FERC yesterday did a complete about-face and set for hearing the allegations that El Paso Natural Gas rigged the bidding process for transportation capacity on its system to favor its merchant-power generation facilities. The decision was a major win for California parties and a disappointing setback for El Paso pipeline and its affiliates.

The Commission took the unprecedented action after it had already cleared El Paso of the charges in late March without holding a fact-finding hearing, ruling then that the pipeline had not violated the standards of conduct prohibiting interstate gas pipelines from showing preference to their affiliates when awarding capacity. Since then the western energy crisis has brought the national spotlight to bear on this case, as well as others before the Federal Energy Regulatory Commission having to do with California energy prices.

“The Commission now believes these [affiliate abuse] allegations raise factual issues that are best resolved in an evidentiary hearing,” yesterday’s order said [RP00-2411-004]. Specifically, it set for hearing the issue of whether El Paso pipeline and its merchant power generators “engaged in affiliate abuse or violated the Affiliate Standards in bidding for or awarding the El Paso [capacity] contracts, including the transportation discount granted by Mojave [Pipeline” to the affiliates.

FERC directed Chief Administrative Law Judge Curtis L. Wagner Jr. to add the affiliate abuse issues to the ongoing hearing at the agency, which is exploring whether El Paso’s merchant power affiliates — El Paso Merchant Energy Gas L.P. and El Paso Merchant Energy Co. — have market power and used it to drive up gas prices in Southern California since June 2000. The two affiliates had contracted for 1.22 Bcf/d of firm capacity on El Paso pipeline for 15 months, starting March 1, 2000 and ending May 31, 2001.

“The Commission grants [Wagner] the discretion to restructure the hearing proceedings to accept additional testimony regarding these [affiliate-abuse] allegations,” the order noted. It directed Wagner to report to FERC within 10 days on a revised hearing schedule.

El Paso was not surprised by the decision. “The order was entirely predictable. The judge asked for more time and more facts and direction on fact-finding. Clearly, FERC had to grant that,” said Norman Dunn, spokeswoman for parent company El Paso Corp. “The bottom line, however, is the facts have not changed” from the March 26 decision when FERC cleared El Paso of affiliate charges. “We are very confident FERC will find the same results the second time.”

FERC reconsidered its earlier decision after Wagner sought guidance from the Commission as to whether he should re-open the affiliate-abuse issues, suggesting that evidence had emerged during the current hearing that warranted a review of the charges. It also was in response to the requests for rehearing of the Commission’s March 26 order by the California Public Utilities Commission, Pacific Gas and Electric and Southern California Edison.

Although the March order exonerated El Paso and affiliates of affiliate-abuse charges, the Commission said at the time it was unable to decide the issue of whether the merchant power affiliates had market power, or the ability to manipulate gas prices at the California border in 2000, so it set that issue for hearing before Wagner. The hearing has been underway for more than four weeks at FERC.

In separate concurring opinions Chairman Curt Hebert and new Commissioner Pat Wood agreed that it was important to develop a full factual record before issuing a decision on the affiliate abuse charges. Wood said it was critical that FERC be seen as “a watchful and vigilant partner” with California regulators, which brought the original complaint over a year ago. Wood noted that when facts are in dispute, a hearing before an ALJ is warranted.

In their rehearing bid, El Paso pipeline and its merchant affiliates asked the Commission to dismiss both the affiliate-abuse and market-power charges against them, but FERC flatly denied their request. “Absent evidence of an abuse of discretion, which El Paso pipeline and El Paso Merchant have not shown on rehearing, the Commission’s decision to hold a trial-type hearing is conclusive.”

The Commission decided to “defer consideration” of whether Judge Wagner can require El Paso Merchant to “disgorge all past profits obtained during periods” if the company is found to have exercised market power. “The Commission views it as premature to address the subject of remedies unless the hearing demonstrates violations by El Paso pipeline and El Paso Merchant with respect to the issues set for hearing.”

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