El Paso: Continued Strength in CA Prices Proves Its Case

El Paso Corp. said last week the market has proved wrong all charges that it manipulated California gas prices over the last year while its marketing/merchant power subsidiary held control over 1.2 Bcf/d of firm capacity on its affiliate pipeline, El Paso Natural Gas. El Paso Merchant relinquished control over most of that capacity on June 1 yet gas prices in California continued to be abnormally high in relation to prices elsewhere in the country, El Paso said.

Its critics, however, point to the $3.24/MMBtu decline in Southern California bidweek prices in June, which was a much sharper drop than the declines elsewhere last month. In addition, the softer June aftermarket left California prices on par with the Henry Hub on several occasions. July bidweek averages in Southern California, meanwhile, are expected to be more than $7/MMBtu less than June bidweek levels. El Paso's critics charge that more competition in the market since 30 shippers assumed control of the El Paso Merchant capacity on June 1 helped to drive down prices and will bring the California spot market back to normal levels.

The El Paso companies are currently under investigation by FERC for alleged manipulation of gas prices in California. But the behavior of gas prices since June 1 proves that supply constraints in California are the reason that prices are higher there than elsewhere in the United States, El Paso said last week in a statement. "Simply put, the demand for natural gas in California has exceeded the available supply, resulting in higher prices in California," said Norma F. Dunn, senior vice president of communications and government affairs.

The price of natural gas across the United States is at a six-month low. Current natural gas prices at Henry Hub, which is the benchmark for natural gas pricing in North America, have dropped from $10 to $3.45/MMBtu -- a decrease of roughly 66% -- over the last six months, El Paso noted. Reductions in demand and increases in supply, along with moderating weather nationwide, have led to this decrease in prices, the company added.

While natural gas prices have also fallen in California, they are still significantly higher than in the rest of the United States. "This is because a natural gas supply/demand imbalance still exists in California not, as some have argued, because of transportation agreements on the El Paso Natural Gas pipeline system," said Dunn. "In fact, in June 2000 when El Paso Merchant Energy held transportation rights on the El Paso Natural Gas system, the natural gas price differential between Texas and New Mexico producing regions and California was $0.27 -- only 5% of what it is today, even though today El Paso Merchant Energy's capacity rights have been resold to some 30 shippers."

According to NGI's bidweek survey, San Juan-SoCal Border Average basis on June 1 was $8.58 and El Paso Permian-SoCal Border basis was $7.88. In June of last year, however, San Juan-SoCal Border basis was only 48 cents, while Permian-SoCal Border basis was only 24 cents.

The basis spread, however, did fall during June bidweek by about $2 from May's levels. Furthermore, Southern California Border prices were $3.24 less than the average for the May bidweek, while prices declined only about $1.20 in Chicago and New York. In addition, Southern California Border prices actually dipped below Henry Hub levels in the daily market twice this month for the first time since Jan. 10, which had been the first time for a negative basis on the daily market since several days in May a year ago. And during the latter part of June, California prices closed in on prices at Chicago and New York and appeared to stabilize in the mid-$4.

"Our feeling is that there is less discipline when there is one (shipper controlling a lot of the capacity on El Paso) versus 30 different shippers," said Bill Wood, chief natural gas forecaster at the California Energy Commission. "As a result, you can anticipate there is going to be greater competition between these parties to get gas to California. So we were anticipating a drop in prices in California, we just didn't know how much it was going to drop. We've gone from $10 to $12 levels last month to $7-8, and on weekends dropping down below $4, because there's a whole lot of gas coming into the state and no demand for it.

"I never have done an evaluation to determine if El Paso Merchant did use market power, but FERC is doing that. I for sure believe that they took advantage of it. Whether they actually used their market power [to manipulate prices], I'm not in a position to say." Wood said his conclusions in a recent report focused on the decrease in competition in the Southern California marketplace because of the El Paso Merchant contract. "Those who have the supply and capacity available have the opportunity to take advantage of that by charging more, as much as what people are willing to pay."

El Paso argues that forces beyond its control were at work to drive up the prices in California over the past year and that now other market forces are driving prices back down, coincidentally at the same time the marketing subsidiary released its control over substantial capacity on its affiliated pipeline.

"We are pleased that California, along with the rest of the country, has received some recent price relief; however, it is important to understand that reduced daily demand for natural gas in California has caused these lower prices," Dunn said.

According to El Paso, several factors have contributed to a reduction in demand for gas in California in the past month. First, there is more electricity available from non-gas-fired electric generation, such as nuclear and hydroelectric facilities. This has decreased the need for fuel for gas-fired plants. Second, energy conservation efforts statewide have caused an overall decrease in the demand for power, resulting in a decrease in demand for natural gas. Third, natural gas storage facilities across the country are refilling at a rapid pace, which has had a downward impact on natural gas prices, El Paso said.

"While reduced prices for natural gas may make it seem that the California market has come back into balance, in actuality, it has not. A comparison of natural gas prices between California and a comparable market such as New York indicates that prices remain high in California relative to the rest of the country, due to a continuing imbalance between supply and demand. Although demand for natural gas has decreased, demand is still higher than available natural gas supply, primarily because the state does not have sufficient pipeline infrastructure to serve its needs," Dunn concluded.

Using price indexes published by NGI and Platt's Gas Market Report, El Paso said that prices averaged $9.23 in Southern California during June bidweek compared to $4.13 in New York at Transco Zone 6 and $3.86 at Chicago. In June 2000, Southern California Border prices averaged $4.30, compared to $4.72 at New York and $4.43 at Chicago.

However, the situation is likely to be much different for July bidweek, with prices in Southern California coming in late Friday below $5, or about $7 less than June bidweek levels. Prices in New York were coming in only about $1 lower than Southern California levels, and prices in Chicago were reported below $3.20.

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