El Paso Natural Gas is trying to head off an attempt by Chief Administrative Law Judge Curtis L. Wagner Jr. to expand the scope of a four-week-old FERC hearing, which has been confined to market-power issues so far, to include the previously-litigated allegations that the pipeline rigged bidding for transportation capacity on its system to favor its merchant-power generation affiliates.

In late March, the Commission cleared the El Paso pipeline of charges that it violated the standards of conduct prohibiting interstate gas pipelines from showing preference to their affiliates when awarding capacity (see NGI, April 2). But Wagner has asked FERC for guidance on whether he should “compile a more complete record on that question and make findings as to whether such a violation, if it existed, contributed to the alleged exercise of market power by El Paso Natural Gas” and its two affiliates, El Paso Merchant Energy Gas L.P. and El Paso Merchant Energy Co.

FERC’s decision on the affiliate-abuse violations “was based solely on the paper record before the Commission at that point in time,” said Wagner, who seemed to suggest that additional evidence has emerged at the trial to warrant a possible review of the charges [RP00-241].

Wagner’s request for the guidance was surprising, given that continually throughout the hearing he has been vigilant in his efforts to keep the affiliate-abuse issues out of the hearing proceeding. Further, the judge has kept the parties in the case on a fairly tight timetable during the hearing. By expanding the issues now, Wagner would drag the hearing out, which is something he has said he doesn’t want to do.

The March 28 order, apart from ruling on the affiliate-abuse issue, directed Wagner to hold a hearing into the single, unresolved issue of market power: do El Paso’s merchant power affiliates have market power and did they use it to drive up natural gas prices at the California border in 2000? FERC was unable to rule on the market-power issue at the time, having found the “current record incomplete.”

Immediately responding to Wagner’s request, El Paso Natural Gas asked FERC to instruct the judge to keep the hearing and his decision in the case focused on market-power issues alone. “No probative evidence has emerged at the hearing that is inconsistent with the facts the Commission had before it at the time it made its ruling on the affiliate issues,” the pipeline said. Further, it noted these issues can be raised during rehearing of the March order.

The pipeline specifically singled out the recent hearing testimony of El Paso Corp. CEO William Wise, saying it revealed nothing new. Rather, it “merely [confirmed] what was obvious from the protected materials that were reviewed by the Commission” in reaching its decision on alleged affiliate-abuse violations. Wise testified that El Paso Merchant had informed him of its decision to bid on El Paso pipeline capacity prior to submitting the bid, and that he had given his “implicit, if not explicit, approval” to the company’s decision.

“Oral testimony confirming what was evident from the paper record reviewed by the Commission does not constitute `new’ evidence, nor does it justify the re-opening of the record on the affiliates issues,” El Paso Natural Gas said. “Even if one could argue that the oral testimony put a new `slant’ on the affiliate issues that was not available to the Commission when it made its decision, there is still absolutely no indication that any violation of any of the [pipeline-affiliate] Standards of Conduct has occurred. Nothing in the Standards precludes a business unit of a corporation from informing the head of the corporation of its business plan.” But assuming there were a prohibition on this type of communications, the El Paso pipeline noted that it wasn’t party to the communications so there was no breach of the affiliate rules on its part.

The interstate gas pipeline further contends that an eleventh-hour decision by the Commission to allow Wagner to re-examine the affiliate-abuse issues would deny it of its due-process rights, which require accused parties to be given “sufficient notice” of the charges against them.

In his latest report to the Commission on the progress of the hearing, Wagner acknowledged that “this case has proven to be much more complex than anyone imagined” previously. “To date, there have been 17 days of hearing [21 days now], with a record that contains more than three linear feet of exhibits and over 2,700 pages of cross-examination.” The hearing was to have wrapped up last week, but it will spill over into Monday and Tuesday of this week. Given the daunting task facing him, Wagner has asked the Commission to extend the deadline for issuing an initial decision in the case. FERC has complied, extending it to Sept. 4. While “there is no question additional time must be allowed in order to conclude the hearing and to ensure due process for all parties, [I believe] that because of the importance of this case, the concern over the higher prices in California than in any other part of the country, and the national interest the case is receiving, it must be moved along as rapidly as possible,” Wagner told FERC. He noted he would make “every effort” to issue an initial decision by around Aug. 24.

Meanwhile, as the trial entered its final full week last Tuesday, a Washington, D.C., attorney for El Paso Merchant Energy Co. accused SoCal Edison of “cherry-picking” historical gas price data and comparing it to more recent prices for natural gas sold in California in an effort to prove that the merchant power generator illegally manipulated prices in the state during 2000.

Douglas Robinson of the law firm of Skadden, Arps, Slate, Meagher & Slom spent the entire day picking apart the Edison-commissioned study by The Brattle Group that concluded El Paso Merchant exercised market power in the March 2000-March 2001 period, withholding firm transportation capacity from the market and illegally driving up prices at the Southern California border.

As a result of El Paso Merchant’s alleged actions, buyers at the California border were forced to pay “significantly” more for natural gas during this year-long period, which ultimately upped the gas bill to the state by $3.6 billion to $3.8 billion, the study said. SoCal Edison and other critics contend that El Paso Merchant was in the position, and took advantage of that position, to manipulate gas prices at the border, given that it held 1.22 Bcf/d of the transportation capacity on affiliate pipeline El Paso Natural Gas as well as transportation capacity on Transwestern Pipeline.

In its attempt to prove price manipulation, the Brattle study showed that gas prices and basis differentials in 1994-1997 (control period) were markedly lower than those in 2000-2001. But El Paso Merchant witness, economist Dr. John R. Morris, testified that comparing prices in the two periods was like comparing “apples to oranges,” given the differences in the demand and supply conditions that existed.

“…[I]f you would compare 1994 to the year 2000, up to about November 2000, you would find that there was over 200 to 250 Bcf [more] gas consumed in the year 2000” in California, said Morris, vice president of Economists Inc. in Washington. The uptick in gas demand began around May 2000 and continued through November of that year, with daily increases ranging from 700 MMcf to 1.4 Bcf, he noted.

“Beginning in May 2000, consumption in the state as a whole [was] greater than in any comparable month during the [1994-1997] control period,” Morris said.

Further, he noted supply conditions in California were dissimilar for the two periods. In November 1994, gas prices at Kingsgate, BC, were 10 cents less than prices at the San Juan Basin, while Kingsgate prices were $3.76 more than San Juan prices in November 2000. “This indicates to me that clearly supply conditions were not comparable” for the two periods, making accurate price comparisons impossible.

Morris also defined the “relevant market” at issue as being the entire state of California, which was in stark contrast to the Brattle study’s market parameters, Southern California. This is a key issue for El Paso Merchant Energy because the larger the market, the smaller its market share would be and the less likely SoCal Edison could prove it exerted market power and manipulated natural gas prices in the state.

Assuming core transportation capacity is included, Morris estimated El Paso Merchant Energy has a 21% share of the relevant (state-wide) capacity market, which he said was “well below” the safe harbor of 35%. This, he said, gives it a Herfindahl-Herschman Index (HHI) of 934, which he noted is “substantially below” his own 1,800 threshold measurement for market power.

But the Brattle study countered that El Paso Merchant controls about 35% of the transportation capacity on El Paso and Transwestern in the relevant (Southern California) market, giving it an HHI of 2,155. “This HHI indicates that the market is highly concentrated and at risk for competitive problems,” the study said. Furthermore, if the capacity dedicated to Southern California Gas and Pacific Gas and Electric to serve core (residential) customers is excluded, it estimated El Paso Merchant’s market share shoots up to 48% of the Southwest capacity available to serve non-core customers. FERC staff basically agreed with that assessment in its own testimony, concluding that under certain conditions El Paso’s market share rises to 45% and its HHI reaches 2,262, exceeding levels deemed appropriate by FERC, the Federal Trade Commission and the Justice Department (see NGI, May 14).

Morris also said the close correlation in prices at the SoCal-Topock delivery point and PG&E citygate during most of 2000 was evidence that California was a single market, and not divided into two markets–southern and northern regions–as the Brattle study has claimed. “All those price correlations are all very high” for the two points for much of 2000, he noted. “And from the price data themselves, you could not distinguish one location [in California] from the other.”

He noted that the PG&E citygate and SoCal-Topock border price had a correlation of 0.9130, which was “very high,” during the March-November 2000 period. “It’s a strong indication that the two locations would be in the same market,” Morris said during the hearing.

After November, Morris said there were two price spikes on the SoCal Gas system in February and March of this year that “[didn’t] correlate well with what happens in northern California,” but he noted that the spikes weren’t of a long enough duration to suggest the existence of two markets within the state.

In related developments, California regulators last week openly attacked FERC on national television for slowly responding to the allegations against El Paso and its affiliates. CPUC President Loretta Lynch accused FERC of doing “absolutely nothing” with respect to the CPUC’s price-manipulation complaint against El Paso, which was filed more than a year ago and launched the current hearing into the pipeline and its affiliates. “In fact, more than that, they sat on the complaint” for over a year, she said.

Lynch made the comment during a Frontline/New York Times presentation on the California energy crisis, which was broadcast on PBS last Tuesday. El Paso top executives declined to be interviewed for the program, it said. (see related story).

A Times reporter said he had obtained El Paso documents that showed the company was intentionally trying to widen the physical spread. When asked what this suggested to him, FERC’s newest Commissioner Pat Wood said, “it says there’s probably something else going on there that ain’t…supposed to be going on there.”

Wood also conceded that he was stymied by gas pricing in California. “I don’t understand why $5 gas and $1 transportation equal [a] $19 product.”

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