Texas Energy Firm Gouged California

By MIGUEL BUSTILLO, JULIE TAMAKI, Times Staff Writers

SACRAMENTO--Citing what they called a textbook example of market manipulation, energy experts told state legislators Wednesday that a Texas company hoarded space on a key natural gas pipeline into California, causing electricity prices to skyrocket.
The testimony before an Assembly committee investigating the natural gas market highlighted a day in which another legislative panel, a joint Assembly-Senate committee, began probing whether energy companies are systematically gouging California.

Because natural gas is burned by many power plants to produce electricity, a move by El Paso Natural Gas Co. to sell pipeline capacity rights directly to an affiliate caused an increase in electricity prices, energy consultants told the Assembly subcommittee on energy oversight.
Much of the pipeline capacity subsequently went unused, and Southern California Edison alone had to pay $750 million more as a result of higher gas prices last year, they estimated.
"This is a classic economist's case for monopoly power," said Paul R. Carpenter of the Brattle Group, a Cambridge, Mass., consulting firm that provided the expert testimony. Executives from El Paso and Dynegy, another Texas energy company accused of anti-competitive activity on the same pipeline a few years earlier, are scheduled to testify today to defend their actions.

Power producers, energy marketers and some Republican lawmakers have argued that the surge in prices is not the result of any manipulation. Rather, they say, it is the logical consequence of California's refusal to build enough power plants to meet its needs, which has led to a dependence on wholesale power markets.

California lawmakers have no authority over interstate gas pipelines. The lines are regulated by the Federal Energy Regulatory Commission, which is scheduled to begin proceedings of its own next week into the claims of anti-competitive behavior on the pipeline.
Lawmakers also have little to no power over the wholesale electricity market, which falls under federal jurisdiction. But by examining the issues themselves, legislators hope to put pressure on FERC.

During the inaugural session of the joint committee on market manipulation, Stanford professor Frank Wolak told legislators that large power companies clearly had excessive influence over prices in California. FERC had not only done nothing to prevent that, he said, but had refused to define what "market power," the term used to define excessive influence, meant to the commission, a situation he deemed "mysterious."

It was at the Assembly hearing, however, that experts offered what they said was specific evidence of market manipulation. The Brattle Group consultants told lawmakers that after Pacific Gas & Electric Co. chose to relinquish the capacity it owned on the El Paso pipeline four years ago, it reverted back to the Texas company.

In a move that surprised industry observers, El Paso then sold the entire block to Dynegy, another Texas energy firm. The amount, one-third of the pipeline capacity, was clearly more than Dynegy would ever need or could ever sell to other marketers, the experts said.
Dynegy soon began charging what the experts said were unreasonably high rates for the right to use its capacity. That immediately caused the other main pipeline into California, which connects the state with the Pacific Northwest, to fill up. Gas prices at the border soon doubled compared to prices for the same commodity in the Texas basin, the experts said.
Yet that spike was nothing compared to what happened last year, when El Paso awarded the capacity contract to its sister company, El Paso Merchant Energy. That deal, combined with a surge in demand for natural gas caused by low electricity supplies, drove gas prices as much as 12 times as high as those in Texas. Never in American history had one company had such control over gas distribution into any region without regulatory checks on its profits, the experts said. "This is just simply unprecedented in the United States," Carpenter said.

In other power news Wednesday, Fitch Inc. placed California's general obligation bonds and lease obligations on "rating watch negative," which means the credit-rating agency is considering lowering the state's strong AA debt rating.

Fitch cited uncertainty created by PG&E's appeal of a recent ruling by state regulators that redirects a portion of customer rates to the state Department of Water Resources to pay for electricity. The appeal could delay the process of issuing bonds to pay for electricity, Fitch said. California Treasurer Phil Angelides said through a spokeswoman that he did not foresee further delays in repaying the bonds.