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 competition."

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 border.

"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" generation units.

"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 gas prices.

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 shipped."

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

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