With California caught in the “midst of a profoundlyserious…crisis” in its deregulated energy markets, the CaliforniaPublic Utilities Commission (CPUC) has called on FERC to “actimmediately” on its complaint against El Paso Natural Gas toprovide some price relief for natural gas and electric customers inthe state.

California regulators contend the high gas prices are due “inlarge part to the market manipulation caused by marketconcentration” resulting from a 1.22 Bcf/d contract arrangementbetween the El Paso pipeline and its two affiliates, El PasoMerchant Energy-Gas L.P. and El Paso Merchant Energy Co. Thecontract transaction awarded more than one-third of the pipeline’scapacity rights to the California border to its affiliatecompanies, the CPUC said.

On Wednesday, the agency renewed its request for summarydisposition of the complaint in which it seeks to abrogate thetransportation contract arrangement between El Paso and itsmarketing affiliates [RP00-241]. The CPUC alleged the affiliateswere given “preferential treatment” by El Paso during the openseason for the capacity, and thus the contracts between the threeshould be declared void. The CPUC initially had sought summarydisposition of the complaint in August, but FERC has yet to act.

Leprino Foods Co., a major cheese producer in the state, alsourged FERC to quickly “address by summary disposition the marketabuse and monopolistic and anticompetitive actions of the ElPaso-related companies and others which the CPUC alleges havelargely, if not exclusively, brought the crisis in the firstplace.” Separately, Southern California Edison and CaliforniaDairies Inc., a California farmer-owned dairy cooperative, saidquick action on the CPUC’s complaint was needed in light of the”extraordinary events in the California gas and electricity markets(see Daily GPI, Dec. 11, 2000)

Edison charged that El Paso Merchant Energy currently is reaping”monopoly rents in excess of 7,000% higher than the just andreasonable rate approved by the Commission for its regulatedsibling,” El Paso Natural Gas.

El Paso Energy Chairman William A. Wise sought to deflect someof the criticism in a Dec. 13 letter to FERC. He said theallegations were “totally unfounded.” El Paso Merchant has not”somehow manipulated” the market by withholding capacity, Wisesaid. “Every day Merchant is nominating virtually all of itspipeline capacity to California. If Merchant fails to fullynominate this capacity, existing regulations require that anyunderutilized capacity be made available to other shippers by ElPaso Natural Gas,” he told the Commission.

Wise further dismissed charges that El Paso Merchant and El Pasoare trying to drive up the California border prices. He estimatedthat about 95% of the marketer’s capacity is hedged in thefinancial markets. “These hedges fix the value Merchant willreceive from this capacity. Therefore, El Paso has substantiallylimited its ability to benefit from higher gas prices inCalifornia.”

He said the El Paso companies always have tried “to be part ofthe solution, not the problem.” Toward this aim, Wise told FERCthat El Paso Merchant is willing to enter into long-term gas-supplyarrangements directly with California utilities to help cushionthem against the volatile prices. The El Paso marketer, Wise noted,would provide the utilities with terms “that would result innear-term pricing structure below market indices.” Also, “El Pasowould back-stop the commitment with equity reserves.”

Moreover, El Paso Energy is committed to adding pipelinecapacity over the next few years to serve the California market andis attempting to expedite the development of a new power plant inSan Francisco to meet the growing power demand, he noted.

In reviewing the gas price situation in California, Wise urgedthe Commission “not to rush to judgment.” He warned “drasticregulatory intervention at this time could have unintentional,asymmetrical results on market participants and disrupt the marketthat the Commission has worked to develop over the past 15 years.”

As another potential remedy for prices, Leprino Foods said italso supported San Diego Gas and Electric’s (SDG&E) emergencyplea to reinstate price caps on short-term capacity releases forservice to the California market [RP01-180]. But it noted therelief sought in that case is a “tourniquet that will stop thebleeding” only temporarily. “It does nothing to address thefundamental underlying problems” in the California gas market,according to Leprino. Rather, it believes the fundamental problemsare “graphically” outlined in the CPUC complaint against El Paso.

With respect to SDG&E’s request, Leprino called on FERC totake “immediate action to stop the bleeding before California’seconomy and the many consumers of natural gas that participate inCalifornia’s economy are irreparably harmed.”

But Enron North America Corp. (ENA), in a strongly wordedfiling, asked the Commission to jettison the utility’s plea toreimpose price caps on short-term releases for transport toCalifornia, saying SDG&E’s allegations that uncapped prices areto blame for the escalating gas prices in the state are”demonstrably false.”

Resurrecting the price caps in the secondary market would notprovide any price relief to gas consumers in California, ENA said,but rather would make a bad situation worse. As the Commission “hasfound elsewhere, price caps will only create arbitrageopportunities that will cause holders of capacity to release it fordeliveries into other markets, reducing supply and further drivingup Southern California prices,” it told the Commission.

SDG&E, a Sempra Energy utility, made the emergency plea forcaps as prices for natural gas delivered to the California-Arizonaborder skyrocketed by more than tenfold over those of last year,surpassing the $50 mark on Dec. 7. Gas delivered to the SouthernCalifornia border hit a high of $69/Mcf last Monday. The utilityproposed that the caps stay in effect until March 31, 2001. FERClifted the caps in March as part of Order 637.

In seeking removal of the price cap, ENA insists that SDG&Eis trying to “deflect blame” for shortcomings associated with itsown supply acquisition strategy. “During the past summer, there wascapacity available into Southern California that was not used.SDG&E does not explain why it did not take advantage of thatcapacity to fill its local storage facilities. SDG&E’s failureto do so, coupled with its failure to contract forward at pricesthat remain relatively low and stable, has made it reliant oninherently volatile spot and short-term markets,” the Enronmarketer said.

Rather than “act precipitously” to the “unsupported allegations”of SDG&E, ENA proposed that FERC investigate the cause of theutility’s vulnerability to volatile gas prices. “As with the casein its recent investigation in California’s power market, theCommission will find the cause in reckless reliance on the spotmarket, too little hedging…and inadequate development ofprice-responsive demand.”

Leprino wants the Commission to focus on remedies, rather thanlay blame. “…[M]any businesses in California cannot withstandthese increases and, so, are closing their doors. Other companiessuch as Leprino will need to make very difficult decisions in thenear future regarding further investment in California-basedfacilities,” the company said.

In response to SDG&E’s allegations, ENA said it reviewed thesecondary capacity releases into California, and found that “there[have been] few, if any, releases at above-maximum rates at thistime, as all firm capacity holders are utilizing the capacitythemselves.”

Of the 11 releases that Transwestern had between Nov. 15-Dec.15, ENA said “none were above the maximum rate; all were at themaximum rate.” El Paso Natural Gas had “several dozen” releasesduring the same period in the California zone, it noted, and allbut five were listed as straight maximum rate deals. Five had fixedrates that were within plus-minus one cent of the maximum rate,according to ENA.

Even though gas prices have soared in California, ENA contendsthe market still is competitive. “The mere fact that the marketproduces spot prices that are higher than those which may have beenplanned for by SDG&E or are higher than SDG&E may wish topay under ideal circumstances…does not mean that the market isnot workably competitive. The opposite is true; it shows thatsupply and demand will find the right balance.”

In addition to seeking a cap that would reduce gas prices inCalifornia by about 80%, SDG&E has asked that thetransportation and commodity components of rates for bundled salesbe stated separately “so that the cap can be enforced on thesetransactions.” In the alternative, SDG&E proposed that bundledtransactions be capped at “150% of the sum of a reported [national]average commodity sales price plus the as-billed rate forinterstate transportation.”

Price caps on bundled sales “will have the opposite impact onmarket prices from that sought by SDG&E,” ENA contends. “One oftwo things will occur if SDG&E prevails. The commodity will goto other markets that place a higher value on gas or the Californiamarket will find ways to circumvent the new caps, which is easilyaccomplished.”

Moreover, ENA argues that the Commission does not have the legalauthority to impose such price caps, which it contends would amountto “backdoor” regulation of wellhead prices (or first sales).

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