Two El Paso Corp. subsidiaries, El Paso Natural Gas and El Paso Merchant Energy Co. (EPME), possessed market power — the ability to maintain prices above competitive levels — during the summer of 2000, and violated FERC’s marketing affiliate standards that govern the behavior of interstate pipelines and their affiliates, FERC staff counsel has concluded.

“El Paso pipeline and El Paso Merchant had market power after May 2000 for at least two months when pipeline capacity constraints created a separate relevant geographic market in Southern California,” according to the “proposed findings of fact and ultimate conclusions” filed by the Commission trial staff last Friday. In such cases, the Herfindahl-Herschman Index (HHI) “increases to 2,262, which exceeds the 1,800 threshold” deemed appropriate by FERC and the Federal Trade Commission for competitive markets, staff counsel said. El Paso’s market share also rises to 45%, which is 10% more than what is considered the safe harbor threshold.

The evidence in this case further “demonstrates that [parent] El Paso Corp. has engaged in affiliate abuse and violated the marketing affiliate standards of conduct,” staff counsel concluded. It pointed to the now-infamous Feb. 7 and 9, 2000 telephone conversations to show that the operating employees of EPME, El Paso pipeline and affiliate Mojave pipeline “were not functioning independently” of each other.

The phone conversations between Harvey Rodman of El Paso pipeline and Robin Cox of EPME took place just days before El Paso pipeline began its open season for 1.22 Bcf/d of firm, California-bound transportation capacity on its system, all of which was awarded to EPME.

The focus of the recorded telephone conversations was EPME’s “imminent bid on El Paso pipeline’s capacity offering and the discussions provided [EPME] new general information as to how Mojave would change its discounting practices to provide real economic support for a high, total package bid by [affiliate EPME] on all El Paso pipeline’s open season capacity offering,” FERC counsel noted.

During and before the open season, EPME “was privy to new general information about the restructured long-term tiered…discount” on Mojave to Wheeler Ridge, while potential non-affiliate shippers were not, counsel said. Both El Paso pipeline and Mojave “conferred an undue competitive advantage” on EPME by their actions.

The discount “was significantly different from Mojave’s traditional discounting practice,” counsel noted, adding that it “was designed for 16 months, March 1, 2000 through June 2001, to coincide with the 1.2 Bcf/d El Paso pipeline capacity term.” The three companies — El Paso pipeline, Mojave and EPME — “coalesced to restructure [the] Mojave discount rate practice such that the new long-term tiered discount was inextricably linked to the El Paso pipeline open season capacity,” Commission staff counsel concluded.

As a result, EPME’s risk management group “had an undue competitive advantage of factoring the new Mojave discount into formulating a successful bid for all El Paso pipeline’s open season capacity.”

The El Paso affiliate companies have vociferously denied the market-power and affiliate abuse allegations. In an initial brief submitted last Friday, EPME said the high gas prices in southern California beginning in mid-2000 were due to a “confluence and tightening of supply/demand factors in both the electric and natural gas sectors,” and to contraints that existed on both pipelines delivering gas to California and on pipelines operating within the state (Daily GPI, Aug. 28 ).

FERC Chief Administrative Law Judge Curtis Wagner Jr., who presided over a hearing this summer exploring both charges, is expected to issue an initial decision in early October.

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