Rates and Regulatory Matters
Marketing Affiliate Final Rule. In November 2003, the Federal Energy
Regulatory Commission (FERC) issued a Final Rule extending its standards of
conduct governing the relationship between interstate pipelines and marketing
affiliates to all energy affiliates. Since our High Island Offshore System
(HIOS) natural gas pipeline and Petal natural gas storage facility, including
the 60-mile Petal natural gas pipeline, are interstate facilities as defined by
the Natural Gas Act, the regulations dictate how HIOS and Petal conduct business
and interact with all energy affiliates of El Paso Corporation and us.
The standards of conduct require us, absent a waiver, to functionally
separate our HIOS and Petal interstate facilities from our other entities. We
must dedicate employees to manage and operate our interstate facilities
independently from our other Energy Affiliates. This employee group must
function independently and is prohibited from communicating non-public
transportation information or customer information to its Energy Affiliates.
Separate office facilities and systems are necessary because of the requirement
to restrict affiliate access to interstate transportation information. The Final
Rule also limits the sharing of employees and offices with Energy Affiliates.
The Final Rule was effective June 1, 2004. On February 9, 2004, each
transmission provider, including Petal and HIOS, filed with the FERC and posted
on the internet website, a plan and scheduling for implementing this Final Rule.
On April 8, 2004, we filed for an exemption from the rule on behalf of Petal and
HIOS. On April 16, 2004, the FERC issued its order on rehearing which, among
other things, affirmed that the Final Rule was needed and extended the
implementation date to September 1, 2004. On July 8, 2004, Petal and HIOS filed
separate notices with the FERC withdrawing their requests. The FERC has not
acted on the requests and they remain pending. However, we believe compliance
with this Final Rule should not place an undue burden on us.
Other Regulatory Matters. HIOS is subject to the jurisdiction of the FERC
in accordance with the Natural Gas Act of 1938 and the Natural Gas Policy Act of
1978. HIOS operates under a FERC approved tariff that governs its operations,
terms and conditions of service, and rates. We timely filed a required rate case
for HIOS on December 31, 2002. The rate filing and tariff changes are based on
HIOS' cost of service, which includes operating costs, a management fee and
changes to depreciation rates and negative salvage amortization. We requested
the rates be effective February 1, 2003, but the FERC suspended the rate
increase until July 1, 2003, subject to refund. As of July 1, 2003, HIOS
implemented the requested rates, subject to a refund, and has established a
reserve for its estimate of its refund obligation. We will continue to review
our expected refund obligation as the rate case moves through the hearing
process and may increase or decrease the amounts reserved for refund obligation
as our expectation changes. The FERC conducted a hearing on this matter and an
initial decision from the Administrative Law Judge was provided in April 2004.
We have filed briefs on exceptions to this decision. In August 2004, HIOS filed
an offer of settlement to resolve all issues in the rate case with the FERC.
This settlement is the result of negotiations among HIOS and all but one of the
customers participating in the rate case. In addition, the FERC Staff is not a
party to the settlement. Comments on the settlement are due on August 25, 2004,
and reply comments on September 7, 2004. The settlement is subject to the
approval of the FERC.
During the latter half of 2002, we experienced a significant unfavorable
variance between the fuel usage on HIOS and the fuel collected from our
customers for our use. This was primarily associated with an unexplained
increase in our fuel use which was not contemporaneously collected from our
customers. We initially believed a series of events may have contributed to this
variance, including two major storms that hit the Gulf Coast Region (and these
assets) in late September and early October 2002. We conducted a thorough review
of our operations and were unable to determine the exact cause of the increase
in fuel use. The fuel use has since returned to historical levels. As of June
30, 2004, we have recorded gross fuel differences of approximately $7.5 million,
which we included in our non-current assets on our balance sheet. In the future,
we expect to have an opportunity to file for collection of the fuel differences.
However, at this time we are not able to determine what amount, if any, may be
collectible from our customers. Any amounts we are unable to resolve or collect
from our customers will negatively impact the future results of our natural gas
pipelines and plants segment.