Frontlines

The Great Gas Grab

 

 

California sued El Paso for gaming the pipeline. But the blame may lie to the East.

To hear one side tell it, it's the "Great California Gas Grab"-a "thinly disguised effort" to steal pipeline capacity from Texas, New Mexico, and Arizona, and to give it back to California, where it sells at a premium.

Nor does the other side mince words. It claims that gas customers in California "have been suffering, and continue to suffer, ever-increasing financial harm on a daily basis."

Caught in the middle is El Paso Natural Gas, which has taken much of the blame for gas price spikes seen last year in California. Yet, the real fault may lie elsewhere.

CUSTOMERS EAST OF CALIFORNIA REMAIN CAPTIVE TO EL PASO, BUT STILL CARRY CLOUT. Many of these "EOC" customers enjoy firm requirements (FR) service rights, and won't let them go. These FR rights allow them to buy all the pipeline capacity they might need. So they find they can boost gas consumption seemingly without limit, and without paying additional capacity charges. They negotiated a rate freeze in 1996, when new pipeline construction in California glutted the market. They agreed to help El Paso cover the cost of unused capacity that California gas utilities had "turned back," and so won favored treatment from the pipeline. Then the Sun Belt exploded. Arizona gained 40 percent in population just during the 90s; Texas gained 22 percent. Firm gas requirements east of California grew just as fast, but the five-year-old agreement bound El Paso to provide more capacity to meet the need-and at frozen demand charges-even as delivery capacity into California became more constrained.

Last year, the California Public Utilities Commission (PUC) complained to the Federal Energy Regulatory Commission (FERC) that El Paso rigged the game by selling a good chunk of pipeline capacity to its marketing affiliate, El Paso Merchant Energy, L.P. (.) That's the case that you read about in the newspapers. Did El Paso favor its affiliate? What did the executives know, and when did they know it?

Yet a new pair of cases raises more important questions.

On July 13, a gas industry group led by the engaging lawyer Katherine Edwards filed a complaint at the FERC accusing the EOC/FR customers of hogging pipeline capacity without really paying for it, and asking the FERC to convert FR service to contract demand service-the same transportation service available to California customers. Such a remedy would likely curtail El Paso gas deliveries to EOC customers. The Edwards group, known as the "joint complainants," includes the PUC, Pacific Gas & Electric, Southern California Edison, Southern California Gas, BP Energy, Texaco Natural Gas, Coral Energy Resources and Amoco Production Co., among others. (.)

Four days later, the EOC/FR customers fired back. In their own complaint, every bit as convincing, a group of gas shippers from Texas, New Mexico, and Arizona (the TNMA group) defended their gas delivery rights. The TNMA shippers claim El Paso has oversold its system to such a degree that the pipeline can no