California: El Paso Corp. withheld gas during crisis, judge rules

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."

"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.

Environmental laws are one reason old pipelines are being rehabilitated; they are already on rights-of-way that have been previously and historically used for fuel delivery. Although environmental studies are needed, they are far less onerous that those required for new lines. And when new lines cross federal lands, look out for an endless parade of EIS's, public hearings, court fights, appeals, etc. Yes, they are very much a big part of why we occassionally have localized energy shortages leading to high commodity prices in the US.

Chief Judge Curtis L. Wagner, Jr. received his law degree from the University of Tennessee in 1951 and received his pre-legal education at Tennessee Polytechnic Institute. He was admitted to the Tennessee. Bar on March 31, l952.

His government service includes both the Criminal and Civil Divisions of the U.S. Department of Justice, and serving in a civilian capacity as Chief of the Regulatory Law Division in the Army's Office of The Judge Advocate General.

Prior to entering Government Service, Chief Judge Wagner was in the private practice of the law with Kramer, Dye, McNabb & Greenwood in Knoxville, Tennessee.

Chief Judge Wagner has extensive experience in mediation and other forms of alternative dispute resolution. He has successfully resolved many large multi-party cases at the Commission and has given many lectures on the subject.

He has been an Administrative Law Judge at FERC and its predecessor, the FPC, since l974, and has been Chief Judge since l978.

Chief Judge Wagner has received numerous awards including the Department of the Army's highest award, the Decoration For Exceptional Civilian Service. He appears in four separate editions of Who's Who.

El Paso was under no obligation whatsoever to ship that gas to CA.

Not so. Natural gas pipelines are regulated by the Federal Energy Regulatory Commission. El Paso had a pipleline with a certified capacity. It was obliged by law and contract to make all that capacity available. From the judgement:

26. El Paso Pipeline had a certificated capacity during the relevant period of 3,290 MMcf/d to its California delivery points. El Paso Pipeline never requested authority to abandon any portion of that certificated capacity. Under these circumstances, El Paso Pipeline was under an obligation to make 3,290 MMcf/d available to its California delivery points.
27. Further, under Section 16.3 of El Paso Pipeline’s ten-year settlement approved by the Commission (El Paso Pipeline Exhibit No. EPNG 14), El Paso Pipeline committed to no decrease in the quality or the quantity of gas during the term of the settlement. That service obligation was 3,290 MMcf/d to California.
28. By not making the 3,290 MMcf/d available El Paso Pipeline not only violated § 284.7 and § 284.9 of the Commission’s regulations, but also its commitment under the ten-year settlement. Since the average flow during the relevant period was only 2,594 MMcf/d, there was a withholding of 696 MMcf/d of capacity to the California delivery points.
http://www.ferc.fed.us/RP00-241-006-09-23-02.pdf

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.

Apparently, a pipeline company is obliged to either run its line at capacity or have that capacity reduced.

47. The record is clear that El Paso Pipeline could have operated at or near MAOP without violating the Department of Transportation’s regulations and could have made available an additional 210 MMcf/d of capacity to its California delivery points. Not doing so was a violation of El Paso Pipeline’s certificate obligation to transport 3,290 MMcf/d to the California border. The Chief Judge can understand a reluctance to run a pipeline at the allowable and expected MAOP when it has just suffered a rupture in its pipeline which resulted in deaths. At the same time, he finds that El Paso Pipeline was under a duty to maintain its pipeline in a condition that would permit operation at or close to MAOP, if necessary, to meet its certificate obligations.

Very good analysis Cedar Dave!

At the time, it was natual gas prices that went crazy. I now that the Sumas border price skyrocketed and seemed strange. I do think that there was some strange things happening in terms of natural gas capacity, the basic gas price was pretty high. If El Paso points a finger to the gasoline pipeline in Bellingham that blew up and killed 3, I suspect they can raise a good issue of going to max pressure on equipment they didn't trust.

However, this is politics and not science! El Paso will need to fight this on a political/public relations basis rather than filling the equivalent to a request for a reversal.

I suspect that Wagner, if he acts as I suspect, is tossing a bone to California with this and is planning on a swift kick to California's collective groin on some electric issues.

This should be interesting to watch.

Hmmm!
Can he do that?

On the capacity issue:

Since the average flow during the relevant period was only 2,594 MMcf/d, there was a withholding of 696 MMcf/d of capacity to the California delivery points.

The record is clear that El Paso Pipeline could have operated at or near MAOP without violating the Department of Transportation’s regulations and could have made available an additional 210 MMcf/d of capacity to its California delivery points. Not doing so was a violation of El Paso Pipeline’s certificate obligation to transport 3,290 MMcf/d to the California border.

Why the 696 MMcf/din one place and 210 MMcf/d in another?

The Chief Judge can understand a reluctance to run a pipeline at the allowable and expected MAOP when it has just suffered a rupture in its pipeline which resulted in deaths. At the same time, he finds that El Paso Pipeline was under a duty to maintain its pipeline in a condition that would permit operation at or close to MAOP, if necessary, to meet its certificate obligations.

Damn the torpedoes! Full speed ahead!

Thanks for the PDF link to the judge's order.

Just doing a calculation here 210 / 3290 is 6.4 % and 696 is 21%. I don't know what the total capacity into California but surely there must be other carriers.

If the Pipeline represents half of the total capacity into California then the per centage of total gas witheld would be %3.2 and %10.5. Certainly the gas price would go up and perhaps there wasn't enough gas to transport at the prices in the period previous to the period in question. I.E. Just the witholding of capacity would not seem to account for the large increase in prices .

Interstate Natural Gas Pipeline
Delivery Capacity to California
(Millions of Cubic Feet per Day)

Map Showing Western States' Natural Gas Pipelines

Pipeline	Current Capacity	Capacity Additions	2002 Total Capacity
PG&E El Paso Transwestern Kern River Southern Trails	1,920 3,290 1,090 700 --	200 500 -- 125 90	2,120 3,790 1,090 825 90
Total	7,000	915	7,915

http://www.energy.ca.gov/naturalgas/natural_gas_pipelines.html

BTW, the pipeline section that ruptured was about 3 ft. in diameter and approximately 50 years old. The explosion obliterated the pipeline section and created a very large crater in the ground. Due to its configuration on an approach to a bridge over the Pecos River, it could not be pigged to determine condition. A lot of existing pipelines are similarly old, and new Congressional legislation was passed to require more inspections and testing. Due to liability issues, you can be sure EPNG and other companies are checking out their individual systems to make sure a similar accident doesn't happen again, especially near a large population area.

I.E. Just the witholding of capacity would not seem to account for the large increase in prices .

El Paso didn't create the situation, they just profited from it by making it worse.

Regardless, this current decision has nothing to do with pricing. It concerns the obligation of a pipeline to carry its rated capacity.

The fact that El Paso owns natural gas production as well as transmission simply gave them the motive.

Due to liability issues, you can be sure EPNG and other companies are checking out their individual systems to make sure a similar accident doesn't happen again, especially near a large population area.

It's about time. El Paso is obliged to properly maintain its pipelines for safety and to provide the contracted capacity.

The U.S. Department of Transportation’s Research and Special Programs Administration (RSPA) today announced it is seeking the largest civil penalty ever proposed against a gas transmission pipeline operator in the history of the federal pipeline safety program.
The $2.52 million civil penalty, proposed today by RSPA’s Office of Pipeline Safety (OPS), is against El Paso Energy Pipeline Group for safety violations related to the August 2000 pipeline failure in Carlsbad, N.M.
snip
RSPA cited El Paso for the following safety violations:
• Failing to ensure that qualified personnel perform required internal corrosion control procedures.
• Transporting corrosive gas on numerous occasions without taking proper preventive and mitigative steps. This included failing to communicate to appropriate personnel when excessive water content was in the gas stream and when liquids and solids were found, and failing to perform necessary tests for corrosion.
• Failing to follow procedures for continuing surveillance of its facilities which would have led to action to control collection of liquid at low points, thereby mitigating conditions which led to the accident.
• Failing to take action to minimize the possibility of a failure recurrence following a similar incident in 1996.
• Not having an accurate elevation map for lines involved in the accident, which would have shown low points where liquid could accumulate and corrosion could occur.
http://ops.dot.gov/press/rsp1701.pdf

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Interstate Natural Gas Pipeline Delivery Capacity to California (Millions of Cubic Feet per Day)

Interstate Natural Gas Pipeline
Delivery Capacity to California
(Millions of Cubic Feet per Day)