Charges fly over California gas market power

By Ann de Rouffignac
OGJ Online

HOUSTON, June 5 -- California's natural gas bill was $3.6-$3.8 billion higher than expected from March 2000-March 2001 because El Paso Merchant Energy, a unit of El Paso Corp., exercised market power through its control of space on a sister company's pipeline, Southern California Edison Co. alleged in testimony before the Federal Energy Regulatory Commission.

FERC is conducting hearings into the allegations in response to a complaint filed by the California Public Utilities Commission last year. The PUC claimed the merchant arm of El Paso Corp, Houston, bought and then withheld space on the El Paso Natural Gas interstate pipeline which serves the southern California market driving up gas prices.

"Purchasers of gas at the California border paid significantly greater prices than a competitive level due to EL Paso Merchant's exercise of market power," according to the testimony. El Paso has denied the allegations and some consultants said the company's use of the pipeline was consistent with FERC rules.

In March 2000, El Paso Merchant Energy (EPME) acquired 1.3 bcfd of capacity on the pipeline from its affiliate El Paso Natural Gas (EPNG). Since that time, the price of natural gas including the basis differential, or spread between the price of gas at the California border and the producing basins in the Southwest, rose sharply.

For example, from November 2000-March 2001, the differential averaged $9.77/MMBtu compared to the average maximum tariff on El Paso Natural Gas plus fuel charge of 60¢/MMBtu. This compares to average differentials between Henry Hub and Chicago of 38¢/MMBtu for comparable time periods, said Paul Carpenter, an attorney with the Brattle Group, in testimony on behalf of Southern California Edison, Rosemead, Calif.

El Paso Merchant controls 48% of the interstate pipeline capacity that serves producing basins in the Southwest which supply gas to noncore southern California customers, including electric generators and industrials, Edison said.

Edison estimated its electricity costs for March 2000 through March 2001 were at least $1 billion higher as a "result of the higher natural gas price caused by El Paso Merchant's anticompetitive conduct." It attributed $670-$710 million to higher payments to electric generators resulting from their higher gas costs. Edison said the balance was the result of higher payments to QFs [qualifying facilities or small generators].

Carpenter alleged from March 2000-November 2000, EPME did not use or even nominate all its capacity on the interstate even when it would have been profitable to do so.

"Out of the 180 days between June 1, 2000 and Nov. 30, 2000, El Paso used only 53% of its capacity on EPNG into Southern California Gas Co. This is the equivalent of not flowing 36 bcf of gas into California that should have flowed," Carpenter said.

No capacity takers
The space was offered for sale, but there were no takers despite the huge demand for gas in southern California. Carpenter testified EPME was unsuccessful at selling off the unutilized capacity because it offered the space at "a price or under terms (such as long duration releases) that did not make it attractive to buyers."

Ralph Eads, president, El Paso Energy Group, denied EPME was withholding capacity from the market.

"At times when our capacity was not fully utilized, other firm shippers were not fully utilizing their capacity either," he said.

Eads explained that EPME's capacity was offered for sale at the posted FERC approved price (which is the maximum allowed by FERC) but it wasn't purchased.

"If the demand was so great for this capacity, how come nobody bought it from us?" he said. He also said the interstate pipeline made all of its unused capacity available for sale as interruptible capacity.

"The notion that you can withhold capacity on an interstate is on its face false," he said. Eads explained the nameplate capacity of the El Paso Natural Gas pipeline is 2.5 bcfd, but the effective capacity of the pipeline into California might have been only 2 bcfd on a given occasion because of a pipeline accident, dropping off gas east of California, and the take-away constraints at the California border.

"There were many days on the pipeline when it was full. Even if we nominated 100% of our (EPME) capacity, we were bumped because of demand east of California," said Eads.

At best, EPME could get 75-80% of all its capacity nominated on the pipeline, he said. There is simply not sufficient take-away capacity at the border delivery point Topock for all the interstate capacity coming in at that point, he said.

"With 6.5-7 bcfd of demand and only 5.5 bcfd of gas that can show up, that means �-1 bcfd more demand than supply," he said. "Higher prices will have to ration that."

But Carpenter said his analysis showed Southern California Edison and Pacific Gas & Electric Co.'s intrastate systems had "take-away" capacity that went unutilized.

Consultant Jay Lukens, president of Lukens Energy Group, Houston, said El Paso Merchant's behavior was consistent with FERC rules. "It is the seller's option how they do it. If they post (a price) and don't sell the capacity, the seller has the option of lowering the price but is not obligated to do so," Lukens said.

Under FERC rules, unused space on the interstate pipeline must be sold as interruptible capacity and priced at a FERC-approved tariff. "But the pipeline is not compelled to discount it from the regulated rate," Lukens said. The interruptible service offered by El Paso went mostly unsold.

"El Paso was putting as much gas into California as they could," said Lukens. "The limitation was due to the fully utilized take-away" capacity." There is about 4 bcfd of interstate capacity and only 3 bcfd of take- away, he said.