FERC Re-Opens Affiliate Abuse Case Against El Paso

Yielding to pressure from all sides, FERC last week did a complete about-face and set for hearing the allegations that El Paso Natural Gas rigged the bidding process for a large block of transportation capacity on its system to favor its merchant-power generation facilities. The decision was a major win for California parties and a disappointing setback for El Paso pipeline and its affiliates.

The Commission took the unprecedented action after it had already cleared El Paso of the charges in late March without holding a fact-finding hearing, ruling then that the pipeline had not violated the standards of conduct prohibiting interstate gas pipelines from showing preference to their affiliates when awarding capacity. Since then the western energy crisis has brought the national spotlight to bear on this case, as well as others before the Federal Energy Regulatory Commission having to do with California energy prices.

"The Commission now believes these [affiliate-abuse] allegations raise factual issues that are best resolved in an evidentiary hearing," last Monday's order said [RP00-2411-004]. Specifically, it set for hearing the issue of whether El Paso pipeline and its merchant power generators "engaged in affiliate abuse or violated the Affiliate Standards in bidding for or awarding the El Paso [capacity] contracts, including the transportation discount granted by Mojave [Pipeline]" to the affiliates.

FERC directed Chief Administrative Law Judge Curtis L. Wagner Jr. to add the affiliate-abuse issues to the related, ongoing hearing at the agency, which is exploring whether El Paso's merchant power affiliates --- El Paso Merchant Energy Gas L.P. and El Paso Merchant Energy Co. --- have market power and exercised it to drive up gas prices in Southern California since June 2000.

California regulators, Southern California Edison and other critics claim that an El Paso open season in early 2000, which lead to the El Paso Merchant companies being awarded 1.22 Bcf/d of capacity on El Paso pipeline, was allegedly skewed to favor the affiliates over non-affiliate bidders for the capacity. Among other things, they contend El Paso Merchant was privvy to discount information on El Paso pipeline affiliate, Mojave Pipeline, during the open season, while non-affiliate bidders weren't informed of the discount until after the close of the open season. El Paso Merchant's contract arrangement for the capacity expired on May 31, 2001.

"The Commission grants [Wagner] the discretion to restructure the hearing proceedings to accept additional testimony regarding these allegations" that the open season was biased, the order noted. It suspended the Sept. 4 deadline for an initial decision in the case, and directed Wagner to submit a revised hearing schedule this week. Wagner has indicated he will announce the schedule for the hearing today.

The judge said last week he intends to call the top executives of parent company El Paso Corp., El Paso pipeline and El Paso Merchant Energy to testify during the hearing, including El Paso Corp. Chairman William Wise. Even with the heavier trial burden, Wagner said he hopes to issue an initial decision in the case sometime in September.

El Paso did not appear to be surprised by the decision. "The order was entirely predictable. The judge asked for more time and more facts and direction on fact-finding. Clearly, FERC had to grant that," said Norman Dunn, spokeswoman for El Paso Corp. "The bottom line, however, is the facts have not changed" from the March 26 decision when FERC cleared El Paso of affiliate charges. "We are very confident FERC will find the same results the second time."

FERC re-considered its earlier ruling after Wagner sought guidance from the Commission as to whether he should re-open the allegations that the El Paso affiliates abused their relationship during the open season, suggesting that evidence had emerged during the current hearing that warranted a review of the charges. It also was in response to the requests for rehearing of the Commission's March 26 order by the California Public Utilities Commission, Pacific Gas and Electric and SoCal Edison.

Although the initial March order exonerated El Paso and affiliates of the affiliate-abuse charges, the Commission said at the time it was unable to decide the issue of whether the merchant power affiliates had market power ---the ability to manipulate gas prices at the California border in 2000 --- so it set that issue for hearing before Wagner. The hearing has been in progress for past five weeks at FERC, and will wrap up on Tuesday (June 19).

In separate concurring opinions Chairman Curt Hebert and new Commissioner Pat Wood agreed that it was important to develop a full factual record before issuing a decision on the affiliate-abuse charges. "I recognize the seriousness of natural gas prices in the California market and I am committed to providing all Commission resources to determine the actuality of that price situation," said Hebert. Wood noted that when facts are in dispute, as they are in this case, a hearing before an ALJ is warranted. He further said it was critical for FERC to be seen as "a watchful and vigilant partner" with California regulators, which brought the original complaint against El Paso over a year ago.

In their rehearing bid, El Paso pipeline and its merchant affiliates asked the Commission to dismiss both the affiliate-abuse and market-power charges against them, but FERC flatly denied their request. "Absent evidence of an abuse of discretion, which El Paso pipeline and El Paso Merchant have not shown on rehearing, the Commission's decision to hold a trial-type hearing is conclusive."

The Commission also decided to "defer consideration" of whether Wagner can require El Paso Merchant to "disgorge all past profits obtained during periods" when the company is alleged to have exercised market power. "The Commission views it as premature to address the subject of remedies unless the hearing demonstrates violations by El Paso pipeline and El Paso Merchant with respect to the issues set for hearing."

In related devlopments last week, a SoCal Edison witness testified that as much as 1 Bcf/d of El Paso's peak-day capacity of 4.59 Bcf/d to serve the southwestern and California markets went unused for the first eight months of last year, until the August rupture on the pipeline, with the figure falling somewhat after that. The disclosure came last Tuesday during the FERC hearing exploring price-manipulation charges against the pipeline and its merchant power affiliates.

Of the 1 Bcf/d of unutilized capacity, El Paso previously testified that more than 500 MMcf/d was "available" to serve its east-of-California (EOC) and California markets during the period up to August, while another 500 MMcf/d was "unavailable" due to various operational factors --- rising gas demand of El Paso's EOC customers and maintenance downtimes. The figures for both available and unavailable capacity dropped following the explosion on the pipeline's South Mainline in New Mexico last August. Much of the pre-rupture "available" capacity reportedly was held by El Paso Merchant Energy, a source noted.

But SoCal Edison, PG&E, California regulators and other critics contend that a large portion of the El Paso capacity was intentionally kept off the market for much of 2000 to drive up natural gas prices in California.

Some of the unused capacity can be explained away by the EOC, rupture and maintenance factors, conceded Paul R. Carpenter, an economist with The Brattle Group, last week. But that still leaves a "significant" amount of capacity that was inexplicably unavailable for California in 2000, he said.

Even after making the capacity adjustments for EOC demand and maintenance, Carpenter estimated that pre-rupture about 500 MMcf/d of El Paso capacity for the market was unavailable for reasons that have not been "fully unexplained" by the pipeline. Post-rupture, that figure dropped to about 200-400 MMcf/d, he said. "While each of these [factors] appears to have had some effect" in reducing the amount of available capacity on El Paso's system, Carpenter noted the numbers simply "don't add up."

Kevin Lipson, Washington, D.C., attorney for SoCal Edison, put Carpenter on the stand to refute the earlier testimony of John Somerhalder, president of the El Paso Pipeline Group, who had said capacity was tight on El Paso after June 2000 and that the utilization rate was very high. Somerhalder is scheduled to testify again at the hearing today about the "unavailable" capacity on the El Paso pipeline.

"The notion that there was insufficient capacity to meet their obligations in California was not something that we would even consider. It was not on our radar screen," countered Carpenter.

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