Off Peak

September 15, 2001

Let's Play "Spin the Pipeline"

 

The El Paso case just won't quit.

It began over a year ago, on April 4, 2000. That's when California accused El Paso Natural Gas Co. of manipulating capacity rights on its natural gas pipeline by auctioning them off to its own affiliate, El Paso Merchant Energy.

It might have ended the following spring, on March 28, when the Federal Energy Regulatory Commission (FERC) said the sale was kosher. But the case took on a second wind when newspapers aired stories suggesting that company officials tried to bully the market. So FERC opened a new investigation - to see if El Paso had "gamed" the pipeline to drive up gas prices in California.

Yet soon came a third twist: Not a crooked auction, nor a conspiracy theory. No, this new spin pointed to nothing more than a classic overbooking: a shortfall in planning and investment that left too much demand chasing too little space on the pipeline. And the pressure, some said, had come not from California, but from shippers serving Arizona and Texas to the East, buying up more than their fair share of pipeline capacity.

This idea grew out of hearings at FERC, and testimony given by John Somerhalder, president of El Paso Corp. Pipeline Group:

Question:"So we know on the 3rd of January [2000] that already we've got some problems; isn't that correct?

Witness:"We know that on that day, that the load growth in east of California is starting to push the capabilities of the system." ¹

And the company seemed only too willing to admit the problem: "There is no question that the demands placed on EPNG's system É combined with the shift in control of the pipeline capacity É to its shippers, jeopardizes [our] ability to provide the level of service that its customers desire." ² But was this again just another case of spin?

One pipeline customer - Southern California Edison - suggested as much: "Somerhalder's testimony appears to Edison to have been calculated in an effort to exonerate the actions of El Paso's marketing affiliate by minimizing the effect of that affiliate's witholding of capacity." ³> Moreover, Edison thought it had found the smoking gun - an abrupt drop in basis differential.

As Edison shows, a dramatic fall occurred early this past summer in the differential between (a) the price of gas in the Permian and the San Juan producing basins, which supply the gas for southern California, and (b) the price of gas paid at the city gate import point by Southern California Gas Co. And that drop began on June 1, 2001 - the very day after El Paso Merchant saw its contracts expire for capacity rights on the El Paso Pipeline. (.)

1. As cited in: Section 5 Complaint, , filed July 13, 2001.
2. Answer of El Paso Natural Gas Co. in opposition to complaint, , filed Aug. 1, 2001.)
3. Motion to intervene and response of Southern California Edison Co., , filed Aug. 1, 2001.

 

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