El Paso and its marketing affiliate El Paso Merchant Energystill face charges of market manipulation through pipeline capacity”hoarding” in a case pending before FERC despite the pipelinecompany’s recent decision to divvy up 1.2 Bcf/d of firm capacityheld by its affiliate among 30 different marketers. Merchant Energyrelinquished all but 277 MMcf/d of firm space on its affiliatedpipeline (see Daily GPI, March 2).

There’s no denying that a scarcity of pipeline capacity hasdeveloped into California, El Paso told FERC recently in answer tocomments from the California Public Utility Commission. But,contrary to the accusations of state regulators, SouthernCalifornia Edison and PG&E Corp., El Paso’s capacity agreementwith Merchant Energy had nothing to do with it nor with the currentgas supply shortage.

El Paso said its accusers would be more accurate pointing thefinger at themselves for the current market situation. They are theones who have neglected in-state pipeline construction and turnedback more than 1.7 Bcf/d of firm capacity on El Paso in the 1990s.

They simply ignored the fact that demand growth in the statesurpassed available capacity on both the interstate and intrastatesystems, the pipeline said. “A brief review of the four deliverypoints on El Paso’s system at the California-Arizona border —SoCal-Topock, Mojave-Topock, PG&E-Topock and Ehrenberg —shows that El Paso is bumping up against its interconnectcapabilities,” El Paso said. There is a significant lack ofcapacity downstream of those delivery points, as the EnergyInformation Administration and FERC’s own staff noted recently.

SoCal-Topock (which has a capacity of 540 MMcf/d) has awell-established history of overnominations and virtually fullutilization. “As a result, to put it mildly, withholding ofcapacity is not a problem at SoCal-Topock,” El Paso said.

Similarly at Ehrenberg, El Paso’s other delivery point into theSoCal system, the pipe has been running full. December throughputthere was 1,183 MMcf/d compared to total capacity of 1,210. AtMojave, throughput was 244 MMcf/d in December compared with a totalcapacity of 400 MMcf/d, but Transwestern uses some of that spaceand there is limited capacity at Mojave’s Wheeler Ridge deliverypoint into SoCal Gas where Mojave competes with PG&E, KernRiver and in-state production for access to SoCal Gas’ market.

Since October 2000, throughput at PG&E-Topock has averagedmore than 650 MMcf/d out of a total capacity of 1,140 MMcf/d, butthe lack of full utilization there has resulted from lower demandin Northern California and competition with Transwestern, KernRiver and other deliveries into PG&E’s system, El Paso said.PG&E-Topock also is constrained on the LDC side.

These bottlenecks take “all the air” out of arguments thatcapacity hoarding is driving up the basis differential, El Pasotold FERC, adding that there is “no basis for employing thedraconian remedy of undoing legitimate contractual rights…,” asEl Paso’s accusers have proposed.

El Paso also noted Merchant Energy could not hoard El Paso’spipeline capacity to drive up prices because of FERC regulationsgoverning interruptible transportation. “Assuming capacity isavailable for [interruptible] service, El Paso is required totransport gas for any party willing to pay the Commission-approvedfull [just and reasonable] rate.”

The utilities and state regulators wouldn’t even be making theseaccusations, El Paso said, had they not so completely misjudged themarket in the early 1990s and relinquished a total of 1.74 Bcf/d ofcapacity on the El Paso system. Now they are seeking to have theCommission come and “rescue them from their mistaken decisions.” ElPaso noted the utilities could have reacquired the capacity duringan open season simply by submitting a bid of 25% of El Paso’smaximum rate. That would have protected them from the high basisdifferential experienced recently.

They now want the Commission to punish the market participantthat were “willing to take the financial risk that value of thepipeline capacity would increase,” El Paso said.

The value of interstate capacity is likely to decrease soon, ElPaso noted, because of the many pipeline expansion projectsproposed by Kern River, PG&E GT-NW, Questar’s Southern Trails,Transwestern and El Paso itself. However, pipeline constructioninside the state is governed by the CPUC. “It is unclear whetherthe CPUC will take the actions necessary to fix the problem thathas developed on its watch,” El Paso told FERC.

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