FERC Staff Finds Market Power Concerns in El Paso Case
El Paso Natural Gas and El Paso Merchant Energy probably exercised market power in the Southern California gas market and drove up gas prices over the past year when pipeline capacity constraints existed, FERC staff concluded last week in testimony before Chief Administrative Law Judge Curtis Wagner Jr.
Southern California Edison told FERC last week El Paso caused a $3.7 billion increase in gas costs in California from March 2000 to March 2001 by withholding capacity from the market and driving up the basis differentials between supply basins and California. Edison based its testimony on analysis by the Brattle Group.
Meanwhile, El Paso countered with its own data arsenal and army of consultants. El Paso said the price increases were caused by unprecedented demand and inadequate supply infrastructure. Harvard University economics professor Joseph Kalt said on behalf of El Paso that the exorbitant gas prices were the result of a combination of supply and demand factors related to the electricity market and ultimately caused by decades of bad public policy decisions rather than El Paso's market power in the Southwest.
FERC set the market power issue for hearing in March before Judge Wagner and ordered him to provide an initial decision within 60 days (see Daily GPI, March 29). The Commission cleared El Paso of charges that it rigged the bidding for capacity on its system during an open season in February 2000 to favor its affiliates. Critics alleged El Paso Merchant Energy Gas L.P. and El Paso Merchant Energy Co. ended up the big winners in the open season, snaring three contracts for 1.22 Bcf/d of firm capacity on El Paso to the California border, because they received inside information on a discount transportation rate. But in the order on complaint, the Commission said it found "no merit in the allegations." Moreover, it said there was no evidence that El Paso violated its standards of conduct. However, the allegations that El Paso engaged in market and price manipulation were not dismissed.
In his testimony last week, FERC Economist Dr. Jonathan D. Ogur concluded that under certain circumstances El Paso was able to wield market power in the Southern California gas market. Its market position as measured by the Herfindahl-Herschman Index (HHI) exceeded levels deemed appropriate by FERC, the Federal Trade Commission and the Justice Department, he said.
When the state is considered as a single market, El Paso's market concentration and market share are "both within the safe harbor,"he said. However, when there are capacity constraints in Southern California, as there were last summer and winter, and when El Paso's supplies include both firm and "nearly firm" gas, the HHI increases to 2262, said Ogur. "This exceeds the 1800 threshold for concern that sellers may possess market power. El Paso's market share rises to 45%, which exceeds the 35% threshold.
"When pipeline constraints separate Southern California from Northern California, market concentration may be outside the safe harbor and El Paso's market share may be greater than the threshold," he said.
Although about 1 Bcf/d of excess capacity may have existed in the Northern California market last summer, it's not clear that it was available to Southern California customers in sufficient quantities to constrain El Paso's market power, said Ogur.
Ogur's testimony differs substantially from testimony submitted last week by John Morris for El Paso Merchant and testimony submitted by Lukens Consulting for El Paso pipeline. Those studies defined the market in question as including all of California, while Ogur defined the relevant market as Southern California when pipeline constraints exist.
The Brattle Study, which was submitted on behalf of Southern California Edison, concludes El Paso Merchant Energy was able to exercise market power through its control over 1.4 Bcf/d of firm capacity on El Paso Pipeline and Transwestern, but the study does not specifically define the market. It places and HHI of 2179 for firm capacity held by El Paso Merchant on El Paso and Transwestern between the San Juan Basin in New Mexico and California. The Brattle study calculates El Paso's market share to be 34%, rising to 48% after adjusting for Southern California Gas' and PG&E's core capacity.
The study fails, according to Ogur, by excluding capacity on other California pipes and storage space. It also attempts to find market power abuse by analyzing basis differentials that exceeded maximum tariff rates, but admits it is unable to determine if the abnormal basis differentials might have been caused instead by capacity constraints. It also can't deny the fact that interruptible transportation was available at maximum rates.
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