El Paso Merchant Energy Co. (EPME), by its own admission, earned a pre-tax net profit of $184 million during 2000 and the first quarter of this year as a result of its control of 1.22 Bcf/d of capacity on affiliate El Paso Natural Gas, said the California Public Utilities Commission (CPUC) Friday.

The figure, however, does not take into consideration the $86.2 million that EPME earned from its equity ownership in California qualifying facilities, whose electric prices were tied to the inflated gas prices at the California border; EPME’s profit from the higher prices for wholesale electricity (much of which was generated by gas) in the state; and EPME’s profits for the capacity it held on Transwestern Pipeline (65 MMcf/d) and El Paso pipeline (156 MMcf/d) prior to acquiring the 1.22 Bcf/d, the CPUC said in an initial brief to FERC Chief Administrative Law Judge Curtis L. Wagner.

Wagner is presiding over the proceeding exploring charges that EPME had market power, and exercised it, to drive up delivered prices for natural gas to southern California beginning in mid-2000, as well as allegations that El Paso pipeline skewed the bidding process for capacity on its system to favor affiliate EPME over non-affiliate bidders [RP00-241].

The FERC judge called on EPME, El Paso pipeline, other parties and the CPUC, which initiated the complaint against the El Paso companies, to submit initial briefs in the case prior to his issuing an initial decision. Wagner is expected to rule on the affiliate and market-power abuse issues in early October (see Daily GPI, Aug. 23).

A key charge made by the CPUC was that EPME allegedly hoarded the capacity it held on El Paso pipeline to drive up prices to the southern California border, and its profits. For 180 days between June 1, 2000 and Nov. 30. 2000, the basis differential between the Southwest producing basins and California exceeded El Paso pipeline’s variable cost by an average of $1.18/MMBtu, which the CPUC says should have made it profitable for EMPE to use its capacity. However, EPME utilized only 53% of its capacity on El Paso into the Southern California Gas (SoCalGas) delivery point during that time.

“In sharp contrast to El Paso Merchant, other large shippers utilized their firm capacity rights on El Paso to a much larger extent,” the California regulators noted. SoCalGas used 85% of the capacity that it didn’t release, Williams used 77%, and Burlington Resources used 85%, they said.

During the term of its contracts, which expired last May, EPME also made significantly fewer capacity-release awards compared to other firm shippers on El Paso pipeline, the CPUC noted. It “awarded released capacity in only 11% of the offers posted” for a total of 8 awards, while other releasing shippers averaged 97% success in awarding offers of released capacity,” or 529 awards, it said.

“It is beyond dispute that El Paso Merchant’s numerous, but unsuccessful, capacity-release offers were merely a cover-up for [its] actual intent to withhold firm capacity from the California market.” NGI tried to obtain the initial briefs of EPME and El Paso pipeline from the companies Friday, but was unsuccessful. El Paso Corp. contends the briefs establish “conclusively” and “demonstrate unambiguously that El Paso violated no laws or regulations.”

This hoarding of capacity led directly to “supracompetitive” gas prices for California, according to the CPUC. It estimated that the alleged illegal conduct on the part of EPME caused California consumers to pay an additional $400 million to $500 million for gas last year.

The CPUC blamed the alleged withholding for SoCalGas’s lower storage levels last winter and the subsequent rise in the utilization of interstate capacity to the California border, which it contends led to the “substantial run-up in the cost of gas delivered to the southern California border.” Last November, the “border price rose 81% in three trading days and the differential skyrocketed and increased by 162%.” EPME, the agency continued, then “cashed in on the higher prices it had caused” by increasing the utilization of its El Paso capacity by about 77%.

“The evidence in the record clearly shows that El Paso Merchant exercised market power, widened the basis differentials, and significantly benefited from the higher natural gas prices it caused in California,” the CPUC said. But EPME didn’t act alone, the agency noted, adding that El Paso Corp. Chairman William Wise and John Somerhalder II, president of the El Paso Pipeline Group, were kept well informed of its marketing plans.

“In short, these affiliated companies were acting in concert to increase natural gas prices in California and to increase profits for their common shareholders.”

This case “demonstrates exactly why an interstate pipeline’s marketing affiliate should not hold firm capacity, let alone a substantial amount of firm capacity, on its affiliated, interstate pipeline,” said the CPUC, adding that in the end the consumers of gas and power in California “were the victims of this market abuse.”

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