FERC last week cleared El Paso Natural Gas of charges that it rigged the bidding for capacity on its system during an open season in February 2000 to favor its affiliates El Paso Merchant Energy Gas L.P. and El Paso Merchant Energy Co., but allegations that the El Paso companies engaged in market and price manipulation weren’t as readily dismissed.

Critics alleged the two affiliates ended up the big winners in the open season, snaring three contracts for 1.22 Bcf/d of firm capacity on El Paso to the California border, because they received inside information on a discount transportation rate. But in the order on complaint, the Commission said it found “no merit in the allegations that the bidding process for the three blocks of capacity was skewed to favor [the] El Paso Merchant [companies], and that El Paso Merchant possessed certain information concerning a discount that was not available to other bidders.”

Moreover, FERC said there was no evidence that El Paso or its affiliates violated the standards of conduct regulating the behavior between interstate natural gas pipelines and their marketing affiliates. It further denied a request for summary disposition by the California Public Utilities Commission (CPUC) to abrogate the capacity contracts between El Paso and its affiliates. The contracts are due to expire on May 31 of this year.

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

The Commission said it found the “current record incomplete” on the market-power issue. The CPUC and other critics argued that the El Paso affiliates’ acquisition of such an “excessive volume of capacity” — about one-third of the capacity on El Paso pipeline — was proof enough that they intended to manipulate the market and drive up gas prices in the California market, and as such its contracts should be abrogated.

But FERC didn’t agree. The “fact that El Paso Merchant controls a large volume of capacity does not, in and of itself, render the El Paso contracts unjust, unreasonable or unduly discriminatory.”

El Paso Corp., parent of the El Paso companies, hailed the Commission order as a major victory last week, and indicated it expects to prevail on the market-power claims as well. “We are confident that the FERC will conclude that El Paso has not engaged in any improper conduct,” said El Paso Chairman William A. Wise.

Last week’s Commission decision was in response to a Section 5 complaint brought last year by the CPUC, which accused El Paso of showing preference to its affiliates during the bidding phase (See NGI, April 10). Specifically, state regulators claimed the affiliates were given information about discounted transportation rates on El Paso’s sister pipeline, Mojave Pipeline, during the bidding process, while non-affiliate bidders weren’t privvy to it. This information had a direct bearing on the value of the capacity that was up for bid, according to the CPUC. The California agency further accused the affiliates of hoarding capacity to manipulate gas prices in California.

In last Wednesday’s order, the Commission said it found “no evidence that El Paso Merchant received any information [on discount rates or other matters], in violation of Standard of Conduct F, related to the transportation of its gas that was not available to other potential shippers” on El Paso. “Further, there is no evidence that El Paso pipeline’s bidding process was improper. Allegations that it was skewed in favor [of] El Paso Merchant because El Paso pipeline knew that only its affiliate would be willing to bid for all the capacity are unsupported.”

Moreover, FERC said it saw no violations of its requirements for posting affiliate transactions involving discounted transportation. It noted that Commission standards required Mojave to post the affiliate discount information only when the gas under the contracts between El Paso and its affiliates began to flow, which was March 1, 2000. Mojave had posted the discount on Feb. 18, the order noted.

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

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

She noted a study presented by Southern California Edison (the Brattle Study) found that El Paso Merchant’s HHI “is at a level that raises our concerns about market power.” In addition, it concluded that the basis differential between the producing basins and California “[has] skyrocketed at least due in part to market power.” However, the FERC order noted the study had two shortcomings — it only covered the period from March 2000 to July 2000, and it did not address other factors that may have affected natural gas prices in California. Also, El Paso pipeline and the El Paso Merchant companies offered competing studies, which challenged the findings of the Brattle study, the order said.

“Because the record contains these conflicting market power studies, I support setting the issue of market power and withholding [of capacity] for hearing,” Breathitt noted. Chairman Curt Hebert Jr. refused to make any comment on the complaint order, saying he would wait until the ALJ’s initial decision is in.

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