GAS DAILY
                             ON-LINE EDITION
                             May 15, 2001
***FERC launches formal hearing in El Paso case
     A collection of high-powered attorneys crowded a FERC hearing 
room yesterday for the launch of a formal hearing into 
allegations of market power abuse by El Paso and its affiliates. 
While a decision is still a way off, the presiding judge in the case 
made it clear that FERC must find a precise way to measure market 
share in California before ruling on the case.
     The hearing also marked the public release of a controversial 
market power study by The Brattle Group, which was commissioned 
by Southern California Edison to find evidence of market power 
abuse by El Paso marketing affiliate El Paso Merchant Energy. The 
Brattle Group said that it found substantial evidence that El Paso 
manipulated California's gas market -- a claim that remains 
strongly in dispute (see story, page 4).
     In an opening statement, FERC Chief Administrative Law Judge 
Curtis Wagner laid down the parameters for the hearing. The 
burden of proof, he said, is on the California Public Utilities 
Commission, which filed the original Section 5 complaint against 
El Paso. But once a case is made, Wagner added, "the burden of 
going forward with evidence to rebut that case shifts to El Paso 
Merchant and the parties on its side of the table."
     The case originated last year, when the CPUC asked FERC to 
abrogate a series of transportation contracts between El Paso 
Natural Gas and El Paso Merchant. The California regulators 
claimed the capacity award was rigged, and further complained of 
a conspiracy to drive up the delivered price of gas into California.
     In March, FERC dismissed the CPUC's claim that there was 
favoritism in the bidding process for El Paso pipeline capacity (GD 
3/29). But the commission also sent the case before an ALJ, saying 
the case raised larger questions of market power. According to 
FERC, certain disputed issues of fact need to be examined at a 
hearing before a decision can be rendered.
     One of the biggest issues will be determining whether the 
affected market is the entire state of California or whether it is 
just Southern California. The CPUC and Southern California Edison 
maintain that only the Southern California market is at issue, 
while El Paso argues that the case applies to the entire state.
     The outcome of the case could hinge on that distinction. As 
Wagner noted in his opening remarks, "The question of the 
geographic market makes a tremendous difference in how El Paso 
Merchant's market share will be measured and the results."
     If the entire state is considered as a single market, said 
Wagner, then El Paso Merchant would have a market share that, 
depending on methodology, would range between 17% and 26.8%. 
But if the CPUC's contention that the market is Southern 
California holds up, he added, then El Paso Merchant's market 
share would be between 35% and 44.9%.
     Finding out whether market power exists also depends on how 
many players are involved in a particular market. Wagner said 
that the parties need to reach a stipulation among counsel on the 
number of players. In addition, he said that he would need a better 
geographic description of El Paso Merchant's capacity holdings 
and information on the price differential of gas between Northern 
and Southern California. 
     Finally, Wagner directed a number of questions to El Paso. El 
Paso Merchant, he said, "should answer the CPUC's question as to 
why it subscribed for the involved [1.2 billion cfd] for 15 months 
when it had no market for that amount." In addition, said Wagner, 
El Paso should "show whether it sold in the secondary market 
short-term releases of the excess [capacity] at a price higher than 
it paid."
     Wagner also heard arguments over the admissibility of certain 
evidence.
     Given the volume of testimony involved, the case will require 
some legal heavy lifting before a preliminary decision is reached. 
Noting that he received a nearly two-foot high stack of testimony 
last week, Wagner said that reading prehearing briefs and 
prepared testimony "consumed a very beautiful Sunday in 
Washington." (RP00-241)     NH

***El Paso takes aim at Calif. Assembly, study
     In an effort to clear its name in the ongoing California market 
power controversy, El Paso is going on the offensive. The company 
yesterday issued a riposte to claims -- publicized by California 
Assembly members and major newspapers -- that it manipulated 
California gas prices. And it took close aim at The Brattle Group, a 
consultancy that has figured prominently in various 
investigations into the matter. 
     According to El Paso, The Brattle Group worked "hand-in-hand" 
with a California Assembly subcommittee to pin the blame on El 
Paso and its subsidiaries for the run-up in gas prices in the 
Golden State. El Paso furnished copies of internal Assembly e-mails 
as proof that the subcommittee did not seek to conduct an 
objective investigation. 
     As reported in Gas Daily, The Brattle Group's study of alleged 
market power abuse by El Paso marketing arm El Paso Merchant 
Energy has been exhibit A in California pipeline litigation (GD 
4/25). In a study commissioned by Southern California Edison, The 
Brattle Group concluded that El Paso had deliberately manipulated 
California-bound pipeline capacity in an effort to drive up the 
price differential between production basins and the California 
border.
     Drawing in large part on The Brattle Group's opinion, the 
California Assembly Subcommittee on Energy Oversight recently 
concluded that El Paso caused the price run-up (GD 4/20). 
Representatives of the Assembly's Democratic majority said The 
Brattle Group study proved conclusively that the rise in gas 
prices at the California border was greater than could be 
accounted for through normal market forces.
     But according to El Paso, the subcommittee majority was -- 
deliberately -- wrong. The inquiry conducted by the subcommittee, 
said El Paso, was a "charade that was orchestrated from the 
beginning" to shore up SoCalEd's case.
     "El Paso has recently obtained, through discovery in a 
proceeding before the Federal Energy Regulatory Commission, 
correspondence between the staff for the subcommittee and the 
paid litigation consultant [The Brattle Group] for Southern 
California Edison," said El Paso in a statement. "This 
communication reveals that the subcommittee majority's 
conclusions were pre-determined to blame El Paso for California's 
failed energy policies."
     The correspondence included apparent requests from 
subcommittee staff members for help in "rebutting" El Paso's 
testimony before the Assembly. El Paso interpreted those requests 
as proof that the subcommittee majority "never intended" to write 
an objective report on the matter. 
     "We are shocked that the subcommittee delegated its 
responsibilities to [SoCalEd's] consultants," said Norma Dunn, El 
Paso senior vice president of communications and government 
affairs. "We voluntarily met with subcommittee staff and testified 
before the subcommittee in good faith, under the false premise 
that the subcommittee was interested in seeking the truth. Now we 
learn that the subcommittee was working at the direction of 
[SoCalEd's] litigation consultants to support SCE's litigation 
position." 
     Litigation pitting SoCalEd and the California Public Utilities 
Commission against El Paso is currently under way at FERC (see 
story, page 1). Following yesterday's hearing, Dunn told Gas Daily 
that SoCalEd and the CPUC were also waging their campaign against 
El Paso in the   national press. 
     The New York Times, for instance, has published articles that 
relied on The Brattle Group study and other sealed documents. 
Dunn said it was "clear" that SoCalEd and the CPUC were using the 
selective leak of documents to take the case against El Paso to the 
public. 
     Prior to recess in yesterday's hearing, FERC Chief 
Administrative Law Judge Curtis Wagner issued a reminder of the 
need to restrict access to protected documents.     NH


NGI's Daily Gas Price Index 
published : May 15, 2001
El Paso Calls California Subcommittee Hearing a 'Sham' 
El Paso Corp. claims it was set up by California Assembly members to take the 
blame for high gas prices in the state. It said recent hearings before a 
subcommittee were a "sham," and that it was "predetermined" that El Paso 
would be accused on wrongdoing in a report approved by the subcommittee 
majority yesterday. 
While El Paso battled similar accusations at the opening of hearings 
yesterday before a FERC administrative law judge, the company publicly 
contested the results of the majority report (approved 3-2) of the California 
Assembly Subcommittee on Energy Oversight, which placed the blame on the 
energy company for skyrocketing gas prices in the state. The majority report 
says El Paso drove up gas prices by withholding pipeline capacity from the 
market, focusing on the same year-old capacity contract between El Paso's 
pipeline and marketing affiliate that is the subject of FERC's investigation. 
Contrary to the majority report, however, are the conclusions of a report 
prepared for the two Republican members of the five-member subcommittee. That 
document said the hearings "produced no conclusive evidence" of price 
manipulation. 
Although the majority report has not been made public, "it is clear, based on 
accounts of the report and recently uncovered documents, that the 
subcommittee hearing was a sham," El Paso said in a statement. 
El Paso released to the public yesterday documents containing e-mail 
correspondence between staff members of the subcommittee and members of the 
Brattle Group, a paid consulting firm for Southern California Edison. The 
Brattle Group is one of El Paso's main opponents at the hearings this week 
before FERC's Chief Administrative Law Judge Curtis Wagner Jr. Brattle 
accuses the company of costing Californians an additional $3.7 billion in gas 
costs over the past year. 
The correspondence El Paso released reveals a close relationship between the 
consulting firm and the subcommittee staff. For example, a staff member said 
to Brattle Group's Matthew O'Loughlin, "I can't thank you and Paul enough for 
your testimony. It was beyond expectations, the members were highly 
impressed. The chairman asked me if you guys could stay and help us with a 
second day. We could have used it." 
El Paso said the communication reveals that the subcommittee majority's 
conclusions were "pre-determined to blame El Paso for California's failed 
energy policies." The subcommittee majority was working "hand-in-hand with, 
and relying on, SCE's consultant, the Brattle Group, in their so-called 
analysis," El Paso said. "In communications between the subcommittee staff 
and SCE's consultant, it is clear that SCE's consultant assisted in preparing 
questions for the hearing and that the subcommittee staff requested 
assistance from SCE's consultant in preparing the final report. 
"That the subcommittee majority never intended to conduct an objective 
investigation is clear... [R]ather than write an objective report based on 
the testimony, the staff went on to ask SCE's consultant for help in 
'rebutting' El Paso's testimony." 
"We are shocked that the subcommittee delegated its responsibilities to SCE's 
consultants," said Norma Dunn, senior vice president of Communications and 
Government Affairs for El Paso. "We voluntarily met with subcommittee staff 
and testified before the subcommittee in good faith, under the false premise 
that the subcommittee was interested in seeking the truth. Now we learn that 
the subcommittee was working at the direction of SCE's litigation consultants 
to support SCE's litigation position. We are particularly concerned that 
after coordinating the questions to be asked, the Brattle Group testified 
before the subcommittee as if it were an independent group. It is obvious 
that the subcommittee hearings were a charade that was orchestrated from the 
beginning. Final conclusions were drawn before we had an opportunity to 
testify and then the final report was leaked to the press instead of provided 
to us, so that we would not have an opportunity to react." 
Dunn said El Paso is confident that once the facts are presented to FERC in 
hearings this week, it will be "vindicated." 
However, El Paso also faces an uphill battle in Washington. The FERC hearings 
pit El Paso and its subsidiaries against the California Public Utilities 
Commission and the state's two largest investor-owned utilities, Pacific Gas 
& Electric and Southern California Edison. 
The regulators and the utilities also allege El Paso withheld capacity on its 
pipelines into the state, which in turn pushed prices up. If the charges are 
substantiated, FERC Judge Wagner could order the company to refund any money 
it earned due to price or supply manipulation. Such a ruling could have even 
broader implications because skyrocketing prices for natural gas, the single 
biggest source of fuel for power plants in California, obviously contributed 
to the financial calamity that brought Southern California Edison to its 
knees and sent Pacific Gas & Electric into bankruptcy. 
The details of the charges are well known at this point. Critics alleged that 
El Paso Merchant Energy Gas LP and El Paso Merchant Energy Co. received 
inside information on a discount transportation rate that enabled them to end 
up the big winners in an open season in February of last year. The open 
season involved 1.22 Bcf/d of firm capacity on El Paso to the California 
border. 
But in an order on complaint, FERC found "no merit in the allegations." It 
cleared El Paso of charges that it rigged the bidding for capacity to favor 
its affiliates. Moreover, it said there was no evidence that El Paso violated 
its standards of conduct. However, the Commission did not dismiss the 
allegations that El Paso engaged in market and price manipulation. It 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). 
FERC staff also appears to be hot on El Paso's tracks. In testimony submitted 
last week before Judge Wagner, FERC staff's expert witness concluded that El 
Paso 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 Economist Dr. Jonathan D. Ogur concluded that under certain 
circumstances El Paso was able to wield market power in the Southern 
California gas market (see Daily GPI, May 14). 
The rise in California natural gas prices is not attributable to El Paso, the 
company said in its statement yesterday, but is attributable to the fact that 
demand for gas has far outstripped supply. Evidence presented at the 
California subcommittee hearings shows that El Paso has consistently utilized 
its pipeline capacity to ship natural gas to California and has never 
restricted supply. Constraints on gas infrastructure in the state have 
limited the supply of gas during a time in which demand has risen 
dramatically, the company said.