Message-ID: <312460.1075844206626.JavaMail.evans@thyme> Date: Tue, 15 May 2001 02:37:00 -0700 (PDT) From: rebecca.cantrell@enron.com To: leslie.lawner@enron.com, james.steffes@enron.com, jennifer.thome@enron.com, robert.neustaedter@enron.com, rrich@bracepatt.com, donna.fulton@enron.com, richard.shapiro@enron.com, christi.nicolay@enron.com Subject: Gas Daily and Natural Gas Intelligence Articles on El Paso Case Hearing Cc: steve.walton@enron.com, susan.mara@enron.com, alan.comnes@enron.com, jeff.dasovich@enron.com, jalexander@gibbs-bruns.com, phillip.allen@enron.com, dave.perrino@enron.com, don.black@enron.com, stephanie.miller@enron.com Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit Bcc: steve.walton@enron.com, susan.mara@enron.com, alan.comnes@enron.com, jeff.dasovich@enron.com, jalexander@gibbs-bruns.com, phillip.allen@enron.com, dave.perrino@enron.com, don.black@enron.com, stephanie.miller@enron.com X-From: Rebecca W Cantrell X-To: Leslie Lawner, James D Steffes, Jennifer Thome, Robert Neustaedter, rrich@bracepatt.com, Donna Fulton, Richard Shapiro, Christi L Nicolay X-cc: Steve Walton, Susan J Mara, Alan Comnes, Jeff Dasovich, jalexander@gibbs-bruns.com, Phillip K Allen, Dave Perrino, Don Black, Stephanie Miller X-bcc: X-Folder: \Richard_Shapiro_June2001\Notes Folders\All documents X-Origin: SHAPIRO-R X-FileName: rshapiro.nsf 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.