t
necessarily believe that to be true,” she argues. “EP
transportation averages 35 cents per decatherm per
day; that is about five percent of the cost of the gas.”