California officials are continuing to negotiate with Houston-based El Paso Corp., hoping for a settlement of the state’s multi-billion-dollar claims of overcharges by one of the state’s principal natural gas suppliers, Gov. Gray Davis said Tuesday in Washington, DC, where he is attending a National Governors Association conference.

The governor, a consistent and vocal critic of merchant energy suppliers since the state’s 2000-2001 wholesale price/supply crisis, told reporters in Washington that he would prefer to reach a settlement with El Paso ahead of the Federal Energy Regulatory Commission ruling on a pending case involving the nation’s largest interstate gas pipeline operator.

Industry analysts have speculated that a settlement would be better for El Paso, whose financial standing has been heavily undermined by the wholesale energy trading meltdown, and for California’s governor, whose standing in the political polls has plummeted despite his re-election last November to a second four-year term. A faction of the Republican Party in California is mounting a growing signature drive to recall Gov. Davis.

In the face of California’s contention that it was overcharged $3.3 billion for natural gas in the 2000-2001 period and an ongoing FERC investigation in which the administrative law judge has proposed a Commission rebuke of the pipeline company, El Paso strongly denies any wrongdoing, and has put much time and money into defending itself at FERC and in the news media.

Tough demands from California’s Attorney General Bill Lockyer and El Paso’s weakened financial position have damped prospects for a settlement, according to an industry source quoted in a Reuters report. Davis, however, confirmed that the talks were continuing.

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