The main targets of California’s legal and political ire —Texas-based energy giants — are denying any wrongdoing in theface of lawsuits and a state legal probe launched last week in themidst of continuing price spirals and tight supplies for naturalgas and electricity throughout the greater western region.

California Gov. Gray Davis earlier in the month asked his stateattorney general to investigate the recent severe spike inwholesale natural gas prices at the California border, where pricesare among the highest in the nation. In a separate action, twoclass action lawsuits were filed last week (Dec. 18) in CaliforniaSuperior Court, alleging that gas and electricity price spikes arethe result of a four-year-old “conspiracy” by Southern CaliforniaGas, San Diego Gas and Electric and El Paso Natural Gas.

El Paso Energy last Thursday issued a “public and unequivocaldenial” of the claims that it conspired with SoCalGas and SDG&Eover a four-year period to drive up the price of gas and power inCalifornia as alleged in the claims made earlier in the week in twoclass action lawsuits filed in California Superior Court.

“We deplore this attempt by plaintiffs’ attorneys to advancetheir cause by taking advantage of the media focus on California’sunfortunate 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 avariety of circumstances, including unusually warm summer weatherfollowed by high winter demand, low gas storage levels, poorhydro-electric power conditions, maintenance downtime ofsignificant generating facilities, price caps that discouragedpower movement from out-of-state into California, etc.”

On Dec. 15, California’s governor said he wanted AttorneyGeneral Bill Lockyer to examine “anti-competitive practices” amongnatural gas suppliers to the state, “including transportation ofgas to the California border,” to determine if any state or federallaws have been broken. “I am further requesting that you determinewhether civil or criminal remedies are available for consumers whohave been harmed, and whether and how the state can pursue thoseremedies,” Gov. Davis said in a prepared statement.

“Current spot market prices are neither competitive noraffordable. They threaten key sectors of California’s economy.”

The California Public Utilities Commission has a complaintbefore federal regulators regarding El Paso Natural Gas’relationship with its marketing affiliate, El Paso Merchant Energy,in influencing California-Arizona border gas prices. With increasedconcerns expressed by gas-dependent industries in the state, theissue of natural gas prices is now sharing the front-page spotlightwith electricity supply/price concerns.

Separate class action lawsuits tied to California’s natural gasand electricity price spikes were filed Dec. 18, alleging that a”conspiracy” dating back to 1996 between Sempra Energy’s twoutility companies and El Paso Natural Gas has contributed to thestate’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 notcomment on the merits of the allegations, but it added that “anyallegations that the company or its subsidiaries violatedanti-trust or other laws are completely false.” An El Pasospokesman also said the company had just learned of the suit andhadn’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’smost powerful Southern California players to preserve and maintainthe market dominance that they have enjoyed for many years asmonopolies,” it was alleged in a class action suit filed by a LosAngeles law firm on behalf of a SoCalGas industrial customer andits 1,600 largest industrial customers as a group.

A simple review of the facts shows the inaccuracy of many of theallegations, Dunn said. “Neither El Paso Energy Corp. nor any ofits affiliates have been or are now engaged in any illegalactivities, alone or in combination with any other parties, toincrease energy prices or create energy shortages in California.”

In a Dec. 13 letter to FERC, El Paso CEO William A. Wise notedthat prior to the recent price increases El Paso Merchant Energylimited its opportunity to profit from such increases by putting inplace financial hedges designed to protect against falling prices.Dunn said these hedges belie the assertion that El Paso hadanticipated the recent increase in natural gas prices, much lessbeen involved in causing it. “Similarly, the lawsuits’ claims of aconspiracy overlook, misrepresent, and misinterpret evidence andevents that contradict the contrived conspiracy theory and renderit totally unbelievable,” she said.

Attorney General Probe Continues

An electricity investigation by California’s attorney general isstill ongoing, although no evidence of illegal actions bymarketers/generators has been uncovered. Nevertheless, in reactingstrongly against the Federal Energy Regulatory Commissionelectricity order last Friday, Gov. Davis said the federalregulators’ action will “ensure unconscionable profits for thepirate generators and power brokers who are gouging Californiaconsumers and businesses.”

The class action lawsuits allege restraint of trade and unfaircompetition/business practices in the 43- and 48-page mirror imagecourt 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 eliminatecompetition.”

On the gas side of the lawsuits, there are a host of anti-trustcharges and claims that El Paso and Dynegy (formerly Natural GasClearinghouse) conspired to create the price differential that hasdeveloped between spot or “index” natural gas prices in the SanJuan Basin of New Mexico, compared to the Arizona-Californiaborder.

“This was, in fact, accomplished because the large block ofcapacity (1.3 Bcf/d) that El Paso sold to Dynegy, gave Dynegymarket power to restrict pipeline capacity and to lower totalvolumes of gas delivered to the market, thus raising prices,” thelawsuits filed by an LA-based firm alleged.

The complaints also accuse Dynegy and El Paso Merchant Energy ofpurchasing California qualifying facility (QF) electric generationplants for which they could use their market power to inflate theCalifornia border prices to increase their profits from “must-run”generation units.

“Under the rules of California’s electric industryrestructuring, such QF’s are ‘must-run’ facilities that sell a veryhigh percentage of their maximum capacity on a daily basis,” thelawsuits argued. “With a guaranteed pass through in place, if theoperator of the QF — Dynegy or El Paso — is a company with themarket power to raise border prices and increase price spreadsbetween the supply markets and the border markets, such increasedspreads are pure, riskless profits.” Even geothermal plantsoperated by El Paso Merchant, the lawsuit alleged, have benefitedfrom pricing formulas tied to the California-Arizona border naturalgas prices.

Both suits cite an alleged Sept. 25, 1996 meeting among “topexecutives” of the three companies named that was held in Phoenix”secretly to hatch a conspiracy to dominate the unregulated aspectsof the natural gas and electricity markets.” At this time, the suitcontends, the representatives of the three companies agreed “not tocompete against each other in the Southern California and BajaCalifornia (Mexico) natural gas delivery markets.”

A typed agenda for the alleged meeting, listing executives —past and present — with the three companies and hand-writtendrawings are attached as addendums to the court filings. Thealleged illegal agreement was arrived at within weeks of the parentcompanies of SoCalGas and SDG&E announcing plans for a mergerthat led to the creation of Sempra in mid-1998 and prior to El Pasobuying Tenneco, which at the time had competing proposals forbringing new gas supplies to California and to Baja.

“As to the charge that Merchant Energy withheld its capacity todrive up California gas prices, commencing before the recent priceincreases and throughout this period, virtually all of thatcapacity that has been physically available has been utilized tomove gas to California,” El Paso’s Dunn said. “The capacity ofCalifornia’s own in-state facilities to receive gas is notphysically sufficient to accept much more gas than has beenshipped.”

Dunn said El Paso intends to respond to the California lawsuitsin court, refuting with independent evidence all claims that itplayed any illegal role in California’s current crisis.

Richard Nemec, Los Angeles

©Copyright 2000 Intelligence Press, Inc. All rightsreserved. The preceding news report may not be republished orredistributed in whole or in part without prior written consent ofIntelligence Press, Inc.