Plaintiffs’ evidence that El Paso Merchant Energy Co. (EPME) illegally drove up delivered natural gas prices to the southern California market beginning in mid-2000 is a “jumble of confusion, contradiction, hyperbole and illogic that does not begin to satisfy [the] burden” of proof, the merchant energy company contends.

For starters, EPME said plaintiffs’ evidence failed to take into consideration two key points — the fact that EPME (like most shippers) was subject to capacity curtailments on El Paso Natural Gas at the time, and that it was “hedging” transactions to protect itself against basis differential losses. Both show, EPME believes, that it couldn’t have withheld capacity on El Paso pipeline, as it has been accused.

“By late June or early July 2000…the pipeline systems delivering gas to California consumers were full, and every shipper, including [EPME], had its nominated volumes of gas curtailed. There was no usable capacity for [EPME] or anyone else to ‘hoard.’ At that point, all capacity on [El Paso pipeline] available to be utilized was in fact being used,” EPME said Friday in an initial brief submitted to FERC Chief Administrative Law Judge Curtis L. Wagner.

The California Public Utilities Commission (CPUC), Pacific Gas and Electric (PG&E) and Southern California Edison have accused EPME of withholding capacity on El Paso pipeline for the purpose of manipulating gas prices in southern California. Wagner directed parties in the high-profile case to file initial briefs prior to his issuing a decision in early October on two charges — whether EPME possessed and exercised market power to run up gas prices, and whether El Paso pipeline violated FERC’s affiliate standards when awarding 1.22 Bcf/d of capacity to affiliate EPME. EPME and El Paso pipeline, in a separate initial brief, urged Wagner to dismiss both charges.

In addition to being subject to curtailments, EPME noted that it “hedged” its transactions to protect itself from losing money if the basis differential between the Southwest producing basins and the California border declined. “As a result of hedging, Merchant’s ability to benefit from higher prices was substantially reduced, while its existing incentive to maximize its flows of gas was reinforced,” EPME argued. “Indeed, if Merchant possessed the market power asserted by the CPUC…it would not have needed to hedge against downside price risks because it could raise prices and basis differentials above ‘competitive levels.”

The bottom line is the “price increases in California during 2000 and early 2001 were due to the confluence and tightening of supply/demand factors in both the electric and natural gas sectors, and the constraints that existed on both the pipelines delivering gas to California and on the pipelines operating within California,” EPME said. This “perfect storm” of unusually warm weather, low hydroelectric production, annual demand growth, lack of new generation facilities and a “seriously flawed” electric market “led to record high gas demand in June 2000 and later months — demand was almost 20%, or more than 1 Bcf/d, higher than in previous years.”

The CPUC’s “pretense that these conditions had no impact on California gas prices is contrary to prior Commission orders, the overwhelming weight of the evidence and plain common sense,” the El Paso affiliate noted.

EPME also defended its acquisition of the 1.22 Bcf/d of firm capacity on the El Paso pipeline, saying it complied with both the “letter and spirit” of the Commission’s standards that bar pipelines from showing favoritism to affiliates over non-affiliate bidders when awarding capacity on their systems.

“Merchant won the capacity because it submitted what proved to be the highest-value bid under [El Paso pipeline’s] publicly posted terms and conditions. Merchant had no foreknowledge of [El Paso pipeline’s] bid criteria,” EPME said. Prior to submitting its bid during the Feb. 14, 2000 open season, “Merchant did not communicate with [El Paso pipeline] — either directly or indirectly — what Merchant believed the capacity might be worth.”

Moreover, it denied that it knew in advance of non-affiliate bidders that Mojave Pipeline, an El Paso affiliate, planned to offer an interruptible discount rate to Wheeler Ridge. “Merchant did not know for certain until after the close of the open season whether Mojave would offer a discount or what the precise terms of any discount would be. But even assuming arguendo that a deal had been struck, Mojave’s posting of the discount was well within the time required by the Commission regulations. Further, knowledge during the open season that Mojave might offered a tiered IT discount to Wheeler Ridge was immaterial to Merchant’s decision to bid for the [El Paso pipeline] capacity and to the value it placed on the capacity — a fact subsequently borne out by Merchant’s use of the discount on only three days during the 15-month term” of its contracts with El Paso pipeline.

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