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FERC judge says El Paso didn’t drive up gas prices

Ann de Rouffignac
OGJ Online

HOUSTON, Oct. 9, 2001 — El Paso Corp. didn’t drive up California natural gas prices on its pipelines unfairly last year, although affiliates engaged in “blatant collusion” in sharing shipping information, a Federal Energy Regulatory Commission judge ruled late Tuesday.

“There are clear violations of the current standards of conduct in this case,” Judge Curtis Wagner said in his initial decision. But, he added, “The record in this case is not at all clear that they, in fact, exercised market power.” The full commission will rule later.

El Paso Corp. spokeswoman Norma Dunn said the Houston company was “gratified” the judge found no price manipulation. However, Dunn said El Paso did not agree that the company “abused those standards.

“El Paso is organized and structured that we obey all FERC standards,” Dunn said. “After the commission rules, you can expect appeals from one side or the other.”

The decision came 1-1/2 years after the California Public Utilities Commission (PUC) filed the original complaint. The PUC alleged contracts between El Paso Natural Gas Co., the FERC-regulated interstate pipeline, and the unregulated merchant unit, El Paso Merchant Energy, raised issues of affiliate abuse and an anticompetitive impact on the delivered price of gas that, in turn, affected the wholesale electric market in California.

Wagner concluded El Paso exceeded the legal standard for market power. But he found the record in the case did not support the use of that power to influence prices because, in part, capacity was not withheld. El Paso’s pipeline was full or virtually full during the entire period the price of natural gas at the California border increased, he said.

Also, El Paso Merchant hedged some of its future price risk under its contracts with El Paso’s pipeline by making forward financial sales at the California border. El Paso argued that if it possessed market power it would not have needed to hedge against possible downside price risks because it could have guaranteed prices above competitive levels. The judge agreed.

While El Paso Merchant did hedge 50% of its capacity, Wagner said the merchant unit made “tremendous profits”, $184 million, off the other 50% of capacity that wasn’t hedged.

Wagner said El Paso violated two standards of conduct, including:

— Standard of Conduct F requires a pipeline that provides marketing information to an affiliate must contemporaneously provide that information to all other potential shippers. Also, pipeline and affiliate personnel must function independently and communications must be limited to information regarding a transportation request or service.

— Standard of Conduct G provides that the pipeline must require operating personnel of its marketing affiliate to function independently of each other.

The judge said evidence obtained from El Paso by the PUC demonstrated “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 giving El Paso Merchant an advantage in making its bid.”

A transcript of a telephone call detailing the alleged collusion between certain personnel of the two El Paso companies was included in the judge’s written decision.

“El Paso Corporation, El Paso Pipeline and El Paso Merchant are guilty of affiliate abuse and have violated commission standards,” he concluded. The parties will have 30 days to submit briefs.