Leslie asked me to forward this.  Summary of FERC staff testimony is in red.

NGI's Daily Gas Price Index 
published : May 14, 2001
FERC Staff Finds Market Power Concerns in El Paso Case 
El Paso Natural Gas and El Paso Merchant Energy probably exercised market 
power in the Southern California gas market and drove up gas prices over the 
past year when pipeline capacity constraints existed, FERC staff concluded 
last week in testimony before Chief Administrative Law Judge Curtis Wagner 
Jr. 
At the same time Southern California Edison told FERC that El Paso caused a 
$3.7 billion increase in gas costs in California from March 2000 to March 
2001 by withholding capacity from the market and driving up the basis 
differentials between supply basins and California. Edison based its 
testimony on analysis by the Brattle Group. 
Meanwhile, El Paso countered with its own data arsenal and army of 
consultants. El Paso said the price increases were caused by unprecedented 
demand and inadequate supply infrastructure. Harvard University economics 
professor Joseph Kalt said on behalf of El Paso that the exorbitant gas 
prices were the result of a combination of supply and demand factors related 
to the electricity market and ultimately caused by decades of bad public 
policy decisions rather than El Paso's market power in the Southwest. 
FERC set the market power issue for hearing in March before Judge Wagner and 
ordered him to provide an initial decision within 60 days (see Daily GPI, 
March 29). The Commission cleared El Paso of charges that it rigged the 
bidding for capacity on its system during an open season in February 2000 to 
favor its affiliates. Critics alleged El Paso Merchant Energy Gas L.P. and El 
Paso Merchant Energy Co. ended up the big winners in the open season, snaring 
three contracts for 1.22 Bcf/d of firm capacity on El Paso to the California 
border, because they received inside information on a discount transportation 
rate. But in the order on complaint, the Commission said it found "no merit 
in the allegations." Moreover, it said there was no evidence that El Paso 
violated its standards of conduct. However, the allegations that El Paso 
engaged in market and price manipulation were not dismissed. 
In his testimony last week, FERC economist Dr. Jonathan D. Ogur concluded 
that under certain circumstances El Paso was able to wield market power in 
the Southern California gas market. Its market position as measured by the 
Herfindahl-Herschman Index (HHI) exceeded levels deemed appropriate by FERC, 
the Federal Trade Commission and the Justice Department, he said. 
When the state is considered as a single market, El Paso's market 
concentration and market share are "both within the safe harbor," he said. 
However, when there are capacity constraints in Southern California, as there 
were last summer and winter, and when El Paso's supplies include both firm 
and "nearly firm" gas, the HHI increases to 2,262, said Ogur. "This exceeds 
the 1,800 threshold for concern that sellers may possess market power. El 
Paso's market share rises to 45%, which exceeds the 35% threshold. 
"When pipeline constraints separate Southern California from Northern 
California, market concentration may be outside the safe harbor and El Paso's 
market share may be greater than the threshold," he said. 
Although about 1 Bcf/d of excess capacity may have existed in the Northern 
California market last summer, it's not clear that it was available to 
Southern California customers in sufficient quantities to constrain El Paso's 
market power, said Ogur. 
Ogur's testimony differs substantially from testimony submitted last week by 
John Morris for El Paso Merchant and testimony submitted by Lukens Consulting 
for El Paso Pipeline. Those studies defined the market in question as 
including all of California, while Ogur defined the relevant market as 
Southern California when pipeline constraints exist. 
The Brattle Study, which was submitted on behalf of Southern California 
Edison, concludes El Paso Merchant Energy was able to exercise market power 
through its control over 1.4 Bcf/d of firm capacity on El Paso Pipeline and 
Transwestern, but the study does not specifically define the market. It 
places an HHI of 2,179 for firm capacity held by El Paso Merchant on El Paso 
and Transwestern between the San Juan Basin in New Mexico and California. The 
Brattle study calculates El Paso's market share to be 34%, rising to 48% 
after adjusting for Southern California Gas' and PG&E's core capacity. 
The study fails, according to Ogur, by excluding capacity on other California 
pipes and storage space. It also attempts to find market power abuse by 
analyzing basis differentials that exceeded maximum tariff rates, but admits 
it is unable to determine if the abnormal basis differentials might have been 
caused instead by capacity constraints. It also can't deny the fact that 
interruptible transportation was available at maximum rates.