THE UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION. El Paso Natural Gas Company, L.L.C. ) Docket No.

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1 THE UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION El Paso Natural Gas Company, L.L.C. ) Docket No. CP ANSWER OF EL PASO NATURAL GAS COMPANY, L.L.C. TO THE MOTIONS TO INTERVENE AND PROTESTS OF THE EL PASO MUNICIPAL CUSTOMER GROUP AND FREEPORT MINERALS CORPORATION Pursuant to Rule 212 and 213 of the Rules of Practice and Procedure of the Federal Energy Regulatory Commission ( Commission ), 1 El Paso Natural Gas Company, L.L.C. ( El Paso ) hereby answers the Motion to Intervene and Protest of the El Paso Municipal Customer Group (the EPMCG Motion ) and the Motion to Intervene and Limited Protest of Freeport Minerals Corporation (the Freeport Motion ), both of which were filed in the instant proceeding in response to El Paso s April 26, 2018 Application for a Certificate of Public Convenience and Necessity ( Application ). For the reasons detailed below, the Commission should reject the arguments advanced in both the EPMCG Motion and the Freeport Motion. I. Motion for Leave to Answer Under Rule 213(a)(2) of the Commission s Rules of Practice and Procedure an answer may not be filed in response to a protest unless otherwise ordered by the decisional authority. 2 Nonetheless, the Commission may waive this prohibition and permit an answer to help ensure a complete record upon which the Commission can C.F.R and (2017). 18 C.F.R (a)(2) (2017).

2 base its decision on the merits of a filing and to aid the Commission in its disposition of issues raised by a protest. 3 El Paso submits that good cause exists to accept this answer because it provides information that will assist in the Commission s decision making process, clarifies the issues under consideration, and will lead to creation of a more complete record. For these reasons, El Paso submits this answer and respectfully requests that the Commission waive the prohibition in Rule 213(a)(2) to the extent necessary to permit El Paso to respond to the protests and comments filed by the protestors in this proceeding. II. Background On April 26, 2018, El Paso filed its Application seeking authority to construct, own, and operate two new compressor stations and a 17-mile loop line of its South Mainline system to be located in El Paso County and Hudspeth County, Texas; Luna County, New Mexico; and Cochise County, Arizona. This project is referred to as the South Mainline Expansion Project. The $127.9 million project is anchored by firm contracts with Comisión Federal de Electricidad ( CFE ), 4 and Salt River Project Agricultural Improvement and Power District ( SRP ). 5 CFE and SRP acquired capacity in separate See, e.g., Enable Gas Transmission, LLC, 151 FERC 61,069, at P 4 (2015); Columbia Gas Transmission, LLC, 150 FERC 61,019, at P 7 (2015); and Columbia Gas Transmission, LLC, 149 FERC 61,092, at P 6 (2014). CFE is the Mexican state-owned electric utility that engages in the generation, transmission, distribution, and sale of electrical power. CFE is also a decentralized government agency responsible for the development, construction, operation and maintenance of Mexico s electricity transmission system. Effective, July 1, 2017 CFE assigned its El Paso capacity to its affiliate, CFE International LLC ( CFEi ). CFEi is wholly-owned by the Mexican Government, and handles all of CFE s U.S. natural gas business. SRP is an agency of the state of Arizona that serves as an electrical utility for the Phoenix metropolitan area. As a political subdivision of the State of Arizona it is governed by the laws of the State of Arizona and not regulated by the Commission as a public utility. 2

3 open seasons conducted in 2016 and in 2017 which necessitate the expansion of El Paso s South Mainline system. On May 30, 2018, the El Paso Municipal Customer Group ( EPMCG ) and Freeport Minerals Corporation ( Freeport ) filed protests requesting that the Commission reject El Paso s request for pre-determination of rolled-in rate and fuel treatment. El Paso respectfully answers as follows: III. Answer A. El Paso s Request for a Pre-Determination to Roll the Cost of the Project into its Rates is Consistent with Commission Precedent and Should be Granted. EPMCG incorrectly asserts that Exhibit N reveals that EPNG has included existing capacity to calculate project rates, contrary to Commission precedent. 6 The failure of EPMCG s argument lies in its misapplication of the Commission s holding in Florida Gas Transmission Co., LLC, 154 FERC 61,256 at P23 (2016) ( Florida Gas ). In Florida Gas, the Commission states that [a] proper comparison requires excluding the revenues associated with service being provided using solely the existing capacity. 7 The Commission s holding in Florida Gas is inapplicable to El Paso s South Mainline Expansion Project because the project s anchor shippers are not served solely by existing capacity. Instead, the existing capacity and expansion capacity combine to form an integrated capacity portfolio tailored to suit CFE s and SRP s transportation needs. EPMCG argues incorrectly that El Paso should exclude from the request for a predetermination all revenues related to the new service that can be provided using El 6 7 EPMCG Motion at p. 4. Florida Gas Transmission Co., LLC, 154 FERC 61,256 at P23 (2016) (emphasis added). 3

4 Paso s existing facilities. 8 Contrary to EPMCG s argument, Commission policy provides that it is appropriate to include in a roll-in analysis the revenues associated with capacity which is integral to enabling the existing capacity to be used to serve [the project shipper], 9 which is precisely the case with El Paso s proposal. Under the Florida Gas order cited by the EPMCG, the Commission excluded the revenues associated with service being provided using solely the existing capacity because that existing capacity was being used to serve the needs of the customer even without the expansion. 10 In Florida Gas, the pipeline had dormant capacity available that was sufficient to meet the majority of the needs of its expansion shipper, but construction of new facilities was required to meet the shipper s additional demand in the Jacksonville, Florida market. 11 The pipeline offered the shipper a transportation arrangement in a single package that would meet all of the shipper s demands, including those that could be met with existing capacity before the new facilities were in service and those that required construction. 12 The Commission, therefore, rejected the pipeline s roll-in analysis because it relied upon revenues generated using the contract volumes for both the service being provided using the capacity made available by the project facilities and the service FGT is able to provide using only existing capacity. 13 This lies in stark contrast to the project being proposed by El Paso in this proceeding EPMCG Motion at p. 4. ANR Pipeline Co., 156 FERC 61,212, at P 22 n. 22 (2016); and Tennessee Gas Pipeline Company, L.L.C., 161 FERC 61,265 at P 30 (2017). See Florida Gas Transmission Co., 154 FERC 61,256, at P 23 (2016). See Florida Gas Transmission Co., Responses to Nov. 30, 2015 Data Request, Staff Request 2.1, Docket No. CP (Dec. 4, 2015). Id. Florida Gas Transmission Co., 154 FERC 61,256, at P 23 (2016). 4

5 El Paso s South Mainline system currently has significant east-to-west constraints which limit shippers ability to transport gas west and downstream of El Paso s Cornudas Compressor Station. It is these western area delivery points on El Paso s system that have generated the greatest market demand in recent years. In response to this market demand El Paso developed the South Mainline Expansion Project with the goals of relieving Texas-area constraints and facilitating deliveries to New Mexico, Arizona and California markets. As El Paso detailed in its Exhibit G to the Application, [i]ncremental capacity created by the South Mainline Expansion provides El Paso with the ability to move volumes historically delivered to markets in the El Paso Texas Area to markets in New Mexico, Arizona and California. 14 CFE and SRP recognized this value in contracting for the capacity that is underpinning the expansion. Exhibit Z-IV of El Paso s Application provides a clear illustration of the relationship between the pre-expansion and post-expansion capacity paths. Prior to the in-service date of the South Mainline Expansion Project, CFE s primary delivery points are predominantly in Texas. However, upon completion of the project, and elimination of the Cornudas area constraints, the majority of the capacity shifts to Arizona and California markets. 15 Similarly, all of SRP s 50,000 Dth per day of capacity is being delivered to Arizona delivery points from the outset. In the absence of either the existing capacity or the South Mainline Expansion Project, El Paso would not be able to perform its obligations to CFE and SRP; the two tranches of capacity are Application, Exhibit G at p. 4. While the South Mainline Expansion Project loop line originates just downstream of El Paso s Hueco Compressor Station in Hudspeth County, Texas, with compressors being installed in Luna County, New Mexico and Cochise County, Arizona, this area of El Paso s system is commonly referred to by customers and operators as the Cornudas area constraint. 5

6 inextricably tied and integral to enabling the existing capacity to be used to serve [the project shipper]. 16 B. The System-Wide Benefits of the South Mainline Expansion Project are Realizable Only by Providing CFE the Full Complement of Rates, Volumes, and Delivery Points contained in Contract No. FT3H4000 EPMCG offers an alternative capacity and revenue analysis which seeks to separate the existing capacity from the expansion capacity and remove the associated revenues. EPMCG s analysis is inconsistent with Commission precedent and unsupportable. As an initial matter, EPMCG states that [n]either does Exhibit N reflect the actual compliance rates recently directed by the Commission. Opinion No. 528-B, El Paso Natural Gas Company, 163 FERC 61,079 (2018). 17 This statement ignores the fact that El Paso s rates did not change between the Commission s Opinion No. 528-A and Opinion No. 528-B. Accordingly, EPMCG s argument regarding the impact of rates on El Paso s Exhibit N roll-in analysis is without merit. Moreover, and as detailed above, the existing capacity and the expansion capacity combine to form an integrated capacity portfolio tailored to suit CFE s and SRP s transportation needs. Accordingly, it is appropriate to include in the roll-in analysis the revenues associated with the existing capacity because it is essential for El Paso to meet the needs of CFE and SRP ANR Pipeline Co., 156 FERC 61,212, at P 22 n. 22 (2016). EPMCG Motion at p. 4. 6

7 EPMCG infers that CFE s existing capacity from New Mexico to the California Border and from Texas to Pecos Trail could be isolated leaving only ~135,000 Dth to be evaluated for rolled-in rate treatment. 18 The fallacy in EPMCG s approach is a belief that CFE would have contracted for only the existing capacity segments and not the expansion capacity which is an integral component of the overall transaction. In fact, Contract No. FT3H4000 was neither negotiated nor transacted on an à la carte basis. Rather, it was an all or nothing proposition for CFE. In light of that commercial reality, the South Mainline Expansion Project, viewed in totality, brings substantial benefits to El Paso s system and its customers. In Southern Natural Gas Company, the Commission found that: Viewing the project as a whole, Southern's revenues of $125.7 million from reservation charges generated from the contract extensions will produce an even more extensive system benefit by reducing the risk of capacity turnback and the potential of increased cost resulting from the reallocation of costs associated with said turnback. Thus, Southern has demonstrated that existing customers will not subsidize the proposed project and will benefit from the reduction in the risk of turn back capacity. 19 Such is the case here. For decades the El Paso system has predominantly facilitated east-to-west transportation. The capacity being created for CFE and SRP is anchored by long-term contracts which provide rate and revenue stability through at least late This stability significantly mitigates the risk of capacity turnback and provides substantial system benefits to existing El Paso shippers over the life of the project These two tranches of capacity are designated as BLANCO to DSCALEHR and IMNDZTRL to Pecos Trl in Exhibit Z to El Paso s Application. Southern Natural Gas Company, 110 FERC 61,052 at P 62 (2005). 7

8 Using Commission precedent as its guide, El Paso prepared Exhibit N of its application with the incorporation of revenues associated with the existing capacity. 20 The resultant analysis aptly demonstrates that the project revenues (derived for purposes of the roll-in analysis using the lower of maximum recourse or negotiated rates), exceed the incremental costs by approximately $9 million. 21 Therefore, a predetermination that El Paso may roll the project costs into its system rates in the next NGA Section 4 rate case is appropriate, merited, and fully consistent with Commission policy. C. El Paso s Application of Tax Rates to its Roll-In Analysis is Appropriate and Consistent With Commission Precedent Freeport argues that El Paso s roll-in analysis is flawed inasmuch as it compares tax-adjusted illustrative incremental rates to existing rates calculated at a 36% corporate federal income tax rate. 22 Freeport further argues that the Commission s current proposed rulemaking in Docket No. RM supports deferring a predetermination of roll-in until after EPNG s existing tariff rates are adjusted to reflect the lower federal corporate tax rate. 23 Freeport s arguments are both presumptuous and premature. Historically, when the Commission has been presented with a request to apply proposed rulemaking concepts in advance of promulgating a final rule, it has declined to do so. In an ANR Pipeline Company case in which a protestor requested the Commission defer action on a rate adjustment until the issue was resolved on an industry-wide basis in a ANR Pipeline Co., 156 FERC 61,212, at P 22 n. 22 (2016). Application, Exhibit N at p. 4. Freeport Motion at pp. 3-4 (erroneously referencing a 36% federal income tax rate in lieu of the correct rate of 35%). Freeport Motion at pp

9 currently pending rulemaking docket, the Commission declined to do so and held as follows: In response to [a protestor s] concern that the proposal should be deferred in light of pending rulemaking proceedings, the Commission believes that ANR's proposal should be reviewed in accordance with the Commission's current policy and precedent and not deferred pending the outcome of [the current rulemaking]. If changes in policy occur as a result of the rulemaking proceedings, then ANR may be required to modify its tariff. In the meantime, however, we have no basis under our current policies to reject the proposed tariff language. 24 The Commission s holding in ANR Pipeline Company is controlling in the instant proceeding. The Commission s current rulemaking proceeding in Docket No. RM involves highly complex issues which have drawn a plethora of comments from across the industry. Until the Commission issues a final rule it would be inappropriate for the Commission to deviate from its current tax policies. 25 Thus El Paso s request for a predetermination of rolled-in rate treatment should be granted in accordance with the Commission's current policies and precedent. 26 D. El Paso s South Mainline Expansion Project is Required by, and will Serve, the Present and Future Public Convenience and Necessity. EPMCG concludes its pleading by raising concerns about the boom-bust cycle, dependency on a foreign government, and infirm market assumptions. 27 Juxtaposed against EPMCG s conjecture is El Paso s thorough analysis of the South Mainline ANR Pipeline Company, 87 FERC P61,241 (1999) (emphasis added). See also Southern Natural Gas Company, L.L.C., 162 FERC 61,122, at P 19 n. 22 (2018). See Tennessee Gas Pipeline Co., L.L.C., 144 FERC 61,219, at P 22 (2013). EPMCG Motion at pp

10 Expansion Project s tangible costs and benefits assembled in accordance with the requirements of the Commission s Certificate Policy Statement. 28 While El Paso respects EPMCG s right to assert concerns regarding the public convenience and necessity of the project, its largely unsubstantiated arguments pale in comparison to the robust, 1,284- page analysis contained in El Paso s Application. El Paso believes that a thorough examination of its Application will reveal that the benefits of the South Mainline Expansion Project far outweigh the costs. IV. Conclusion A thorough analysis of El Paso s Application yields the clear conclusion that the South Mainline Expansion Project qualifies for rolled-in rate and fuel treatment. 29 Contrary to the protestors assertions, this project does not represent the packaging of existing and expansion capacity having independent utility into a single transaction. Rather, the South Mainline Expansion Project entails tangible system improvements to unlock the transportation of West Texas, Permian gas supplies to valued markets in New Mexico, Arizona, and California. El Paso elected to request a predetermination of rolled-in rate treatment only after conducting comprehensive studies, and analyzing the Commission's current policy and precedent. The analyses contained in El Paso s Application, and this Answer, soundly support approval of El Paso s request Certificate Policy Statement, 88 FERC 61,227 (1999). Both the rolled-in rate and fuel analyses contained in El Paso s Application are based on Commission policy and support a finding of roll-in for the reasons elucidated above. 10

11 WHEREFORE, El Paso respectfully requests that the Commission accept this answer and reject the arguments raised in both the EPMCG Motion and the Freeport Motion. William D. Wible Vice President, Regulatory Two North Nevada Avenue Colorado Springs, Colorado Telephone: June 14, 2018 Respectfully submitted, EL PASO NATURAL GAS COMPANY, L.L.C. /s/ David K. Dewey David K. Dewey Assistant General Counsel Legal Department Two North Nevada Avenue Colorado Springs, Colorado Telephone: Facsimile: COUNSEL FOR EL PASO NATURAL GAS COMPANY, L.L.C. 11

12 CERTIFICATE OF SERVICE I hereby certify that, pursuant to Rule 2010 of the Rules of Practice and Procedure of the Federal Energy Regulatory Commission, 18 C.F.R (2017), I have served the foregoing document upon all parties designated on the official service list compiled and maintained by the Secretary in this proceeding. Dated at Colorado Springs, Colorado as of this 14 th day of June /s/ David K. Dewey David K. Dewey