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FERC faces tough decision on El Paso.

If nothing else, the density and bewildering technicalities of the arguments tossed around by El Paso and its Southern California opponents at the unusual hearing at the Federal Energy Regulatory Commission (FERC) on Dec. 2 were a warning to anyone contemplating bidding for either of the two vacant commission seats. Deciding for one side or the other will be anything but clear cut.

Pat Wood, Nora Brownell and Bill Massey, the three sitting commissioners, were holding an "en banc" hearing for the first time since 1998 where outside representatives plead their case. In this case, the three were trying to figure out whether FERC Chief Administrative Law Judge Curtis Wagner made the right decision the previous September when he held that El Paso Corp. had conspired with its Merchant affiliate to withhold natural gas from the southern California market for 15 months in 2000-01.

Wagner found El Paso had exercised "market power" conspiring with Merchant to purposely hold back capacity to California as a means of boosting gas prices. Southern California Edison and Pacific Gas & Electric paid higher natural gas prices as a result. Wagner stirred up a political hornet's nest in September when he alleged that El Paso ran segments of its pipeline at less than maximum allowable operating pressure (MAOP) in a concerted effort to hold back gas from a California.

In the days leading up to the Dec. 2 hearing, El Paso widely publicized Wagner's apparent argument that pipelines must operate at MAOP at all times--and could even operate at 10 percent above MAOP--and called it a charge to the interstate pipeline industry to ignore the dictates of safety, Members of Congress wrote to FERC complaining about Wagner's implication, and at least one former top pipeline safety official wrote to FERC, calling Wagner's point of view "incorrect."

That El Paso public relations campaign was on the mind of Kevin Lipson, the Southern California Edison lawyer who told the commissioners at the start of his remarks, "This case is not about the safety of the pipeline grate. The California parties have never advocated that any party operate above MAOP. El Paso has tried mightily to generate a safety issue where none exists."

The hearing was contentious from the start. The California team wanted to talk about an internal memo prepared for El Paso Corp. CEO William Wise to use at a board meeting on Feb. 14, 2000. Parts of that memo had been claimed as confidential by El Paso, and had been whited out in the public record.

William Scherman, an El Paso attorney, pleaded with FERC Chairman Pat wood to clear the hearing room of everyone who hadn't signed a confidentiality agreement so that the remaining inhabitants of the second-floor meeting room could discuss the confidential portions while everyone else waited outside. Scherman said that if Wood then decided that the confidential portions could be made public, El Paso would have no problem with that, Scherman's plan did not fly. All three commissioners decided on the spot to air the confidential portions in the hearing.

But when Frank Lindh, an attorney for PG&E, eventually discussed the memorandum for Wise, which Lindh claimed showed El Paso's intent to drive up prices in California, the memo seemed to pale as a smoking gun. It was more like a water pistol. The memorandum laid out possible business strategies for El Paso, most of which sounded eminently reasonable. Moreover, Lindh made no contention that Wise or anyone else had ever approved any of the items in the memo.

El Paso and the California parties did seem to agree on a couple of basic facts: that El Paso had pipeline capacity to the Southern California border of 3290 MMcf/d and that natural gas prices had increased considerably during the 15-month period in question. But beyond those facts, the two stories diverged.

The California team argued that the El Paso pipeline division had taken the unprecedented step of contracting for one-third of its capacity to Southern California with its affiliate, El Paso Merchant Energy. Merchant then used its dominant position by using only 54 percent of its capacity during the critical June-November 2000 period when Southern California gas prices hit the roof. Other shippers were using 85 percent of theirs, Lipson said. If Merchant had released just 50-100 MMcf of the 348 MMcf/d it was withholding, the price crisis would have been avoided, Lipson argued. The El Paso pipeline division did its part by running four compressor stations an average of between 3-14 percent below MAOP during a 151 day period.

When his turn came, Scherman insist ed that El Paso had not withheld any capacity from California. Rather, he contended that what happened was exactly what FERC expected to happen when it finalized Order 637. "Unprecedented supply and demand conditions in California led to what many have dubbed the perfect storm," Scherman said. "The California parties cannot rely on a non-existent Oliver Stone-like conspiracy to prove their case," In fact, El Paso actually offered to lend gas to the California parties during the crisis.

The reason El Paso Merchant wound up with so much capacity on the El Paso pipeline was because both Southern California Edison and Pacific Gas & Electric had turned back substantial firm capacity they held in 1996 at the behest of the California Public Utility Commission, The CPUC told the gas companies to buy their gas on the spot market instead.

Dan Collins, the senior regulatory counsel for El Paso Corp., came back to the question of the pipeline's 3,290 MMcf/d capacity to Southern California. He noted that Wagner alleged that 696 MMcf was withheld from California purposely. "The judge got the math right, but it stops right there," Collins noted. Breaking down the 696 MMcf, Collins attributed 270 MMcf to the Department of Transportation corrective action El Paso was then operating under, owing to the Carlsbad, NM accident. Another 95 MMcf was maintenance related to the corrective action. To meet an unexpected stone in demand from markets in Arizona and New Mexico, El Paso diverted 221 MMcf there. The last 110 MMcf was capacity that El Paso did make available on its pipeline, but that shippers did not use.
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Title Annotation:Federal Energy Regulatory Commission
Comment:FERC faces tough decision on El Paso.(Federal Energy Regulatory Commission)
Author:Barlas, Stephen
Publication:Pipeline & Gas Journal
Geographic Code:1USA
Date:Jan 1, 2003
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