El Paso Gas Supplier Denies Monopoly

A Texas energy conglomerate accused of driving up natural gas prices in California might have amassed monopolistic power at times last year, according to opening testimony Monday before the Federal Energy Regulatory Commission.

FERC economist Jonathan Ogur said that under certain conditions during the past year, a subsidiary of El Paso Corp. of Houston might have controlled as much as 45% of the pipeline capacity for shipping gas to Southern California. That share exceeds a commonly used threshold of 35%, raising concern with regulators.

“We obviously disagree with that,” said Bill Sherman, lead lawyer for El Paso Merchant Energy, which markets natural gas. Merchant is accused by the California Public Utilities Commission and Southern California Edison of withholding supply in a bid to raise prices. It had contracted with its pipeline affiliate--El Paso Natural Gas Co.--for rights to ship 1.2 billion cubic feet of natural gas a day to California.

The El Paso firms say the allegations are based on a misrepresentation of how their relationship worked. They argue that natural gas prices in California have spiked much higher than elsewhere in the country because of insatiable demand from power plants, a lack of pipeline capacity within the state, and shortages brought on by unusual weather. High prices for natural gas are a key component of California’s soaring energy bills.

“We did nothing wrong,” said Norma Dunn, a vice president with El Paso Corp. “We need to look at this in context. All shippers were trying to move as much gas as they could into the state. The problem is you can’t get all that much gas into the state.”

The issue of market share appeared to loom large in the administrative hearing, which has become the closest thing to a trial arising from California’s energy crisis. A company that controls a large portion of any market enhances its ability to dictate prices and other conditions.

El Paso Merchant has argued that its market share should be computed as a proportion of the statewide natural gas market, in which case it would fall below 20% and would not raise anti-competitive concerns.

But the PUC counters that, because of difficulties in shipping gas from north to south within the state, El Paso’s true market is limited to Southern California.

“The question of the geographic market makes a tremendous difference in how El Paso Merchant’s market share will be measured and the results,” acknowledged Judge Curtis L. Wagner Jr. in an opening statement. “If the market is Southern California and not the entire state, the figures tend to demonstrate a rather high level of concentration in El Paso Merchant.”

Ogur said in prepared testimony filed last week that it is “likely” that El Paso exercised market power in Southern California.

Wagner will hear the evidence and present a decision to the FERC board, which has the authority to order El Paso to surrender any ill-gotten profits.

During cross-examination Monday, Sherman sought to discredit the testimony of Sandra Rovetti, a technical analyst with the PUC. Rovetti had submitted testimony in which she said she studied the market in a “controlled experiment” and concluded that El Paso Merchant had wielded monopolistic power to drive up prices.

But Sherman won an admission from Rovetti that she had not considered the price impact of such factors as unusual weather and power plant outages.

The hearing is expected to last all week and a decision from Wagner is due before June 30.

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