CPUC Attorney: El Paso Not Out of the Woods Yet

The California Public Utility Commission (CPUC) still intends to press FERC for a finding of affiliate abuse and tariff violations in the El Paso Natural Gas pipeline case, said CPUC Attorney Harvey Morris (see NGI, March 5), despite El Paso Merchant Energy's decision to turnback on May 31 most of the 1.2 Bcf/d of firm space it has held on its affiliated pipeline system.

"There still can be penalties found for affiliate abuse," he said in an interview with NGI. "PG&E has filed pleadings suggesting that because this [El Paso agreement with its marketing affiliate] should have been a section 4 filing all along, and El Paso violated its tariff, they should disgorge any profits."

In December, El Paso Merchant, responding to an emergency motion from Southern California Edison, said that it was using as much capacity as it could to the California border because it had exercised an option under a contract with its affiliated pipeline. The option, it said, allowed it under maximum rates to obtain primary receipt points in the Permian Basin to buy gas and sell it at the California border, Morris explained.

"There is a live issue right now about whether they really had violated their tariff all along by not filing a Section 4," he said. "Their story had always been that they never had to file a Section 4 because there were no [special terms to their $38 million contract with their marketing affiliate]. Well we learned there was a deviation [from their pro-forma agreement].

"What's significant is if they violated their tariff we can get retroactive relief," said Morris. "The affiliate abuse issue also could result in penalties and that's still a live issue."

In a recent answer to CPUC comments, El Paso continued to defend itself against the long-standing charges of market manipulation through pipeline capacity "hoarding" by its marketing affiliate. It also redirected the blame for the high California prices and basis blowout on state regulators and utilities.

The case [RP00-241] has been pending at the Commission for nearly a year. The CPUC has always charged that putting so much capacity in the hands of a marketing affiliate creates an incentive for the pipeline to not sell interruptible transportation in order to drive up the cost of firm capacity and maximize its affiliate's profits.

El Paso said its conscience is clear, however. There's no denying that a scarcity of pipeline capacity has developed into California, the company told FERC. But, contrary to the accusations of state regulators, Southern California Edison and PG&E Corp., the capacity agreement with Merchant Energy had nothing to do with it.

El Paso said its accusers would be more accurate pointing the finger at themselves for the current market situation. They are the ones who neglected in-state pipeline construction and turned back more than 1.7 Bcf/d of firm capacity on El Paso in the 1990s. They simply ignored the fact that demand growth in the state surpassed available capacity on both the interstate and intrastate systems, the pipeline said.

Border Capacity Examined

"A brief review of the four delivery points on El Paso's system at the California-Arizona border --- SoCal-Topock, Mojave-Topock, PG&E-Topock and Ehrenberg --- shows that El Paso is bumping up against its interconnect capabilities," El Paso said. There is a significant lack of capacity downstream of those delivery points, as the Energy Information Administration and FERC's own staff noted recently.

SoCal-Topock (which has a capacity of 540 MMcf/d) has a well-established history of overnominations and virtually full utilization. "As a result, to put it mildly, withholding of capacity is not a problem at SoCal-Topock," El Paso said.

Similarly at Ehrenberg, El Paso's other delivery point into the SoCal system, the pipe has been running full. December throughput there was 1,183 MMcf/d compared to total capacity of 1,210 MMcf/d. At Mojave, throughput was 244 MMcf/d in December compared with a total capacity of 400 MMcf/d, but Transwestern uses some of that space and there is limited capacity at Mojave's Wheeler Ridge delivery point into SoCal Gas where Mojave competes with PG&E, Kern River and in-state production for access to SoCal Gas' market.

Since October 2000, throughput at PG&E-Topock has averaged more than 650 MMcf/d out of a total capacity of 1,140 MMcf/d, but the lack of full utilization there has resulted from lower demand in Northern California and competition with Transwestern, Kern River and other deliveries into PG&E's system, El Paso said. PG&E-Topock also is constrained on the LDC side, according to El Paso.

These bottlenecks take "all the air" out of arguments that capacity hoarding is driving up the basis differential, El Paso told FERC, adding that there is "no basis for employing the draconian remedy of undoing legitimate contractual rights...," as El Paso's accusers have proposed.

But focusing on the unused space at PG&E-Topock, Morris asked how there could be a capacity shortage when the existing pipelines to Northern California aren't even full. How could prices in Northern California skyrocket if pipeline capacity is going unused?

Market Manipulation?

"There's market manipulation going on. It's not just the law of supply and demand. The fact that anyone hoarded so much capacity, like Dynegy did and El Paso did, is proof in the pudding of why [prices are astronomical]," he said. "While there might have been constraints into SoCal's system this winter at various times, there was not a constraint at Ehrenberg in Southern California this past summer." Even prior to the El Paso explosion, the basis differential greatly exceeded the maximum transportation rate on El Paso, he noted.

That shows you something was wrong with the market fundamentals. This winter, demand rose, and things got worse, but it still doesn't explain Northern California where there were no capacity constraints on El Paso, and "yet the basis differential greatly exceeded the maximum regulated interstate charge."

El Paso, however, noted that Merchant Energy could not hoard pipeline capacity to drive up prices because of FERC regulations governing interruptible transportation. "Assuming capacity is available for [interruptible] service, El Paso is required to transport gas for any party willing to pay the Commission-approved full [just and reasonable] rate."

According to Morris, though, the pipeline was not selling IT to Northern California despite the availability of capacity and the demand for it.

"We have some questions in our mind right now why El Paso this winter didn't have interruptible transportation available to Northern California," he said. "It would have put downward pressure on the California border prices, so we understand why they had incentive not to. From what we understand, PG&E tried to get some interruptible transportation this winter and couldn't, and PG&E operates the interconnecting point at PG&E-Topock with El Paso. They know there was slack capacity on both sides of the border, but they couldn't get any interruptible transportation."

Morris said the so called constraint on PG&E's side of the border at PG&E-Topock only occurs when Transwestern is running full there at 300 MMcf/d and El Paso is delivering more than 840 MMcf/d. PG&E's takeaway capacity is 1,140 MMcf/d on line 300.

"PG&E's line 300 had spare takeaway capacity all winter long," said Morris, adding that El Paso should have been selling IT if Merchant Energy wasn't fully using its contracted space. "IT would have been at the maximum rate, but that's still a heck of lot better at the California border than what the border prices have been, which is way higher than the maximum transportation rate plus the producing basin prices."

The CPUC is pleased El Paso Merchant relinquished a large part of its capacity holdings on its affiliated pipeline, but any capacity held by a marketing affiliate is too much for California regulators, said Morris.

El Paso Merchant was awarded 270 MMcf/d during the recent open season, but it also picked up 156 MMcf/d of long-term capacity released by SoCal Gas through 2006. Morris believes even 400 MMcf/d provides cost incentives for the pipeline to play games with interruptible transportation rather than operate efficiently. "We're still in conflict-of-interest land," he said.

"I can't share with you stuff that we filed under seal at FERC, but if they will release some of these documents, I will be happy to refute their claims of who is at fault for [soaring prices]."

On Feb. 23, FERC issued a data request to El Paso Merchant asking for its derivative arrangements involving supply and transportation capacity on El Paso Natural Gas. It also ordered the marketer to send those details to the intervenors in the case. El Paso Merchant still has not done that (see NGI, Jan. 15).

Rocco Canonica

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