El Paso Corp. claims it was set up by California Assembly members to take the blame for high gas prices in the state. It said recent hearings before a subcommittee were a “sham,” and that it was “predetermined” that El Paso would be accused on wrongdoing in a report approved by the subcommittee majority yesterday.

While El Paso battled similar accusations at the opening of hearings yesterday before a FERC administrative law judge, the company publicly contested the results of the majority report (approved 3-2) of the California Assembly Subcommittee on Energy Oversight, which placed the blame on the energy company for skyrocketing gas prices in the state. The majority report says El Paso drove up gas prices by withholding pipeline capacity from the market, focusing on the same year-old capacity contract between El Paso’s pipeline and marketing affiliate that is the subject of FERC’s investigation.

Contrary to the majority report, however, are the conclusions of a report prepared for the two Republican members of the five-member subcommittee. That document said the hearings “produced no conclusive evidence” of price manipulation.

Although the majority report has not been made public, “it is clear, based on accounts of the report and recently uncovered documents, that the subcommittee hearing was a sham,” El Paso said in a statement.

El Paso released to the public yesterday documents containing e-mail correspondence between staff members of the subcommittee and members of the Brattle Group, a paid consulting firm for Southern California Edison. The Brattle Group is one of El Paso’s main opponents at the hearings this week before FERC’s Chief Administrative Law Judge Curtis Wagner Jr. Brattle accuses the company of costing Californians an additional $3.7 billion in gas costs over the past year.

The correspondence El Paso released reveals a close relationship between the consulting firm and the subcommittee staff. For example, a staff member said to Brattle Group’s Matthew O’Loughlin, “I can’t thank you and Paul enough for your testimony. It was beyond expectations, the members were highly impressed. The chairman asked me if you guys could stay and help us with a second day. We could have used it.”

El Paso said the communication reveals that the subcommittee majority’s conclusions were “pre-determined to blame El Paso for California’s failed energy policies.” The subcommittee majority was working “hand-in-hand with, and relying on, SCE’s consultant, the Brattle Group, in their so-called analysis,” El Paso said. “In communications between the subcommittee staff and SCE’s consultant, it is clear that SCE’s consultant assisted in preparing questions for the hearing and that the subcommittee staff requested assistance from SCE’s consultant in preparing the final report.

“That the subcommittee majority never intended to conduct an objective investigation is clear… [R]ather than write an objective report based on the testimony, the staff went on to ask SCE’s consultant for help in ‘rebutting’ El Paso’s testimony.”

“We are shocked that the subcommittee delegated its responsibilities to SCE’s consultants,” said Norma Dunn, senior vice president of Communications and Government Affairs for El Paso. “We voluntarily met with subcommittee staff and testified before the subcommittee in good faith, under the false premise that the subcommittee was interested in seeking the truth. Now we learn that the subcommittee was working at the direction of SCE’s litigation consultants to support SCE’s litigation position. We are particularly concerned that after coordinating the questions to be asked, the Brattle Group testified before the subcommittee as if it were an independent group. It is obvious that the subcommittee hearings were a charade that was orchestrated from the beginning. Final conclusions were drawn before we had an opportunity to testify and then the final report was leaked to the press instead of provided to us, so that we would not have an opportunity to react.”

Dunn said El Paso is confident that once the facts are presented to FERC in hearings this week, it will be “vindicated.”

However, El Paso also faces an uphill battle in Washington. The FERC hearings pit El Paso and its subsidiaries against the California Public Utilities Commission and the state’s two largest investor-owned utilities, Pacific Gas & Electric and Southern California Edison.

The regulators and the utilities also allege El Paso withheld capacity on its pipelines into the state, which in turn pushed prices up. If the charges are substantiated, FERC Judge Wagner could order the company to refund any money it earned due to price or supply manipulation. Such a ruling could have even broader implications because skyrocketing prices for natural gas, the single biggest source of fuel for power plants in California, obviously contributed to the financial calamity that brought Southern California Edison to its knees and sent Pacific Gas & Electric into bankruptcy.

The details of the charges are well known at this point. Critics alleged that El Paso Merchant Energy Gas LP and El Paso Merchant Energy Co. received inside information on a discount transportation rate that enabled them to end up the big winners in an open season in February of last year. The open season involved 1.22 Bcf/d of firm capacity on El Paso to the California border.

But in an order on complaint, FERC found “no merit in the allegations.” It cleared El Paso of charges that it rigged the bidding for capacity to favor its affiliates. Moreover, it said there was no evidence that El Paso violated its standards of conduct. However, the Commission did not dismiss the allegations that El Paso engaged in market and price manipulation. It set the market power issue for hearing in March before Judge Wagner and ordered him to provide an initial decision within 60 days (see Daily GPI, March 29).

FERC staff also appears to be hot on El Paso’s tracks. In testimony submitted last week before Judge Wagner, FERC staff’s expert witness concluded that El Paso probably exercised market power in the Southern California gas market and drove up gas prices over the past year when pipeline capacity constraints existed. FERC Economist Dr. Jonathan D. Ogur concluded that under certain circumstances El Paso was able to wield market power in the Southern California gas market (see Daily GPI, May 14).

The rise in California natural gas prices is not attributable to El Paso, the company said in its statement yesterday, but is attributable to the fact that demand for gas has far outstripped supply. Evidence presented at the California subcommittee hearings shows that El Paso has consistently utilized its pipeline capacity to ship natural gas to California and has never restricted supply. Constraints on gas infrastructure in the state have limited the supply of gas during a time in which demand has risen dramatically, the company said.

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