To: Editors, News Directors

Date: July 10, 2003

For: Immediate Release

FERC Rules On El Paso Capacity Allocation
Regulators See Urgent Need to Develop New Supply Lines

PHOENIX - At yesterday's Federal Energy Regulatory Commission (FERC) meeting, FERC Commissioners denied Arizona's request for re-hearing and set Arizona on a collision course with a key September 1 deadline. As of September 1, 2003, Arizona contracts for wholesale natural gas capacity on the El Paso pipeline will be converted from "full requirements" contracts to contracts with limited rights.

FERC's decision is likely to usher in a period of price volatility for wholesale natural gas users. Increased costs could trickle down to affect prices consumers pay for household gas and electric service and even the products made by businesses that use natural gas as their primary power source.

"FERC's decision signals an alert to natural gas companies, power plants, mining companies and large manufacturers that natural gas is about to get more expensive and supplies may be unpredictable unless we get serious about finding other suppliers," Arizona Corporation Commission Chairman Marc Spitzer said. "That means moving fast - lightning fast - on getting another pipeline built to move natural gas into Arizona."

"Very simply, the previous full requirements contracts gave Arizona natural gas users all the gas they needed, as much as they needed, whenever they needed it," Commissioner Bill Mundell said.

"What FERC did yesterday was to set a cap on the amount of natural gas Arizona can draw from the El Paso line," Mundell explained. "We don't know exactly what that cap will be until we see the written order from FERC in a few days. But a cap is a cap. It's not the outcome we were hoping for."

In reaction to the numerous issues that arose during California's energy supply crunch, California authorities sought FERC's intervention to change the way gas pipeline capacity is allocated to Arizona.

Arizona Corporation Commissioners were active at FERC and notified Arizona's congressional delegation of the looming issue. The Commissioners hoped FERC would leave the full requirements contracts in place or, at minimum, ensure that Arizona's growing need for natural gas would be met.

In April 2002, while serving as Chairman of the Arizona Corporation Commission, Bill Mundell traveled to Washington to urge FERC to recognize that Arizona's situation was unique because the state is captive to the El Paso pipeline while California can draw from multiple suppliers.

"Unfortunately FERC tends to favor the interests of California over all of the states east of California. Despite the existence of fully binding, legal agreements originally approved by FERC, as well as the fact that California has multiple sources for its natural gas, the FERC still interjected its authority to allow California to acquire natural gas rightfully contracted to others," Commissioner Jim Irvin said. "I believe that the FERC's decision to abrogate our state's full requirements rights was horrible and leaves our state with a very big dilemma."

What Happens Next?

Unlike Arizona regulatory procedures, FERC does not make its documents available in advance of its meetings. The final ruling should be available in the next week or so. Those documents should spell out precisely what the capacity allocations for Arizona are. During the FERC meeting, Arizona regulators learned that the capacity allocations are based on 2001 peaks which were then adjusted.

Commissioner Mike Gleason suggested that any capacity allocation tied to 2001 peaks could be completely out of line by now.

"Arizona has experienced record population growth, even in the last two years. Since 2001 new natural gas-fired power plants have come on line and are producing power for our state. Even if the allocation does meet Arizona's current needs, it is unlikely that natural gas supplies will meet our requirements in the near future," Gleason added. "FERC took natural gas that was available to Arizona users and gave it to California."

The Arizona Corporation Commission is examining natural gas supply issues and what pricing, contractual, construction or storage development might be needed to mitigate supply problems. Arizona regulators issued a Notice of Inquiry (NOI) on gas infrastructure issues to natural gas producers and users in April 2003. The Commission staff is reviewing responses to the questions and will recommend a course of action in the near future.

How Could Pipeline Expansion & Storage Help?

Kinder Morgan, Power-Up Corporation, Transwestern Pipeline Company and Pacific Texas Pipeline & Transportation Company have each expressed an interest in developing or expanding pipeline service or pipeline capacity for Arizona.

Another group calling itself the Desert Crossing Gas Storage & Transportation System, LLC is looking at possible pipeline and storage facilities that would draw on supply lines running through Nevada.

Additionally, North Baja Pipeline (Ehrenberg, AZ through to Mexico) is looking at a possible expansion of its existing line to make more natural gas available to wholesale users in Arizona.

The proposed Copper Eagle Project west of Phoenix could be the site of Arizona's first natural gas storage facility. If geologically and environmentally appropriate, storage allows users to draw natural gas off when prices are lower during non-peak times and safely store it underground until it is needed. On June 4, FERC terminated an application by Red Lake Gas Storage LP to establish a storage facility near Kingman, Arizona.

FERC is planning a technical conference on natural gas storage in the southwest for August 26, 2003 in Phoenix.

A National Issue with Local Implications

Last month, Federal Reserve Chairman Alan Greenspan addressed the U.S. House Committee on Energy and Commerce. In his remarks (see http://www.federalreserve.gov/BoardDocs/testimony/2003/20030610/default.htm) he cited price volatility in the natural gas market resulting from an imbalance between supply and demand as one of the more critical issues facing our economy in the coming years.

"I would like Arizona residents to realize that the rise of natural gas prices and potential diminishing supply threaten the well being of this state," Commissioner Jeff Hatch-Miller explained. "We are working to find genuine solutions through constructive dialog with suppliers and users so there are no disruptions in price or supply."