State’s Monopoly Charge Against Texas Energy Group Rejected
The California Public Utilities Commission failed to prove that a Texas energy conglomerate wielded monopoly power to drive up natural gas prices during the state’s energy crisis, a federal regulatory judge ruled Tuesday.
But units of Houston-based El Paso Corp. engaged in “blatant collusion” that violated federal rules as they negotiated a shipping deal, concluded Judge Curtis L. Wagner Jr. of the Federal Energy Regulatory Commission.
The ruling, which is likely to be appealed by the PUC, illustrates the difficulties that California political leaders face as the state tries to prove charges of rampant market manipulation by energy companies. The case against El Paso was widely considered among the strongest.
At issue was a deal in which one El Paso subsidiary won the right to ship 1.2 billion cubic feet of natural gas a day to Southern California through an interstate pipeline operated by another subsidiary.
California natural gas prices shot up during the term of the contract last year, and dropped dramatically after it expired on May 31 of this year. The PUC and California electric utilities alleged that the companies withheld shipping capacity on the pipeline during part of 2000, creating an artificial shortage that sent prices zooming.
In a 44-page ruling, Wagner found that the El Paso companies had violated FERC rules requiring arms-length dealings between a pipeline and subsidiaries of the same corporate parent. Wagner, who is FERC’s chief administrative law judge, also concluded that the company gained enough market share to have the “ability” to manipulate California prices.
However, he found that the voluminous record of testimony and exhibits on both sides of the case was “not at all clear” on whether El Paso misused its clout.
“Therefore, the issue in the complaint on whether [El Paso] may have had market power and, if so, exercised it to drive up natural gas prices at the California border should be dismissed,” Wagner recommended to FERC’s governing board, which has the final say in the case and could overrule him.
El Paso greeted the judge’s ruling as vindication. The company had maintained that unseasonable weather, high demand for electricity and low volumes of gas in California storage tanks were to blame for the price spike. “We are gratified with his finding on the market power issue,” said El Paso spokeswoman Norma Dunn. “That’s what we believed all along.”
El Paso also contends that its subsidiaries did not violate FERC rules requiring arms-length conduct. However, Dunn said the company would support an ongoing effort by the FERC board to tighten the rules.
Wagner said that El Paso Merchant--the subsidiary that won the shipping contract--reaped “tremendous profits” of $184 million from its transaction with the pipeline firm, El Paso Natural Gas Co.
PUC attorney Harvey Morris said he expects an appeal of the ruling to the full FERC board.
“What’s so disappointing is that we won on the affiliate abuse issue, and we won on their having the ability to exercise market power, and then to lose on a conclusionary finding by the judge,” Morris said. “I suspect this is not the end of the matter.”
Kevin Lipson, an attorney representing Southern California Edison, said that if--as Wagner found--the El Paso companies worked together behind the scenes to build their clout, it is reasonable to conclude that their objective was to raise prices. “There is something illogical in concluding there was not an exercise of market power,” Lipson said.
Mindy Spatt, media director for the Utility Reform Network, a consumer group in San Francisco, said the ruling is a blow to the state. “There’s a system in place here where apparently it’s easy to manipulate the market but hard to prove that,” Spatt said. “One obvious fact that points to that conclusion is that prices did drop dramatically after the affiliate no longer held the capacity.”
Wagner reached his conclusion by studying the flows of natural gas on the El Paso pipeline system. In his ruling, he said that there was nothing extraordinary about El Paso Merchant’s decision to refrain from using all of its shipping rights during the spring of 2000. Other shippers on the pipeline were behaving similarly.
And he also found El Paso Natural Gas Co.--the pipeline company--routinely offered to sell to other shippers the capacity El Paso Merchant was not using, albeit on less attractive terms.
“The record in this case is not at all clear that they in fact exercised market power,” Wagner wrote.
The evidence was persuasive, however, on the issue of insider dealing, the judge wrote. He cited taped conversations between officials of El Paso subsidiaries and testimony from the firm’s chief executive in concluding that “there was no firewall” between the companies.
On the tapes, an official of El Paso Merchant seeks and obtains a shipping discount from yet another El Paso subsidiary and asks that the information not be immediately released to competitors. The effect of the discount was to make Merchant’s deal with El Paso Natural Gas Co. more attractive, according to lawyers in the case.
And William Wise, chief executive officer of the parent firm El Paso Corp., testified that he approved the contract between Merchant and the pipeline. FERC rules prohibit pipelines from giving unfair advantages to related firms, to prevent the exercise of monopoly power.
Wagner concluded that the affiliates were in “clear violation” of FERC rules because they “were not operating independently.”
It remained unclear Tuesday whether El Paso Corp. would face any penalties for the violations. Some lawyers involved in the case said civil fines could apply, but a FERC attorney said there may be no legal authority for the board to impose a penalty.
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Times staff writer Nancy Vogel in Sacramento contributed to this report.
