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.
Do they do periodic pressure testing on pipelines?
Me too. In another article [not posted] on the subject, it was estimated that El Paso trading division made "over one hundred million" dollars on this so-called "scam".
My guess is that California made up the $3 billion figure just like they did the $9 billion that the "energy pirates" owed them: because it sounded good in press releases.
I'd second that guess. We also shouldn't forget that the California government was not buying natural gas as it was electricity. So, even if there were $50 billion in excesssive profits due to manipulation, it wouldn't be owed to "California."
California did very little direct buying of Natural Gas.
Chronicle Washington Bureau
Washington - A key senator said yesterday that he would try to kill or rewrite a federal war-powers law used to force suppliers to keep shipping natural gas to California during its electricity crisis.
Sen. Phil Gramm, R-Texas, said that a 1950 law enacted during the height of the Korean War should not be applied in peace-time to make private companies sell gas to nearly bankrupt California utilities.
Former President Clinton first invoked the Defense Production Act Jan. 19, - a day before leaving office - to allow Pacific Gas & Electric Co. to continue buying natural gas. PG&E relies on gas to make electricity, and its near bankruptcy scared off gas suppliers.
President Bush extended the gas emergency order for two more weeks after taking office, but refused any further extensions when it expired this past Wednesday.
Gramm, who chairs the Senate Banking Committee and held a hearing on the order yesterday, called the law "powerful and potentially dangerous".
National security should not be invoked to deal with utility credit problems, Gramm said. He charged it was an abuse for the federal government to make suppliers "sell to parties that they would not have supplied in the absence of the use of the police power of the federal government".
Gramm also charged that the orders had created a potential financial liability for federal taxpayers, who could wind up footing the bill if the suppliers who were ordered to provide gas are not paid in return.
But PG&E spojesman Shawn Cooper said the company intends to make its monthly gas payment to suppliers - estimated at $300 million - when the bills come due Feb. 25. PG&E, the main investor-owned utility serving Northern California, uses about 1 billion cubic feet of natural gas each day.
Eric Fygi, the Energy Department's acting counsel who defended the orders, said use of the act was justified because otherwise PG&E might have seized gas flowing to military bases in California and diverted it to residential customers.
Gramm, a pro-market conservative, was unconvinced, however, noting the law had been used by President Nixon to impose wage and price controls during the nation's last energy crisis in the 1970s.
"We're not going to extend the Defense Production Act as it's now written. It's either going to die or it's going to be dramatically rewritten," Gramm said. "In a free society, in the midst of peace-time, it ought to be an extraordinary action, in my opinion, for the government to be taking people's property and dictating prices."
Are you sure? (California) State building natural gas reserve ! Officials refuse to reveal details of the contract
The issue comes down to materials science. Hydrostatic testing is a way of "proofing a system." It can also make things worse by damaging a pipeing system. For example if you have modest material cracking the hydrostatic test can increase the size of some of them. Most of the piping experts I talked to (at the time) stated that repeated and frequent hydro-static testing was generally not a good idea. They urged other non-destructive testing methods.
They did some statistical magic and estimated the number of hydro-stats before the units would have to be replaced. Somehow, the maximum number always came out a few more than they would need to do.
I am thinking that NDT might not be feasable on a long pipeline. Somehow you need to get the cobalt source inside the pipeline to do X-ray testing, then reading all those films is a black art, anyway.
Eddy current testing? I had thought that was only useful on non-ferrous materials, but could be wrong.
Mag-particle inspection would probably work well, but would be really expensive. I mean, there must be a lot of weld joints in a thousand-mile pipeline.
I'm just speculating here, since I have no special knowledge other than just seeing this kind of stuff done in other environments.
Sen. Phil Gramm, R-Texas, said that a 1950 law enacted during the height of the Korean War should not be applied in peace-time to make private companies sell gas to nearly bankrupt California utilities.
Check out the description at http: Collapsible ‘Smart Pig’ for Pipeline Inspection
Back to your memory from the past! Sen. Gramm 's statement: "In a free society, in the midst of peace-time, it ought to be an extraordinary action, in my opinion, for the government to be taking people's property and dictating prices."
That is happening in a number of places not just in the buying of natural gas.
and I mean that in California with the environmentalists!!
Actuallly, at the location where the Bellingham pipeline failed a smart pig had earlier detected a discontinuity in the pipeline. If one assumed that the abnormality was caused by corrosion, the depth did not require repair under the ASME code. If it was a gouge (with stress concentration) then it required immediate repair.
The pipeline operator fought with one of its employees over the catorization of the discontinuity. The operator determined that it was a corrosion. It was also at a real low point in the line and no nearby pressure releif. It wasn't corrosion, there was a waterhammer and two boys and a young man died.
I liked your description of Diablo Canyon. When I was at Bechel Power SF Power Div Headquarters we kept hearing stories about how PG&E was having price contolled plate steel welded into I beams, because there was a shortage of I-Beams. Some things associated with the long errection of that plant were crazy.
Thanks for that information on the pipeline testing.
I am becoming even more cynical (if that's possible) about the media in this country. They might as well just make up the "news".
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