FERC yesterday cleared El Paso Natural Gas of charges that itrigged the bidding for capacity on its system during an open seasonin February 2000 to favor its affiliates El Paso Merchant EnergyGas L.P. and El Paso Merchant Energy Co. The charges arose when thetwo affiliates ended up the big winners, snaring contracts for 1.22Bcf of firm capacity to the California border – about one-third ofthe capacity on the pipeline.

In an order on complaint, the Commission said it found therewere “no violations” by El Paso or its affiliates of the standardsof conduct regulating the behavior between interstate natural gaspipelines and their marketing affiliates. It further denied arequest for summary disposition by the California Public UtilityCommission (CPUC) to abrogate the capacity contracts between ElPaso and its affiliates. The contracts are due to expire on May 31of this year.

But charges that the El Paso affiliates may have exercisedmarket power to drive up natural gas prices at the Californiaborder were not dismissed. Rather, the Commission set the issue forhearing before an administrative law judge (ALJ), and ordered theALJ to provide an initial decision within 60 days [RP00-341].

The decision was in response to a Section 5 complaint broughtlast year by the CPUC, which accused El Paso of showing preferenceto its affiliates during the bidding phase. Specifically, stateregulators claimed the affiliates were given information aboutdiscounted transportation rates on El Paso’s sister pipeline,Mojave Pipeline, during the bidding process, while non-affiliatebidders weren’t. The CPUC further accused the affiliates ofhoarding capacity to manipulate gas prices in California.

In Wednesday’s order, the Commission said it “finds no evidencethat El Paso Merchant received any information [on discount ratesor otherwise], in violation of Standard of Conduct F, related tothe transportation of its gas that was not available to otherpotential shippers” on El Paso. “Further, there is no evidence thatEl Paso pipeline’s bidding process was improper. Allegations thatit was skewed in favor [of] El Paso Merchant because El Pasopipeline knew that only its affiliate would be willing to bid forall the capacity are unsupported.”

Moreover, FERC said it could not find any violation of itsrequirements for posting affiliate transactions involvingdiscounted transportation. It noted that Commission standardsrequired Mojave to post the affiliate discount information onlywhen the gas under the contracts between El Paso and its affiliatesbegan to flow, which was March 1, 2000. Mojave had posted theinformation in mid-February, the order noted.

Commissioner William Massey said he went along with the FERCmajority’s decision “in the spirit of compromise,” but he wouldhave preferred to have taken a tougher position. “If I were czar, Iwould have set all [the] issues for hearing,” he noted during theCommission’s regular meeting yesterday.

Commissioner Linda Breathitt backed FERC’s action, saying shebelieved it was “prudent and necessary” to explore manipulations inthe price spreads between the Southwest producing basins and theCalifornia border. “…I am very concerned about the nexus betweenthe increase in natural gas prices over the last year and the highcosts of electric generation into California.”

She noted a study presented by Southern California Edison foundthat El Paso Merchant’s HHI “is at a level that raises our concernsabout market power.” In addition, it concluded that the basisdifferential between the producing basins and California “haveskyrocketed at least due in part to market power.” But a competingstudy, she said, came to very different conclusions on the issue.

“Because the record contains these conflicting market powerstudies, I support setting the issue of market power andwithholding [of capacity] for hearing.”

Chairman Curt Hebert Jr. refused to make any comment on thecomplaint order, saying he would wait until the ALJ’s initialdecision is in.

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