Price Drop Has Probe pf Gas Supplier Abuzz

As the price of natural gas destined for California power plants continued to collapse Friday, new questions were being raised about a controversial shipping deal between two offshoots of a Texas energy conglomerate.

State officials and utilities have complained to the Federal Energy Regulatory Commission that subsidiaries of Houston-based El Paso Corp. restricted gas supplies on a major pipeline system last year, creating an artificial shortage that sent energy costs soaring. The company has steadfastly denied the allegations, which are the focus of a trial-like hearing stretching into its fifth week at FERC.

But in a development that had the courtroom abuzz Friday, the markup for natural gas shipped from producing basins in Texas to the Southern California border has plunged by 96% since May 31, when the contract between the El Paso subsidiaries expired and about 30 competitors entered the market.

According to data from Natural Gas Week, the markup between Texas and a major California-border pipeline junction served by El Paso fell from $6.32 per million British thermal units on May 31--the last day of the controversial deal--to only 23 cents Friday. A million BTU is about what a typical Southern California household consumes in five or six days.

That put Southern California natural gas prices in line with the rest of the country for the first time since last July.

State officials and California utilities said the price collapse bolstered their case that the El Paso companies had been exercising market power--engaging in monopolistic behavior.

“You can’t help but think that the market is reacting to the difference between having many shippers instead of one,” said Kevin Lipson, a lawyer representing Southern California Edison in the proceedings against El Paso. “The market knows the difference between competition and monopoly.”

Under the deal that just expired, one subsidiary of El Paso had obtained the shipping rights for up to 17% of California’s daily gas consumption through a pipeline system owned by another subsidiary.

“We don’t have an 800-pound gorilla any more,” said Harvey Morris, a lawyer for the California Public Utilities Commission. “We have a chimpanzee.”

But Peggy Heeg, deputy general counsel for El Paso Corp., said other factors--such as mild weather and increased storage levels of gas in California--are behind the dramatic price swing.

“We are glad to see prices coming down and to see some relief for Californians,” Heeg said. “The price movement is consistent with what we are saying, which is that supply and demand are driving prices.”

The swift reversal in prices has raised suspicions at FERC.

“It’s not enough to convict El Paso and send them to jail, but this piece of information is certainly consistent with the idea that there was market power,” said an agency official.

“Prices had been dropping a little, but since June 1, it’s become very noticeable,” said another agency official. “Obviously, one of the reasons has to be that the capacity changed hands.”

FERC’s governing board can order El Paso to refund profits if it finds that the subsidiaries tried to manipulate the California market.

One independent economist cautioned against a rush to judgment. “There are a lot of things going on which in and of themselves could account for a significant price decline,” said Bruce Henning of Energy and Environmental Analysis Inc. in Arlington, Va. “I would be unwilling to draw a causal link.”

In addition to the weather and fuller storage cited by El Paso’s Heeg, increased conservation by Californians has reduced demand for electricity. That, in turn, has dampened the market for natural gas, the fuel most commonly used by the state’s power plants.

But the industry also has come under strong political pressure in recent weeks. In hearings before Congress and the California Legislature, lawmakers spoke out against natural gas prices that were much higher than elsewhere in the nation. California Atty. Gen. Bill Lockyer launched an investigation. And FERC, in addition to the El Paso hearing, called an industry conference.

Plaintiffs’ lawyers in the El Paso case say they believe the pressure led El Paso Merchant Energy--which sells natural gas--to pass up an option to renew its contract with El Paso Natural Gas Co., which owns the pipeline system. Instead, El Paso Merchant settled for a much smaller chunk of capacity on its sister company’s system. El Paso says the decision was made for business reasons, not in response to pressure from regulators.