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,"
"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
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."