In his much-awaited initial decision, FERC Chief Administrative Law Judge Curtis Wagner Jr. ruled Tuesday that El Paso Natural Gas engaged in “blatant collusion” by rigging the bidding process for a large block of transportation capacity on its system to favor its merchant-power affiliate. However, he recommended dismissal of the charge that El Paso Merchant Energy Co. illegally exercised market power to drive up prices for natural gas delivered to southern California beginning in mid-2000.

Wagner said what convinced him that El Paso pipeline’s bidding process was tilted towards El Paso Merchant was a transcript of a telephone call between Robin Cox, vice president of El Paso Merchant, and Harvey Rodman of El Paso affiliate, Mojave Pipeline, which markets transportation for both El Paso pipeline and Mojave. Based on that, “it [was] clear to the Chief Judge that a deal was reached during the open season for a term discount that other potential shippers were not aware of.”

California regulators and others had argued that El Paso Merchant ended up the big winner in the February 2000 open season, snaring three contracts for 1.22 Bcf/d of firm capacity on the El Paso pipeline, because it received inside information about a discount interruptible transportation rate on Mojave, while non-affiliate bidders weren’t privy to the same information.

“These telephone transcripts demonstrate blatant collusion on the part of El Paso Merchant and Mojave/El Paso pipeline to keep secret a discount for service on the downstream Mojave system until the open season ended, giving El Paso Merchant an advantage in making its bid for the total 1,220 MMBtu/d offered.”

Despite his “strong urging” during the hearing this summer, Wagner noted that El Paso officials refused to produce Cox and Rodman as witnesses. Even then, the FERC judge called the telephone transcripts “devastating.”

Wagner specifically noted that El Paso pipeline violated two of the Commission’s standards of conduct — one that requires pipeline operating personnel and marketing-affiliate personnel to function independently of each other, and a second that prohibits an interstate pipeline from sharing information solely with its marketing affiliates and not with non-affiliates shippers on its system.

In his ruling, Wagner noted that William Wise, chairman of El Paso Corp., approved El Paso Merchant’s bid for the transportation capacity on El Paso pipeline. “Getting this important evidence from [El Paso Merchant’s] Ralph Eads was a rather difficult job,” he said.

He further pointed to an April 14, 2000 memo from El Paso Merchant President Greg Jenkins to Wise, with a copy sent to John Somerhalder, executive vice president of El Paso’s pipeline group. “The sharing of this document which discusses nearly every aspect of El Paso Merchant’s business, including what was necessary to make a profit and what must happen if it is to make money, indicates clearly that there was no firewall between El Paso Pipeline and El Paso Merchant,” Wagner said.

Interestingly, he seemed to understand the need of large companies, such as El Paso Corp., to “exercise more control over [their] affiliates” in today’s business environment. “In the opinion of the Chief Judge, the officers of parent companies would be derelict in their duties if they did not exercise some degree of supervision and approval over important decisions, particularly in matters with a magnitude as large as that involved in this proceeding.” But, he added, “it must be kept in mind that here there was a dialog between the pipeline affiliates and the marketing affiliate that gave an unfair advantage to the bidding in the open season.”

As for the second allegation of market power, Wagner said he found that while El Paso pipeline and El Paso Merchant had the ability to exercise market power — the capacity to significantly manipulate prices to their advantage — “the record in this case is not at all clear that they in fact exercised market power.” Given this, he recommended to the full Commission that these charges be dismissed.

Even though the “three contracts gave El Paso Merchant additional capacity of 1,220 MMBtu/d and…El Paso Pipeline is one of the largest pipeline companies in the United States, ranking eighth in operating revenue, seventh in peak rate send-out, fourth in miles of transmission pipe, and fourth in number of compression stations in the nation,” Wagner said he “recognizes that size alone is not sufficient to find market power.”

If anything, “the evidence in this case shows that El Paso Pipeline did in fact comply with Order Nos. 637 and 637-A,” which Wagner said signals that the “exercise of market power by the withholding of capacity by an affiliate or any other shipper on a pipeline is prevented.”

The Commission is not required to accept Wagner’s initial decision in the case. It can accept it entirely or in part, or reject it entirely or in part.

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