An “outraged” El Paso Natural Gas and El Paso Merchant Energy Co. called on FERC last week to short-circuit an attempt by its Office of General Counsel’s Market Oversight and Enforcement Section (MOE) to expand an investigation into whether the two affiliates conspired last winter to artificially drive up prices for natural gas delivered to the Southern California border.

El Paso Merchant attorney William Scherman called the FERC enforcement section’s request for a “more complete investigation” of alleged capacity withholding and pricing violations an “abuse of process,” given that the issues already had been reviewed during a hearing last summer and were found to have no merit. This attempt to re-try the issues “has never, ever happened before. It’s unsanctioned [under] FERC rules.” If MOE “had not been so sloppy” in its review of the hearing record, “it would have seen that the judge [already] addressed this issue,” he told NGI.

In a formal motion filed at FERC last Thursday, the two El Paso affiliates urged the Commission to strike MOE’s comments and its bid for an expanded investigation on the basis that it would be violation of the companies’ due process rights. The affiliates insist they have been “prejudiced” by MOE’s comments, and believe that the case will be “much more difficult” for FERC to decide as a result.

The request by MOE comes three weeks after Chief Administrative Law Judge Curtis Wagner Jr. recommended the dismissal of charges that El Paso pipeline and El Paso Merchant illegally exercised market power (withheld capacity) to drive up prices for gas transported to the border beginning in mid-2000 [RP00-241]. Wagner found merit, however, to the charge that El Paso rigged its capacity bidding process to favor El Paso Merchant, ruling that the pipeline engaged in “blatant collusion.”

Specifically, MOE is seeking the go-ahead to further explore whether the El Paso pipeline violated the Commission’s open-access regulations by withholding interruptible transportation (IT) service last winter from customers in an attempt to maintain “upward pressure” on prices for gas delivered to the California border.

MOE said the issue it raises — whether El Paso made its unused capacity available to shippers on an IT basis, as is required by FERC’s open-access rule — was neither the focus of the hearing last summer nor Wagner’s initial decision that was issued last month (see NGI, Oct. 15).

But the El Paso affiliates countered that this was the “central issue” in the hearing. In fact, Wagner ruled that it “is undisputed in this case that El Paso pipeline posted all capacity not scheduled by its firm shippers,” they told the Commission.

By “publicly proclaiming” that Wagner may have erred in his decision to dismiss the withholding charges, “MOE is attempting to inappropriately influence the decision-making process in this already high-profile case,” the El Paso affiliates charged. In fact, they went as far as to accuse MOE of trying to do an “end-run around” the Commission’s adjudicatory process.

Nevertheless, MOE said its review of the public portion of the hearing record suggested that El Paso may have committed “potential violations” of FERC’s Part 284 open-access regulations by withholding IT capacity. But it conceded there may be “other potential explanations” for the existence of unused capacity on the pipeline. “We recommend a more complete investigation of the reasons why capacity went unused on the pipeline at times during the period [of] November 2000 through March 2001.”

It suggested that the Commission either direct MOE to conduct a further probe, remand the decision to Judge Wagner for consideration or use other procedures. Although “this step is unusual, it is not unprecedented for the Commission’s enforcement staff to inform the Commission of its views regarding potential violations concerning a pending proceeding,” MOE said.

MOE’s claim that its action was unusual is a “major understatement,” the El Paso affiliates said. “To the best of El Paso’s and Merchant Energy’s knowledge, since the creation of the Commission’s Enforcement Office in December 1977, the Commission has never interrupted, postponed or suspended an adjudicated case — in particular, a case involving extensive discovery and a voluminous record — in order to institute a preliminary investigation probing the very facts and issues that were tried before an administrative law judge and resolved in the initial decision.”

Wagner’s initial decision still has not been forwarded to the full Commission, which has the option to accept or reject the ruling in full or in part. Parties to the case are in the process of preparing briefs on exceptions, which are due at FERC on Nov. 15. Briefs opposing exceptions are then due on Dec. 12.

Meanwhile, “the rules under which the complaint is to be judged have become a moving target, El Paso’s and Merchant Energy’s due process rights and reputation have been harmed, and they have been put in the untenable position of now trying to prove a negative. MOE’s improper comments should be disregarded and stricken from the record in this proceeding,” El Paso attorneys told FERC.

But MOE believes the hearing record points up the need for further inquiry. “Record evidence disclosed that [El Paso’s] capacity was not fully used at times during the November 2000 through March 2001 period, which coincided with periods of high gas prices in California. The record further indicates that in the five months ending in March 2001, El Paso Merchant Energy Co. undernominated its contract demand for reasons unrelated to pipeline maintenance, in a pattern consistent with strategic behavior to withhold capacity to increase commodity prices at the SoCal border.

“The record also suggests that requests for interruptible service that became available as a result of Merchant’s undernominations, by shippers to the pipeline, went unfilled during this period. If [El Paso] did not make available unused pipeline capacity on an interruptible basis, Merchant’s undernominations [then] could have put upward pressure on prices at the SoCal border,” MOE said. It stressed that two players were necessary to drive up prices. “Withholding by a firm shipper [Merchant, for example] is only a successful strategy if the pipeline does not provide interruptible service that would compensate for the reduction in firm nominations.”

However, MOE noted the record at this point “is inadequate to determine the reasons for the apparent unused capacity [on El Paso] since this was not the focus of the parties at the hearing” last summer.

“It is possible that problems in the scheduling process, or other technical reasons, made it difficult [for shippers] to acquire interruptible transportation. Because even small amounts of unused capacity can affect prices during periods of supply-demand imbalance, there is a strong public interest in determining the existence and reasons for unused pipeline capacity during such periods, so that the Commission can prospectively eliminate such barriers to open-access transportation.”

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