A Washington D.C. attorney for El Paso Merchant Energy Co. accused Southern California Edison of “cherry-picking” historical gas price data and comparing it to more recent prices for natural gas sold in California in an effort to prove that the merchant power generator illegally manipulated prices in the state during 2000.

As the FERC hearing into whether El Paso Natural Gas and its power affiliates — El Paso Merchant-Gas LP and El Paso Merchant Energy — manipulated gas prices in the state entered its fourth week on Tuesday, Washington attorney Douglas Robinson spent the entire day picking apart the Edison-commissioned study by The Brattle Group that concluded El Paso Merchant exercised market power in the March 2000-March 2001 period, withholding firm transportation capacity from the market and illegally driving up prices at the Southern California border.

As a result of El Paso Merchant’s alleged actions, gas buyers at the California border were forced to pay “significantly” more — between $3.6 billion and $3.8 billion more — for natural gas during this year-long period, the study said. SoCal Edison and other critics contend that El Paso Merchant was in a position to manipulate gas prices at the border, given that it held 1.22 Bcf/d of the transportation capacity on affiliate pipeline El Paso Natural Gas as well as transportation capacity on Transwestern Pipeline.

Chief Administrative Law Judge Curtis L. Wagner Jr. Tuesday announced that an initial decision on the price-manipulation charge will be issued Sept. 4, having just received another extension from the Commission. Also, it was indicated that the hearing, which was expected to wrap up this week, could spill over into a fifth week.

In its attempt to prove price manipulation, the Brattle study showed that gas prices and basis differentials in 1994-1997 (control period) were markedly lower than those in 2000-2001 under similar demand levels. But El Paso Merchant witness, economist Dr. John R. Morris, testified that comparing prices in the two periods was like comparing “apples to oranges,” given the differences in the demand and supply conditions that existed.

“…[I]f you would compare 1994 to the year 2000, up to about November 2000, you would find that there was over 200 to 250 Bcf [more] gas consumed in the year 2000” in California, said Morris, vice president of Economists Inc. in Washington. The uptick in gas demand began around May 2000 and continued through November of that year, with daily increases ranging from 700 MMcf to 1.4 Bcf, he noted.

“Beginning in May 2000, consumption in the state as a whole [was] greater than in any comparable month during the [1994-1997] control period,” Morris said.

Further, he noted supply conditions in California were dissimilar for the two periods. In November 1994, gas prices at Kingsgate, BC, were 10 cents less than prices at the San Juan Basin, while Kingsgate prices were $3.76 more than San Juan prices in November 2000. “This indicates to me that clearly supply conditions were not comparable” for the two periods, making accurate price comparisons impossible.

Morris also defined the “relevant market” at issue as being the entire state of California, which was in stark contrast to the Brattle study’s market parameters — Southern California. This is a key issue for El Paso Merchant Energy because the larger the market, the smaller it’s market share will be and the lesser chance it has to exert market power and manipulate natural gas prices in the state.

Assuming core capacity is included, Morris estimated El Paso Merchant Energy has a 21% share of the relevant (state-wide) capacity market, which he said was “well below” the safe harbor of 35%. This, he said, gives it a Herfindahl-Herschman Index (HHI) of 934, which he noted is “substantially below” his own 1,800 threshold measurement for market power.

But the Brattle study countered that El Paso Merchant controls about 35% of the transportation capacity on El Paso and Transwestern in the relevant (southern California) market, giving it an HHI of 2,155. “This HHI indicates that the market is highly concentrated and at risk for competitive problems,” the study said. If the capacity dedicated to Southern California Gas and Pacific Gas and Electric to serve core (residential) customers is excluded, it estimated El Paso Merchant’s market share shoots up to 48% of the Southwest capacity available to serve non-core customers. FERC Staff basically agreed with that assessment in its own testimony, concluding that under certain conditions El Paso’s market share rises to 45% and its HHI reaches 2,262, exceeding levels deemed appropriate by FERC, the Federal Trade Commission and the Justice Department (see Daily GPI, May 14).

Morris, however, said the close correlation in prices at the SoCal-Topock delivery point and PG&E citygate during most of 2000 was further evidence that California was a single, state-wide market, and not divided into two markets — southern and northern — as the Brattle study has claimed. “All those price correlations are all very high” for the two points for much of 2000, he noted. “And from the price data themselves, you could not distinguish one location [in California] from the other.”

He noted that the PG&E citygate and SoCal-Topock border price had a correlation of 0.9130, which was “very high,” during the March-November 2000 period. “It’s a strong indication that the two locations would be in the same market,” Morris said during the hearing.

After November, Morris said there were two price spikes on the SoCal Gas system in February and March of this year that “[didn’t] correlate well with what happens in northern California,” but he noted that the spikes weren’t of a long enough duration to suggest the existence of two markets within the state.

The attacks against El Paso and its power affiliates weren’t just limited to the FERC hearing room. CPUC President Loretta Lynch accused FERC of doing “absolutely nothing” with respect to the CPUC’s price-manipulation complaint against El Paso, which was filed more than a year ago and launched the current hearing into the pipeline and its affiliates. “In fact, more than that, they sat on the complaint” for over a year, she said.

Lynch made the comment during a Frontline/New York Times presentation on the California energy crisis, which was broadcast on PBS Tuesday. El Paso top executives declined to be interviewed for the program, it said.

A Times reporter said he had obtained El Paso documents that showed the company was intentionally trying to widen the physical spread. When asked what this suggested to him, FERC’s newest Commissioner Pat Wood said, “it says there’s probably something else going on there that ain’t…supposed to be going on there.”

Wood also conceded that he was confused by California gas prices. “I don’t understand why $5 gas and $1 transportation equal [a] $19 product.”

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