California Class Action Suits Hit El Paso, Sempra
Class-action lawsuits overshadowed the political finger-pointing in California last week as multiple El Paso Energy and Sempra Energy subsidiaries were hit with complaints for alleged conspiracy and price manipulation that led to abnormally high gas prices for consumers.
The firm Lieff Cabraser, Heimann & Bernstein fired off a complaint on Friday on behalf of all the commercial and residential gas customers in the state of California against El Paso Natural Gas and its marketing affiliates for allegedly rigging a capacity auction to gain market power and then manipulating gas prices at the California border.
El Paso Natural Gas also was named in two other class-action complaints last week along with Sempra Energy's two utility companies. In those lawsuits filed in the Los Angeles Superior Court on Wednesday, the cities of Los Angeles and Long Beach alleged that the pipeline and the utilities conspired in mid-1990s to block development of two new interstate gas pipelines into the state, resulting in excessively high prices at the California-Arizona border.
All the lawsuits are a reaction to the high price of natural gas in the state, particularly at the Southern California border where spot prices hit new records on the daily and bidweek markets this winter.
In the Lieff Cabraser, Heimann & Bernstein case against El Paso and affiliate, Plaintiff's attorney Barry R. Himmelstein explained that El Paso Natural Gas "basically created a situation where customers within California were not able to obtain the amount of gas they had contracted for and that forced the [customers] onto the spot market to buy gas, including from [Merchant Energy]. They basically created an artificial shortage and became one of the only companies that had supplies available from which people could make up that shortage; that's market power," he said.
That complaint alleges that El Paso Merchant Energy, a marketing affiliate of El Paso Natural Gas and Mojave Pipeline, secretly obtained a 50% firm transportation rate discount from Mojave Pipeline prior to submitting a bid for 1.2 Bcf/d of firm capacity on the upstream El Paso Natural Gas system (Merchant Energy eventually ended up with 1.4 Bcf/d after purchasing two other packages of firm capacity).
The plaintiffs, which include Sweetie's Bar --- a commercial gas customer in California --- on behalf of itself and all other "similarly situated" commercial and residential customers in the state, use as one piece of evidence a Feb. 9, 2000 e-mail from Robert Cox, vice president of Merchant Energy, regarding the discounts on Mojave. The e-mail was obtained in comments filed with the Federal Energy Regulatory Commission by the California Public Utilities Commission in a similar case involving El Paso. The Mojave discounts were significant because they allowed Merchant Energy to bypass the bottleneck that occurs at the SoCalGas delivery point at the California-Arizona border at Topock, AZ. The discounts would enable Merchant Energy to transport at reduced rates a significant amount of gas from Topock down the Mojave line and through the Wheeler Ridge delivery point into Southern California Gas Co.'s system, the complaint said.
Once that option was obtained, the plaintiffs allege, Merchant Energy was able to confidently outbid all other competitors for the El Paso Natural Gas capacity. Furthermore, once Merchant Energy obtained the capacity rights on El Paso, it was able to use its market power allegedly to drive up prices at the Southern California border and in fact throughout the state of California.
"By controlling a substantial portion of deliverable natural gas, [Merchant Energy] thereby controls prices and suppresses competition in the Topock spot market," the complaint states..... In inelastic markets such as these, one participant that controls a sizable percentage of supply can manipulate the market and cause price spikes."
The damages amount to "a lot" of money, Himmelstein said, noting that the California Department of Energy estimated that ratepayer costs from last March through this winter went up by about $7 million per day for every $1/MMBtu increase in the basis differential between the Southern California border and the San Juan Basin. "I really can't give you a number," said Himmelstein. "The damages calculation in an antitrust case is a very complex matter and I really can't give you off the cuff even a ballpark estimate but it's a lot." In the complaint the Plaintiffs state that historical basis between Topock and the southwestern supply basin has been about 25-50 cents, but in recent months has skyrocketed during bidweek to $7/MMBtu. In the daily spot market, basis spiked above $50 in December 2000 and still varies between $6 and $20/MMBtu. "These increases are extremely costly to consumers," the complaint said.
Regarding the selection of the lead plaintiff in this case, Sweetie's Bar, Himmelstein said, "They are a typical class member. They are a business that pays a monthly gas bill, and it has really gone up."
El Paso Energy Corp. spokesman Mel Scott said the company was not prepared to comment on the particular details of these lawsuits. He referred to prior statements from the company on earlier cases in which El Paso stated that "Allegations that natural gas prices were deliberately manipulated by withholding capacity on the El Paso Natural Gas pipeline overlook critical facts and are demonstrably untrue."
Himmelstein said he doesn't expect a quick resolution in the this case. "I would expect more than a year if the matter is litigated as we anticipate it will be."
He doubts his case will be consolidated with the other class action lawsuits. "I would expect that the defendants will attempt to have the proceedings consolidated either in state court or in federal court as they have in the electricity cases. But the theory asserted in our complaint is different from the theory asserted in the other complaints that are already on file."
There are a total of four other gas complaints on file. The other cases are proceeding on a theory that the gas companies and defendants in those actions basically agreed not to build additional pipeline capacity into California and that is responsible at least in part for the high prices this year and last.
Long Beach's complaint claims damages continue today, but it asks a minimum of $28 million covering the period of November 2000 through February 2001.
"Our suit is based along the same line of factual information as the other class action lawsuits," said Long Beach's Bob Shannon, noting that the city is using the same private attorneys in Los Angeles who filed the earlier class action suits.
As a result of the continuing gas price aberration at the California-Arizona border, retail gas bills in Long Beach have quadrupled in many cases, said Chris Garner, general manager of the city gas and electric department, which has about two-thirds of its supplies coming from the California border, with SoCalGas transporting the volumes to the city distribution system.
Saying that the Sempra companies are "stunned" by the lawsuit, a SoCalGas spokesperson in Los Angeles argued that "the conspiracy theories have no basis in reality."
Los Angeles, which operates the largest municipal electric utility in the nation, LA Department of Water and Power (LADWP), has avoided the power price spikes and rolling blackouts that the state's major investor-owned utilities have struggled with for months, but it has been hurt by prevailing wholesale natural gas price spikes.
In the past years, LADWP has protected its native generation for LA residents with long-term gas deals, but for the extra power that it has been selling into the California grid it has been dependent on spot supplies at the border, much like the Long Beach Gas Department.
In its lawsuit, Los Angeles City Attorney, James Hahn, who is a leading candidate for mayor, said the alleged conspiracy has led to both natural gas "price-gouging" and has helped worsen the continuing electricity crisis in the state. LA alleges "unfair, unlawful and fraudulent business practices" along with violating state anti-trust laws.
One source, however, said LADWP's leaders believe it is a "long stretch" to think anti-trust laws were actually violated, and that El Paso, SoCalGas, et al., actually conspired to rig prices. "The proposed pipelines died of their own weight," the source said. "And there is no other evidence other than the memo on the meeting in a Phoenix motel room." Rocco Canonica; Richard Nemec, Los Angeles