Posted on 09/24/2002 9:43:28 AM PDT by Ernest_at_the_Beach
WASHINGTON – El Paso Corp. illegally manipulated California's natural gas market during the height of the state's energy crisis and should be penalized, a regulatory judge ruled yesterday.
Judge Curtis Wagner Jr. issued a finding that El Paso subsidiaries "withheld extremely large amounts of capacity that could have flowed to its California delivery points" from November 2000 to March 2001.
Wagner, the chief judge for the Federal Energy Regulatory Commission, said El Paso's actions resulted in soaring prices while California was reeling from an energy crisis and rolling blackouts. It was the first ruling by a federal regulatory official that widespread energy manipulation had taken place.
California officials praised Wagner's decision and said it reflected their long-standing view that corporate market abuses contributed to the state's electricity crisis. Natural gas is used to fuel many power generating plants in California.
In the 23-page ruling released yesterday, Wagner sided with California Public Utilities Commission officials who filed a complaint in 2000 accusing El Paso and its affiliates of inflating the price of natural gas by reducing deliveries to the state. California officials said the firm's price manipulation cost consumers $3.7 billion.
Wagner said El Paso "substantially tightened the supply of gas" by withholding capacity from at least 21 percent of its pipelines that delivered natural gas to the California border.
As a result, Wagner recommended that FERC "institute penalty procedures" against El Paso subsidiaries for violating its conduct standards and for the "unlawful exercise of market power" by its El Paso Natural Gas Co. subsidiary.
But an aide to Gov. Gray Davis, a frequent critic of the power industry and federal regulators, was wary that FERC would carry out the judge's recommendations.
"Consumers in California have known about these abuses all along," said Steve Maviglio, a spokesman for Davis. "The big question is: What is FERC going to do next? They are awfully slow to responding to consumers' concerns."
Yesterday, El Paso's president criticized Wagner's decision, saying the judge's findings ignored evidence that the company properly operated its pipelines.
"Given the critical safety and deliverability concerns associated with operating a natural gas pipeline, it is inappropriate and without precedent to second-guess a pipeline's day-to-day operations," El Paso president William Wise said.
Following the judge's decision, El Paso's market shares fell sharply on the New York Stock Exchange.
Harvey Morris, principal attorney for the PUC, had argued before Wagner during lengthy hearings that El Paso shareholders earned enormous profits "from increasing natural gas prices to California."
Yesterday, Morris said the PUC was vindicated by Wagner's decision against El Paso, which owns the largest natural gas interstate pipeline serving California.
"California's natural gas customers really suffered during the winter of 2000-2001, and we've waited 21/2 years for this ruling," Morris said. "But we won't be satisfied until we get rate relief from FERC for California consumers."
California officials suggested that they would seek relief for the price of natural gas they said was two to three times more than elsewhere in the United States.
But FERC officials said they cannot decide on a penalty until they review possible appeals. Appeals and opposing arguments must be filed within 50 days, officials said.
The judge's decision came on the heels of a PUC report released last week that said several power generators withheld electricity to drive up prices, contributing to the state's power blackouts from 2000 to 2001.
Although El Paso Corp. was not named in the PUC report, the Houston-based company has been targeted by federal regulators in a sweeping investigation following "preliminary evidence" of electricity price manipulation in the California energy crisis.
Last month, FERC revealed findings of an initial investigation into the power crisis, and said it was conducting a more in-depth investigation into Enron Corp., the fallen energy giant, and two other energy companies that dealt with Enron, including El Paso.
California authorities are seeking $8.9 billion in refunds from power sellers stemming from inflated electricity prices, including El Paso.
Federal authorities yesterday declined to say whether Judge Wagner's finding about El Paso's role in the natural gas market would have an impact on its investigation.
But Sen. Dianne Feinstein, D-Calif. said she will seek a hearing "so that this new evidence can be evaluated and that we can learn the extent of this manipulation."
Feinstein called the judge's decision a "tremendous victory."
"Judge Wagner's decision validates what I have long suspected – and described in floor speeches and other speeches – that by withholding natural gas capacity in the pipeline, El Paso Natural Gas caused natural gas prices to increase by nearly 600 percent." El Paso Natural Gas was one of the El Paso Corp. affiliates cited by Wagner.
As a result of El Paso's actions, Feinstein said, "customers in Southern California were forced to pay exorbitant prices for natural gas."
According to Wagner, El Paso had the capacity during 2000-2001 to deliver about 3.3 billion cubic feet a day to the California border and was obligated to make the full capacity available to natural gas shippers. But millions of cubic feet were withheld each day, the judge said.
In the meantime, prices for gas along the California-Arizona border soared more than eightfold from November to December 2000, according to Wagner.
Wagner's finding yesterday partially reversed a ruling he made in October when he declined to say that El Paso abused its market power. Wagner made his initial finding after lengthy hearings into PUC complaints.
Two months later, FERC ordered more hearings after regulators found evidence of unused pipeline capacity through the winter of 2000-2001.
"The new evidence produced in this case shows a clear withholding of substantial capacity during the relevant period, which clearly indicates an exercise of market power," Wagner said yesterday. Market power is a term for the ability of a company to improperly influence prices.
Though that quote sounds self-serving, the fact that El Paso had a pipeline explosion two years ago in an older mainline pipeline outside Carlsbad NM that killed 12 persons, leads to caution in pushing gas through at full "capacity", especially when older lines are revamped and put into service to meet capacity demands. I fully expect this decision to be reversed on appeal.
Gray Davis and Diane Feinstein disgust us all. But that doesn't mean that they can't be right once in a while. This has all the appearance of a CYA campaign, but if El Paso did something wrong, they should be held to account for it.
Gotta say that it looks a lot like Davis needs to recoop some of the $30 billion he's squandered in the last four years though.
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You got it!
We are big, it is fair ! /sarcasm
The proposed finding that El Paso Natural Gas did not make all of its capacity available is unsupported by the evidence and is inconsistent with FERC policy. The evidence in this case demonstrates that, at all times, El Paso Natural Gas operated its system to maximize the amount of capacity available to California. The evidence demonstrates that the pipeline was full to the extent permitted by safety and operational considerations and, therefore, El Paso Natural Gas could not have exercised market power. The only response offered by the complaining parties was that, in hindsight, they would have operated the system differently. However, not one witness for the complaining parties had engineering, operating, or scheduling experience on the El Paso Natural Gas or a comparable system. The Commission has never allowed parties to prevail in such an unsupported attack on the prudence of a pipeline's operating decisions.
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Last quarter, Anadarko Petroleum Corp., a Houston oil-and-gas concern, discovered an unexpected bonus from last year's acquisition of rival Union Pacific Resources Group Inc.![[logo]](http://interactive.wsj.com/public/resources/images/calpowgoto02062001212534.gif)
The purchase, it turns out, included commitments to transport natural gas along a pipeline running from the Rocky Mountains into California. For years, those contracts weren't worth much. But late last year natural-gas prices skyrocketed, especially for gas delivered to California.
Thanks to its hold on precious space in one of a handful of pipelines into the state, Anadarko booked about $135 million in extra profit in the fourth quarter. It may see more in the first quarter.
Call it a California bonanza for natural-gas companies. While wholesale natural-gas prices have eased in some parts of the country such as in West Texas -- where prices are hovering around $5 to $6 per thousand cubic feet -- the gas can fetch twice as much if it is delivered in California. Natural gas was recently changing hands at as much as $10 to $15 per thousand cubic feet at Topock, Ariz., a pricing hub on the California border.
Regional gas prices often fluctuate because of unusual weather or pipeline disruptions. But California's gas premium has been remarkable for how wide it has grown and how long it has lingered.![[Commodities]](http://interactive.wsj.com/public/resources/images/cmdlede02062001215108.gif)
"It's a pretty major change in market dynamics," says Art Gelber, principal at Gelber & Associates, a Houston energy-consulting and asset-resources firm. The simple explanation for the difference: Natural-gas demand continues to outstrip the state's own modest production, and pipeline capacity for out-of-state gas hasn't kept up.
According to the California Energy Commission, the state produced just 16% of the gas it consumed in 1999, the most recent year for which figures are available. Of the nearly 5.15 billion cubic feet of gas a day California imported, almost half came from the Southwest, an additional 28% came from Canada and 10% from the Rocky Mountain states. To get that gas from the well to users, gas marketers buy up capacity in a limited number of California-bound pipelines. With a shortage of pipeline capacity, transportation costs have climbed and are passed along to end users.
California's pain has turned into unexpected gain for a handful of companies. Occidental Petroleum Corp., a big California gas producer, is finding its gas is suddenly much more valuable than it was just a few months ago. In a recent conference call with analysts, the company noted that prices in California have been more than $3 higher per thousand cubic feet of gas than elsewhere in the country, which the company said will be reflected in the first-quarter earnings.
Both Occidental and Anadarko have spent time explaining the unusual California gains to Wall Street, and any windfalls this quarter are likely already priced into their shares, analysts say. In 4 p.m. composite trading on the New York Stock Exchange Tuesday, Occidental rose 20 cents to $23.62 while Anadarko rose $2.05 to $63.45.
Considering the companies' diverse oil-and-gas portfolios, California's recent volatility wouldn't likely move stock prices much anyway. But the experiences of Occidental and Anadarko in the state highlight what unforeseen surprises can pop up in such an unbalanced commodity market.
California is serviced by four major pipelines. Transwestern Pipeline Co., a subsidiary of Enron Corp., operates a line from West Texas into Southern California; El Paso Corp.'s El Paso Natural Gas Co. runs another pipeline largely parallel to Transwestern; PG&E Corp.'s PG&E Gas Transmission Co. brings gas down from Canada; and Williams Co.'s Kern River pipeline brings gas in from the Rocky Mountains.
For years, the contracts on the Kern River line and other pipelines that Anadarko inherited from Union Pacific were money losers as transportation rights into California traded at a discount. "There was plenty of gas going into California and California didn't need any more," says David Larson, Anadarko's manager of investor relations. But by the end of last year, the contracts were soaring in value.
With California gas consumption ballooning to meet soaring electricity-generation demand, the state's pipelines filled up quickly. Normally, other suppliers would redirect gas to places where the price was highest, and the situation would work itself out. But capacity is so limited that producers simply can't get more gas to California.
In its complicated contractual agreements involving a handful of gas marketers, Anadarko was able to realize big gains, in essence agreeing to transport other producers' gas into California. Anadarko's contracts lay out fixed rates for slots in the pipelines, but the company can pocket gains if market rates for the transportation rise above the fixed rates. Anadarko booked the fourth-quarter gain by valuing its contracts at current market prices, called marking to market.
The contracts stretch out over several years and with rates still volatile, Anadarko could book more profit should the market price of the contracts continue to soar. Mr. Larson says the contracts could add $10 million to $20 million to the company's bottom line in the current quarter, though their value could just as easily fall, resulting in a charge.
Meanwhile, Occidental, based in Los Angeles, produces and markets a little more than 300 million cubic feet of natural gas a day in California. The higher prices that gas is currently fetching there is likely to show up on its bottom line this quarter.
Occidental's Elk Hills field is producing at about 10% above its stated capacity, says John Allen, general manager for the operation, about 15 miles west of Bakersfield in south-central California.
[snip]
-- Enza Tedesco contributed to this article.
Write to Chip Cummins at chip.cummins@wsj.com
With California gas consumption ballooning to meet soaring electricity-generation demand, the state's pipelines filled up quickly. Normally, other suppliers would redirect gas to places where the price was highest, and the situation would work itself out. But capacity is so limited that producers simply can't get more gas to California.
Supply and demand capitalism at work. The supply and demand were there, but the ability to allow the supply meet the demand was not. I can imagine a pincer situation occurred in company boardrooms: Raise prices to take advantage of the demand and risk government court action to penalize "price gouging", or have to face angry stockholders for failing to maximize profits.
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