Accusations Fly Over CA's Energy Crisis; Davis Calls for Probe
The main targets of California's legal and political ire ---
Texas-based energy giants --- are denying any wrongdoing in the
face of lawsuits and a state legal probe launched last week in the
midst of continuing price spirals and tight supplies for natural
gas and electricity throughout the greater western region.
California Gov. Gray Davis earlier in the month asked his state
attorney general to investigate the recent severe spike in
wholesale natural gas prices at the California border, where prices
are among the highest in the nation. In a separate action, two
class action lawsuits were filed last week (Dec. 18) in California
Superior Court, alleging that gas and electricity price spikes are
the result of a four-year-old "conspiracy" by Southern California
Gas, San Diego Gas and Electric and El Paso Natural Gas.
El Paso Energy last Thursday issued a "public and unequivocal
denial" of the claims that it conspired with SoCalGas and SDG&E
over a four-year period to drive up the price of gas and power in
California as alleged in the claims made earlier in the week in two
class action lawsuits filed in California Superior Court.
"We deplore this attempt by plaintiffs' attorneys to advance
their cause by taking advantage of the media focus on California's
unfortunate circumstances," El Paso Spokeswoman Norma F. Dunn said.
"As virtually all knowledgeable parties have publicly recognized,
the present energy shortages result from the concurrence of a
variety of circumstances, including unusually warm summer weather
followed by high winter demand, low gas storage levels, poor
hydro-electric power conditions, maintenance downtime of
significant generating facilities, price caps that discouraged
power movement from out-of-state into California, etc."
On Dec. 15, California's governor said he wanted Attorney
General Bill Lockyer to examine "anti-competitive practices" among
natural gas suppliers to the state, "including transportation of
gas to the California border," to determine if any state or federal
laws have been broken. "I am further requesting that you determine
whether civil or criminal remedies are available for consumers who
have been harmed, and whether and how the state can pursue those
remedies," Gov. Davis said in a prepared statement.
"Current spot market prices are neither competitive nor
affordable. They threaten key sectors of California's economy."
The California Public Utilities Commission has a complaint
before federal regulators regarding El Paso Natural Gas'
relationship with its marketing affiliate, El Paso Merchant Energy,
in influencing California-Arizona border gas prices. With increased
concerns expressed by gas-dependent industries in the state, the
issue of natural gas prices is now sharing the front-page spotlight
with electricity supply/price concerns.
Separate class action lawsuits tied to California's natural gas
and electricity price spikes were filed Dec. 18, alleging that a
"conspiracy" dating back to 1996 between Sempra Energy's two
utility companies and El Paso Natural Gas has contributed to the
state's skyrocketing energy prices and short supplies.
In a tersely worded statement from its San Diego headquarters,
Sempra said it had not been served with a lawsuit, so it could not
comment on the merits of the allegations, but it added that "any
allegations that the company or its subsidiaries violated
anti-trust or other laws are completely false." An El Paso
spokesman also said the company had just learned of the suit and
hadn't had time to review it.
California's current natural gas and electricity woes are the
"direct result of a conspiracy among the natural gas industry's
most powerful Southern California players to preserve and maintain
the market dominance that they have enjoyed for many years as
monopolies," it was alleged in a class action suit filed by a Los
Angeles law firm on behalf of a SoCalGas industrial customer and
its 1,600 largest industrial customers as a group.
A simple review of the facts shows the inaccuracy of many of the
allegations, Dunn said. "Neither El Paso Energy Corp. nor any of
its affiliates have been or are now engaged in any illegal
activities, alone or in combination with any other parties, to
increase energy prices or create energy shortages in California."
In a Dec. 13 letter to FERC, El Paso CEO William A. Wise noted
that prior to the recent price increases El Paso Merchant Energy
limited its opportunity to profit from such increases by putting in
place financial hedges designed to protect against falling prices.
Dunn said these hedges belie the assertion that El Paso had
anticipated the recent increase in natural gas prices, much less
been involved in causing it. "Similarly, the lawsuits' claims of a
conspiracy overlook, misrepresent, and misinterpret evidence and
events that contradict the contrived conspiracy theory and render
it totally unbelievable," she said.
Attorney General Probe Continues
An electricity investigation by California's attorney general is
still ongoing, although no evidence of illegal actions by
marketers/generators has been uncovered. Nevertheless, in reacting
strongly against the Federal Energy Regulatory Commission
electricity order last Friday, Gov. Davis said the federal
regulators' action will "ensure unconscionable profits for the
pirate generators and power brokers who are gouging California
consumers and businesses."
The class action lawsuits allege restraint of trade and unfair
competition/business practices in the 43- and 48-page mirror image
court filings, contending that the three companies agreed to
"refrain from competition, not to challenge one another's mergers,
and to exchange reciprocal benefits designed to eliminate
On the gas side of the lawsuits, there are a host of anti-trust
charges and claims that El Paso and Dynegy (formerly Natural Gas
Clearinghouse) conspired to create the price differential that has
developed between spot or "index" natural gas prices in the San
Juan Basin of New Mexico, compared to the Arizona-California
"This was, in fact, accomplished because the large block of
capacity (1.3 Bcf/d) that El Paso sold to Dynegy, gave Dynegy
market power to restrict pipeline capacity and to lower total
volumes of gas delivered to the market, thus raising prices," the
lawsuits filed by an LA-based firm alleged.
The complaints also accuse Dynegy and El Paso Merchant Energy of
purchasing California qualifying facility (QF) electric generation
plants for which they could use their market power to inflate the
California border prices to increase their profits from "must-run"
"Under the rules of California's electric industry
restructuring, such QF's are 'must-run' facilities that sell a very
high percentage of their maximum capacity on a daily basis," the
lawsuits argued. "With a guaranteed pass through in place, if the
operator of the QF --- Dynegy or El Paso --- is a company with the
market power to raise border prices and increase price spreads
between the supply markets and the border markets, such increased
spreads are pure, riskless profits." Even geothermal plants
operated by El Paso Merchant, the lawsuit alleged, have benefited
from pricing formulas tied to the California-Arizona border natural
Both suits cite an alleged Sept. 25, 1996 meeting among "top
executives" of the three companies named that was held in Phoenix
"secretly to hatch a conspiracy to dominate the unregulated aspects
of the natural gas and electricity markets." At this time, the suit
contends, the representatives of the three companies agreed "not to
compete against each other in the Southern California and Baja
California (Mexico) natural gas delivery markets."
A typed agenda for the alleged meeting, listing executives ---
past and present --- with the three companies and hand-written
drawings are attached as addendums to the court filings. The
alleged illegal agreement was arrived at within weeks of the parent
companies of SoCalGas and SDG&E announcing plans for a merger
that led to the creation of Sempra in mid-1998 and prior to El Paso
buying Tenneco, which at the time had competing proposals for
bringing new gas supplies to California and to Baja.
"As to the charge that Merchant Energy withheld its capacity to
drive up California gas prices, commencing before the recent price
increases and throughout this period, virtually all of that
capacity that has been physically available has been utilized to
move gas to California," El Paso's Dunn said. "The capacity of
California's own in-state facilities to receive gas is not
physically sufficient to accept much more gas than has been
Dunn said El Paso intends to respond to the California lawsuits
in court, refuting with independent evidence all claims that it
played any illegal role in California's current crisis.
Richard Nemec, Los Angeles