PUC Contends Pipeline Ploys Jack Up Prices Lawyers say Texas firm limiting natural gas flow to maximize profit

Bernadette Tansey, Chronicle Staff Writer Sunday, February 11, 2001

California's torturous struggle with soaring electricity and natural gas prices is being driven by market manipulation on the part of a giant Texas gas pipeline firm seeking to maximize profits.

That's the conclusion of attorneys with the state Public Utilities Commission, who claim that anticompetitive maneuvers by El Paso Natural Gas Co.

jacked up gas prices, causing a cascade of rising bills not only for gas but also for electricity.

The state charges that El Paso, the biggest pipeline company in North America, is deliberately restricting the flow of gas through its extensive network of pipes into California. The PUC has filed a complaint with federal officials asking them to force El Paso to allow other gas marketers to ship gas through its pipelines at reasonable rates.

El Paso denies it has done anything wrong, and blames a host of other factors for the boost in gas prices, including an unusually hot summer and cold winter, low storage reserves and rising demand for electricity.

Whatever the cause, the price hikes for gas are being felt keenly by Californians. Utility companies are permitted to pass along the full cost of their gas purchases to ratepayers. For customers of Pacific Gas and Electric Co., the average gas bill has nearly tripled in a year, from $46 in January 2000 to $122 in January this year.

Spot prices for natural gas in California have risen to more than double national rates despite the fact that there are supplies available and room in pipelines to carry gas into California, the PUC charges. This has led to a double whammy of higher gas prices and increased production costs for electricity plants that run on natural gas.

Gas prices have been rising nationwide, but state authorities say El Paso's alleged anticompetitive acts magnified the effect in California.

HISTORICAL ANALOGY

Harvey Morris, the lead PUC attorney in the state's claim against El Paso, said that in the wake of deregulation, energy companies are exercising the kind of monopoly power that led to the formation of regulatory agencies to protect consumers in the early 20th century.

"California now knows what was going on in the '20s and '30s," Morris said. "They went after consumers with a vengeance."

El Paso executives deny they have manipulated the market by withholding pipeline capacity.

"Such allegations are totally unfounded," William Wise, president of El Paso's parent company, said in a letter to federal energy officials Dec. 13.

Wise said the company has offered to sell space on the pipelines, but has gotten no takers. The state counters that there have been no takers because the price is exorbitant.

El Paso also says it can't benefit from rising prices because it has contracts at fixed rates to sell 95 percent of the gas it is shipping through its pipelines.

"El Paso has substantially limited its ability to benefit from higher gas prices in California," Wise said. Company representatives said they could not comment further on the PUC complaint.

El Paso has grown substantially in recent years, and in 1999 became the largest natural gas pipeline company on the continent.

Morris, who has 19 years' experience in energy law, saw a curious change in the pattern of pipeline contracts at El Paso starting in 1998.

LARGE CAPACITY

The Texas firm runs one of the largest pipeline networks bringing natural gas into Southern California from gas-producing basins in the Southwest and Mexico. El Paso and other companies expanded pipelines in the mid-1990s, so California has plenty of capacity to import gas even in the winter months of high demand, PUC analysts say.

To sell off the excess space, El Paso routinely used to offer discounts on transportation fees to gas shippers.

But in 1998 an energy company named Dynegy bought up most of the extra capacity on El Paso's pipelines, well over the amount it needed to supply its own customers, according to the PUC.

Instead of reselling the excess to other gas marketers and scoring a quick profit, Dynegy let the space remain unused. At the same time, Morris said, El Paso Natural Gas stopped offering discounted transportation rates to other shippers.

The effect was the same as physically narrowing the pipeline, the PUC said. Space became scarce and therefore more expensive. Gas prices started to rise at the Southern California border.

The rising border price was a potential bonanza for companies like Dynegy and El Paso, whose affiliates sell both gas and electricity, the PUC concluded.

They could forgo the much smaller profit from selling pipeline space.

The state urged the Federal Energy Regulatory Commission to vacate the Dynegy contract. Federal officials refused, saying they saw some anticompetitive features in the deal but not enough to void it.

Last year, one of El Paso's own affiliates, a gas marketing firm named El Paso Merchant Energy, took over what had been Dynegy's contract. The state has gone back to FERC, saying that arrangement is plainly anticompetitive.

PRICE HIKE AT BORDER

As demand for natural gas rose sharply over the past year, El Paso and its affiliate have maintained a stranglehold on shipments, the PUC says, and the price of natural gas has jumped sharply at the Southern California border.

The impact was felt beyond Southern California, the PUC concluded. Canadian gas suppliers, which had been providing lower-priced gas to PG&E's service area -- Northern and Central California -- pegged their rates to the rising Southern California border price. California became an "energy island" with gas rates uniformly lifted above the national average.

FERC has not yet acted on the latest PUC complaint. Representatives of the federal agency were not available for comment.

FERC has shown little inclination to intervene in California's chaotic energy market, however. Federal regulators have ignored pleas by the PUC and Gov. Gray Davis, among others, to impose wholesale price controls, saying that the state should raise consumer rates and let market forces fix things.

California's utilities have joined the PUC in protesting El Paso's pipeline situation. Southern California Edison, which serves 4.3 million customers, complained to federal officials about the El Paso contracts in 1998, fearing they would drive up the cost of producing electricity. Electric rates, unlike gas prices, are still capped in much of California, and utilities have been losing billions of dollars in recent months.

PG&E and San Diego Gas & Electric also have sided with the state, but did so only recently, once electricity prices started soaring. Southern California Gas also supports the complaint.

OTHER ACTIONS AGAINST EL PASO

The PUC action isn't the only one accusing El Paso of anticompetitive practices. In a separate case, attorneys for utility customers in Southern California claim El Paso began manipulating the California market as far back as 1996.

In two lawsuits filed in Los Angeles, the attorneys say El Paso colluded with Southern California Gas and San Diego Gas & Electric to restrict competition in the natural gas market.

The suits accuse El Paso of canceling construction of a proposed pipeline that would have connected cheaper gas fields in Canada to the Southern California market. The Texas firm and the two utilities then agreed to divide up territories in California and Mexico where each had been competing to build pipelines, the suit alleges.

El Paso spokeswoman Norma Dunn called the civil complaint a "contrived conspiracy theory."

Denise King, a spokeswoman for SoCalGas and San Diego Gas & Electric, said company executives met with El Paso leaders but discussed no illicit scheme concerning natural gas.

"The theories of the plaintiffs' attorneys make no sense," King said. "In fact, both utilities have been aggressively pressing federal regulators to address the high natural gas prices in the marketplace they regulate."

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-- Martin Thompson (mthom1927@aol.com), February 11, 2001