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El Paso 'Pushes Envelope' with Affiliate Contracts, CPUC Says

El Paso 'Pushes Envelope' with Affiliate Contracts, CPUC Says

Just when you thought the news about the controversial contract arrangement between El Paso Natural Gas and its marketing affiliate El Paso Merchant Energy Co. had died down, California regulators come out with a request from left field asking FERC to rescind the $38.5 million contract transaction for 1.22 Bcf/d of firm capacity on the pipeline.

In a Section 5 complaint filed last Monday, the California Public Utilities Commission (CPUC) challenged the "justness and reasonableness and anticompetitive effects" of El Paso's three contracts with El Paso Merchant, saying the state's gas and electric consumers will be forced to pay an additional $100 million at least as a result of the alleged anticompetitive practices of the two companies [RP00-241].

El Paso Natural Gas spurned the bids of 24 other shippers in order to award the California-bound transportation capacity to El Paso Merchant, which "could afford to pay above-market prices [for the capacity] because it was simply recirculating El Paso's shareholder money from one pocket to another," the CPUC said.

Although they didn't think it was possible, El Paso Natural Gas, which first contracted the California-bound capacity out to Dynegy Marketing and Trade in early 1998, has gone from bad to worse in marketing the capacity, the state regulators told FERC. "From the El Paso-Dynegy contracts, to the El Paso-Enron contracts, and now the El Paso-El Paso contracts, El Paso keeps pushing the envelope," they said.

"The situation facing the California natural gas and electric market has been getting worse and worse as El Paso's anticompetitive arrangement involving this [1.22 Bcf/d] of firm capacity is now replete with affiliate-abuse problems as well. El Paso Merchant, which had previously been a small player in the California market, has suddenly emerged as the largest holder of firm capacity to California on its own affiliate's interstate pipeline."

If the 1.22 Bcf/d is added to El Paso Merchant's other capacity rights on El Paso and Transwestern Pipeline, the CPUC estimates the affiliate controls a total of 1.44 Bcf/d of firm capacity to the California market. "No entity could realistically use all of this capacity to California." As the largest capacity holder to California, El Paso Merchant has the ability to "artificially drive up prices" for both gas and electricity, state regulators said.

In the event FERC rejects the CPUC's request to "nullify" the contracts, the agency asked the Commission to consider ordering El Paso Merchant to release unused firm capacity on a short-term basis to replacement shippers at a higher rate than it would pay El Paso. As part of the complaint, the CPUC also asked the Commission to reconsider its rulings on the recall provisions associated with the Block II capacity contract held by El Paso Merchant, saying they were inconsistent with the 1996 settlement between El Paso pipeline and its customers.

California regulators don't believe their complaint can be resolved via FERC's Enforcement Hotline, Dispute Resolution Service or other informal procedures "because this case is a very significant case involving the entire natural gas and electric market in California." And while a number of the issues are pending before the U.S. Court of Appeals for the D.C. Circuit in a petition challenging FERC's approval of the Dynegy-El Paso contracts, the CPUC said it can't wait until then.

The D.C. Circuit "will not have its oral argument in this matter until Nov. 6, 2000, and the D.C. Circuit's order, while providing an important precedent and mandate to FERC, cannot directly nullify the El Paso-El Paso contracts as the FERC can." Moreover, the CPUC said its complaint deals with a "more extreme and egregious situation" than will be addressed by the court.

The CPUC, which has conducted an informal investigation of its own, said it wasn't seeking fast-track processing of the complaint because it first needed to conduct discovery of "information in the hands of El Paso, El Paso Merchant and/or their affiliates." Toward that aim, it asked the Commission to issue a proposed protective order that would give it access to "very confidential documents that other parties could not view."

Susan Parker

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