Message-ID: <13299605.1075854943888.JavaMail.evans@thyme> Date: Wed, 10 Oct 2001 09:16:34 -0700 (PDT) From: issuealert@scientech.com To: issuealerthtml@listserv.scientech.com Subject: El Paso Corp. Absolved of Manipulation Charges (For Now), But Affiliate Abuse Allegations Linger Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: quoted-printable X-From: IssueAlert@SCIENTECH.COM X-To: ISSUEALERTHTML@LISTSERV.SCIENTECH.COM X-cc: X-bcc: X-Folder: \MHAEDIC (Non-Privileged)\Inbox X-Origin: Haedicke-M X-FileName: MHAEDIC (Non-Privileged).pst Today's IssueAlert Sponsors:=20 We are seeking 75 of the most promising energy-based technology and service= companies to present at Energy Venture Fair II, January 29 & 30, 2002, Hou= ston, TX-the follow-up to the explosively successful Energy Venture Fair I = held in Boston in June. If you are a Senior Executive from one of these com= panies, and are interested in having a platform to present your vision and = business plans before a national audience of investors, please contact Nann= ette Mooney at (818) 888-4445, Ext. 11, for more information, or via email = at nannettem@energyventurefair.com = . APPLY TODAY - SPACE IS LIMITED.=20 =20 Electric Power System & Natural Gas System Maps are available from SCIENTECH, Inc. Click here for full descriptions and prices of Electric and Gas Maps. October 10, 2001=20 El Paso Corp. Absolved of Manipulation Charges (For Now),=20 But Affiliate Abuse Allegations Linger=20 By Will McNamara Director, Electric Industry Analysis=20 [News item from Reuters] El Paso Corp. (NYSE: EPG) was cleared on Oct. 9 of= manipulating natural-gas prices in California, but the agency judge overse= eing the case expressed impatience with company executives who engaged in w= hat he described as "hanky panky" in arranging pipeline shipments. Curtis W= agner, FERC's chief administrative law judge, ruled that El Paso did not un= fairly drive up natural-gas prices on its four pipelines into energy-starve= d California last year, but used blunt language in assessing the behavior o= f two executives with the Houston-based energy giant. Wagner said telephone= records of the conversations showed "blatant collusion" between company af= filiates in booking pipeline space at a discounted rate for future shipment= s.=20 Analysis: The best assessment of this ruling in the ongoing case against El= Paso Corp. is that it is a mixed bag of judgments, and only one more step = in what will continue to be a very long and drawn-out case. On one hand, th= e FERC administrative law judge appears to be absolving El Paso Corp. of th= e accusations that it intentionally manipulated conditions in California to= gain market power over the state's natural-gas market. That is the good ne= ws for El Paso Corp. However, on the other hand, the same judge has also in= tensified lingering claims that El Paso exclusively shared market-sensitive= information between its affiliates, violating a FERC standard of conduct t= hat a pipeline must give information about natural-gas transportation to al= l potential shippers as well as a company's own marketing affiliates. Furth= er, as noted Judge Curtis Wagner has indicated that existing telephone reco= rds from last year indicate "blatant collusion" between El Paso Corp. compa= ny affiliates, potentially violating FERC rules that a pipeline's operating= staff and the staff of its marketing affiliate function independently of e= ach other. The next step in this case will be to determine any possible fin= es that might be affixed by the full FERC commission on the basis of the al= leged collusion or affiliate abuse issues.=20 The case against El Paso Corp. is a very complicated one, but it essentiall= y comes down to one core issue. The case revolves around allegations that d= uring the period of May to November 2000 El Paso improperly shared market-s= ensitive information with one of its affiliates, which drove up natural-gas= prices, pre-empted competition from non-affiliated companies and resulted = in extra costs for fuel in the range of $3.7 billion for Californians. El P= aso Corp. has consistently maintained that it engaged in no wrongdoing. The= case has carried enormous significance for the energy industry as it impac= ts not only the profits earned by El Paso Corp. but also the degree to whic= h federal regulators may continue to intercede into wholesale markets. In a= ddition, the other key aspect to this case is the extent to which FERC, und= er the leadership of new Chairman Pat Wood, will exhibit strong regulatory = oversight over these claims of market abuse and issue its own harsh financi= al penalties against El Paso Corp.=20 What is critically new about this case is the information now available fro= m transcripts of phone conversations between El Paso affiliates. First, let= me establish some background that will help to explain the significance of= the transcripts. El Paso Corp. is the parent of subsidiaries El Paso Natur= al Gas and El Paso Merchant Energy, which are the companies in question reg= arding the California transactions. El Paso Natural Gas, a regulated compan= y, operates pipelines and El Paso Merchant Energy, which is unregulated, ma= rkets natural gas. El Paso Natural Gas owns and manages the Western Divisio= n pipeline, which includes 14,604 miles of interstate transmission pipeline= , serving markets in California, the southwestern United States, northern M= exico, and throughout the Rocky Mountains. In early 2000, El Paso Natural G= as awarded approximately one-third of the capacity on this interstate pipel= ine to El Paso Merchant Energy. This contract essentially gave subsidiaries= of El Paso Corp. control over transporting about one-sixth of the state's = daily demand in California. As such, this gave the El Paso affiliates betwe= en 35 and 45 percent of the Southern California gas market, clearly positio= ning it as the largest natural-gas provider in the state.=20 As subsidiaries, all of El Paso's operations fall under FERC's "arms-length= " rule, which enforces a separation between affiliated production and pipel= ine companies that exist within a corporate family. Since early 2001, FERC = has been examining allegations that El Paso manipulated natural-gas prices = in California by blocking competitors' access to the interstate pipeline. C= alifornia officials have claimed that El Paso subsidiaries secretly shared = information about the pipeline that was not available to other companies. S= pecifically, the transcripts of phone conversations between executives at E= l Paso Merchant and Mojave Pipeline Co., an El Paso affiliate, reportedly i= nclude comments from El Paso Merchant that inquire about a delay in publish= ing information about the pipeline's available capacity to all potential co= mpetitors.=20 The existence of these phone records gave some credence to ongoing claims t= hat El Paso had shared what should have been public information only with i= ts affiliates. According to Reuters, the executive at El Paso Merchant aske= d the executive at Mojave Pipeline to hold off on posting competitive data = about the capacity on the pipeline for a week. This allegation has importan= t ramifications. First, the sharing of this non-public information might me= an that El Paso's subsidiaries had provided preferential treatment to affil= iated subsidiaries, which gave the company as a whole an unlawful advantage= over competitors. Any potential abuse of affiliate standards could include= the unlawful exchange of classified information between subsidiaries or th= e extension of discounted prices between two affiliated companies. Yet, acc= ording to Judge Wagner this sharing of information among affiliates did not= contribute to a clear case of market power abuse, and in fact should be di= smissed outright, which is why the ruling is such a mixed bag for El Paso C= orp.=20 Nevertheless, the California Public Utilities Commission (CPUC), Pacific Ga= s & Electric Co. and Southern California Edison may continue to fight the c= ase with an appeal on the ruling that could be launched within 30 days. Acc= ording to the California parties, this alleged manipulation cost California= ns an extra $3.7 billion in unnecessary power purchase costs that the two u= tilities are still attempting to recover. It is important to note that San = Diego Gas & Electric, California's third IOU, purchases all of its natural-= gas supply from Southern California Gas and is therefore not a participant = in this case against El Paso.=20 In response, El Paso has repeatedly denied any wrongdoing, including market= manipulation or inappropriate sharing of information between its affiliate= s, and thus has not violated any standards set out by FERC in its "arms-len= gth" policy applied to affiliates. Instead, El Paso claims that the seeming= ly high prices that it charged in California resulted solely from nationall= y high gas prices. However, according to the Energy Information Administrat= ion, delivery prices for natural gas in California during the October 2000 = to January 2001 timeframe were considerably higher than other national mark= ets. For instance, during this time period, natural-gas prices in Californi= a were running near $23/MMBtu, while prices at Henry Hub and in Florida wer= e at around $7/MMBtu.=20 El Paso says the sudden drop in natural-gas prices once its contract on the= pipeline expired is the result of constraints that are inherent in Califor= nia's distribution system. In addition, the company claims that mild weathe= r in the region and increased storage levels of natural gas have also drive= n the dramatic price swing. Further, El Paso says that it hedged most of it= s gas capacity into California to protect itself from potential losses, cut= ting potential profits in the process. The significance of this, El Paso co= ntends, is that the company's hedging indicates that it had no foreknowledg= e that gas prices would be higher than normal. In other words, El Paso hedg= ed on its gas supply because the company thought that prices would be flat = or go down. On the other hand, hedging is a common practice among seasoned = traders and gas traders have countered that hedged contracts are often reso= ld at higher multiples before the gas is ultimately delivered.=20 It will be interesting to see where this case goes from here. As noted, the= "new" FERC that has emerged under the leadership of Pat Wood may demonstra= te a decidedly lower tolerance for any allegations of affiliate abuse and c= onsequently issue stiff penalties. In addition, it is interesting to note t= hat other pending affiliate abuse cases have recently been launched by FERC= , indicating that the commission is increasing its efforts to investigate s= uch abuse. For instance, last week FERC ordered an inquiry into whether Exe= lon Corp., PECO Energy and their affiliates improperly manipulated Northeas= t power markets in 1999 by possibly sharing non-public information. Further= , Wood has made no bones about the fact that he embraces a market philosoph= y that includes regulatory intervention when necessary. Consequently, Wood = could very well spearhead a re-examination of FERC's methodology regarding = market-based rates in markets that become deregulated, along with how merch= ant plants calculate their rates, and the ruling on potential fines against= El Paso Corp. could be the first indication of this policy change.=20 An archive list of previous IssueAlerts is available at www.scientech.com =20 We encourage our readers to contact us with their comments. We look forward= to hearing from you. Nancy Spring Reach thousands of utility analysts and decision makers every day. Your com= pany can schedule a sponsorship of IssueAlert by contacting Jane Pelz . Advertising opportunities are also available on o= ur Website.=20 SCIENTECH is pleased to provide you with your free, daily IssueAlert. Let u= s know if we can help you with in-depth analyses or any other SCIENTECH inf= ormation products. If you would like to refer a colleague to receive our fr= ee, daily IssueAlerts, please reply to this e-mail and include their full n= ame and e-mail address or register directly on our site.=20 If you no longer wish to receive this daily e-mail, and you are currently a= registered subscriber to IssueAlert via SCIENTECH's website, please visit = to unsubscribe. Otherwise, please se= nd an e-mail to to IssueAlert , with "Dele= te IA Subscription" in the subject line.=20 SCIENTECH's IssueAlerts(SM) are compiled based on the independent analysis = of SCIENTECH consultants. The opinions expressed in SCIENTECH's IssueAlerts= are not intended to predict financial performance of companies discussed, = or to be the basis for investment decisions of any kind. SCIENTECH's sole p= urpose in publishing its IssueAlerts is to offer an independent perspective= regarding the key events occurring in the energy industry, based on its lo= ng-standing reputation as an expert on energy issues.=20 Copyright 2001. SCIENTECH, Inc. All rights reserved.