FERC Judge Finds El Paso Withheld Pipeline Capacity to California
Mon Sep 23, 3:45 PM ET
story.news.yahoo.com
By Campion Walsh
Dow Jones Newswires
WASHINGTON -- Shares of El Paso Corp. (NYSE:
EP - News) sank Monday afternoon after a Federal
Energy Regulatory Commission ( news - web sites)
judge ruled the company withheld natural- gas
pipeline capacity from California customers and
should pay penalties.
Administrative Law Judge Curtis Wagner said El
Paso's interstate gas-pipeline unit "withheld
extremely large amounts of capacity that it could
have flowed to its California delivery points," thereby
violating its certificate and settlement-agreement
obligations.
The judge said El Paso's actions constrained gas supplies to the California
border during the state's 2000-2001 energy shortage, raising price premiums to
gas deliveries in other regions.
In a 23-page ruling, Judge Wagner said El Paso's pipeline unit used "market
power by withholding substantial volumes of capacity to its California delivery
points, which tightened the supply and broadened the basis differential." Market
power is a regulatory term for the ability of a company to influence prices.
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The judge recommended penalties against El Paso Natural Gas Co. and its El
Paso Merchant Energy Gas LP and El Paso Merchant Energy Co. affiliates for
violation of FERC's standards of conduct for pipelines with marketing affiliates.
He also recommended penalties for El Paso Natural gas for "unlawful exercise
of market power."
At 4 p.m. EDT on the New York Stock Exchange ( news - web sites), shares of
El Paso Corp. were down $4.18, or 36%, at $7.49 on volume of 50 million
shares. The stock earlier set a 52-week low of $6.75.
Chairman and Chief Executive William A. Wise said in a statement he was
disappointed with the decision. "Given the critical safety and deliverability
concerns associated with operating a natural-gas pipeline, it is inappropriate
and without precedent to second-guess a pipeline's day-to-day operations," he
added.
El Paso owns and operates the largest interstate gas pipeline to California,
carrying gas from producing regions in Texas, Oklahoma and New Mexico to
the California-Arizona border.
The company had a certified capacity during the 2000-2001 period to deliver
about 3.3 billion cubic feet a day to California's border, and it was under
obligation to make the full capacity available, the judge said.
"Since the average flow during the relevant period was only 2,594 million cubic
feet a day, there was withholding of 696 million cubic feet a day of capacity to
the California delivery points," according to Judge Wagner's ruling.
He said 210 million cubic feet a day of the capacity was withheld because the
pipeline wasn't operating at its maximum capacity and another 35 million cubic
feet a day was withheld because of nonessential maintenance.
The case has evolved from a California Public Utilities Commission ( news - web
sites) complaint filed April 4, 2000, that El Paso's pipeline and marketing
affiliates may have manipulated California prices through three pipeline
contracts for 1.2 billion cubic feet a day.
The California-Arizona border price for gas soared to more than $50 per million
British thermal units in December 2000, from less than $6 per million British
thermal units a month earlier, even as prices in Gulf Coast producing areas
remained below $10 per million British thermal units. (A British thermal unit is a
meausure of heat energy).
In March 2001, FERC initially found El Paso's pipeline and marketing affiliates
hadn't violated FERC standards and the record was incomplete on the issue of
market-power abuse. It called for further evidence on the latter issue.
In early October, Judge Wagner ruled to the contrary that the El Paso
subsidiaries were guilty of affiliate abuses, while market-power abuse
allegations should be dismissed. But later that month, FERC's market oversight
staff found evidence of unused pipeline capacity from November 2000 through
March 2001.
With Monday's ruling, Judge Wagner changed his opinion on market-power
issues as a result of new evidence that "El Paso Pipeline failed to post and
make available at least 345 million cubic feet a day of available capacity at its
California delivery points."
His ruling will be reviewed by FERC for a final opinion, El Paso Corp. said. The
company added it will submit briefs to the full commission, asking it to reject
Judge Wagner's finding.
"The question is will FERC act in a timely manner on the judge's finding?" said
Steven Maviglio, spokesman for California Gov. Gray Davis ( news - web sites).
"FERC's found evidence of market manipulation before but hasn't done squat."
California authorities claim El Paso's actions caused $3.3 billion in damages,
not including the effect of high natural-gas prices on electricity prices at
gas-fired power plants.
In an interim report on the West Coast energy shortage, FERC staff said they
were considering changing their criteria for potential refunds to the state
because gas prices may have been manipulated.
Parties to the El Paso case will have 30 days to submit to FERC any
objections they have to the judge's findings and 20 days after that to respond to
others' submissions. As well as deciding whether to accept Judge Wagner's
findings, commissioners could decide on the amount of penalties themselves or
refer the issue to another administrative law judge.
"This is a complicated case," FERC spokesman Bryan Lee said. "The
commission's aware of the interests of all the parties involved as well as Wall
Street and will act as expeditiously as possible."
Judge Wagner's ruling details what he saw as the El Paso pipeline subsidiary's
mismanagement and apparent consideration of deliberate manipulation of
pipelines and related facilities. He cited a June 22, 2000, white paper by El
Paso Pipeline Vice President Al Clark, indicating company officials were
considering diverting gas deliveries away from California. El Paso Pipeline
President Patricia Shelton testified Mr. Clark's white-paper proposals were
never approved or acted on.
Judge Wagner also faults El Paso Corp. for "consciously looking to expand the
east-of-California market and markets in Mexico when it did not have sufficient
capacity to meet its certified obligation to California" and failing to advise
California customers they could find additional capacity at an alternate delivery
point.
El Paso officials have argued that supply curtailments at its delivery points on
California border were the result of increased demand east of California, reduced
line pressure from fluctuating power generation demand and restrictions
imposed by regulators after an Aug. 19, 2000, pipeline explosion near Carlsbad,
N.M.
In its response to Judge Wagner's ruling, the company said it will argue to
FERC's commissioners that the finding on unused pipeline capacity "should be
rejected in light of the evidence, the law, and sound public policy." The
company said it operated its system at the maximum available capacity to
California.
-By Campion Walsh, Dow Jones Newswires; 202-862-9291; Campion.Walsh@
dowjones.com
(Jessica Berthold in Los Angeles contributed to this story)
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