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

In a Section 5 complaint filed last Monday, the CaliforniaPublic Utilities Commission (CPUC) challenged the “justness andreasonableness and anticompetitive effects” of El Paso’s threecontracts with El Paso Merchant, saying the state’s gas andelectric consumers will be forced to pay an additional $100 millionat least as a result of the alleged anticompetitive practices ofthe two companies [RP00-241].

El Paso Natural Gas spurned the bids of 24 other shippers inorder to award the California-bound transportation capacity to ElPaso Merchant, which “could afford to pay above-market prices [forthe capacity] because it was simply recirculating El Paso’sshareholder 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 DynegyMarketing and Trade in early 1998, has gone from bad to worse inmarketing the capacity, the state regulators told FERC. “From theEl Paso-Dynegy contracts, to the El Paso-Enron contracts, and nowthe El Paso-El Paso contracts, El Paso keeps pushing the envelope,”they said.

“The situation facing the California natural gas and electricmarket has been getting worse and worse as El Paso’santicompetitive arrangement involving this [1.22 Bcf/d] of firmcapacity is now replete with affiliate-abuse problems as well. ElPaso Merchant, which had previously been a small player in theCalifornia market, has suddenly emerged as the largest holder offirm capacity to California on its own affiliate’s interstatepipeline.”

If the 1.22 Bcf/d is added to El Paso Merchant’s other capacityrights on El Paso and Transwestern Pipeline, the CPUC estimates theaffiliate controls a total of 1.44 Bcf/d of firm capacity to theCalifornia market. “No entity could realistically use all of thiscapacity to California.” As the largest capacity holder toCalifornia, El Paso Merchant has the ability to “artificially driveup prices” for both gas and electricity, state regulators said.

In the event FERC rejects the CPUC’s request to “nullify” thecontracts, the agency asked the Commission to consider ordering ElPaso Merchant to release unused firm capacity on a short-term basisto replacement shippers at a higher rate than it would pay El Paso.As part of the complaint, the CPUC also asked the Commission toreconsider its rulings on the recall provisions associated with theBlock II capacity contract held by El Paso Merchant, saying theywere inconsistent with the 1996 settlement between El Paso pipelineand its customers.

California regulators don’t believe their complaint can beresolved via FERC’s Enforcement Hotline, Dispute Resolution Serviceor other informal procedures “because this case is a verysignificant case involving the entire natural gas and electricmarket in California.” And while a number of the issues are pendingbefore the U.S. Court of Appeals for the D.C. Circuit in a petitionchallenging FERC’s approval of the Dynegy-El Paso contracts, theCPUC said it can’t wait until then.

The D.C. Circuit “will not have its oral argument in this matteruntil Nov. 6, 2000, and the D.C. Circuit’s order, while providingan important precedent and mandate to FERC, cannot directly nullifythe El Paso-El Paso contracts as the FERC can.” Moreover, the CPUCsaid its complaint deals with a “more extreme and egregioussituation” than will be addressed by the court.

The CPUC, which has conducted an informal investigation of itsown, said it wasn’t seeking fast-track processing of the complaintbecause it first needed to conduct discovery of “information in thehands of El Paso, El Paso Merchant and/or their affiliates.” Towardthat aim, it asked the Commission to issue a proposed protectiveorder that would give it access to “very confidential documentsthat other parties could not view.”

Susan Parker

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