El Paso Corp. Chairman William Wise said Wednesday he was “absolutely convinced” FERC will overturn the ALJ ruling that found El Paso Natural Gas guilty of skirting the Commission’s affiliate standards when awarding transportation capacity on its system. But even if the agency doesn’t do this, he said it was unlikely that the company would be slapped with a major penalty.

“There has never [been a] penalty assessed of more than $8 or $10 million in an affiliate violation case,” Wise said during a teleconference with reporters and analysts. In a worst-case scenario, the Commission could order El Paso Merchant Energy Co. — the chief beneficiary of the affiliate violations — to disgorge all of the profits that it made during the period that it held the capacity, which Chief ALJ Curtis Wagner Jr. estimated in his initial decision were $185 million, Wise said. But that action by FERC “would be extraordinary and certainly without precedent” as a remedy.

California regulators and others had argued that El Paso Merchant ended up the big winner in the February 2000 open season, snaring three contracts for 1.22 Bcf/d of firm capacity on the El Paso pipeline, because it received inside information about a discount interruptible transportation rate on El Paso affiliate Mojave Pipeline, while non-affiliate bidders weren’t privy to the same information. That information, critics said, gave El Paso Merchant an advantage over non-affiliate shippers when bidding for the capacity.

But even if FERC should order the profits to be disgorged, Wise said El Paso Merchant still would have a “zero sum game” in California, once offsetting receivables owed by state utilities are collected. He said California utilities currently owe El Paso “significant dollars,” which he estimated were in the range of $200 million.

In the end, Wise said he believes the likely scenario will be that “we will convince the Commission that our position [on the affiliate issues] is correct, or that…a much smaller penalty, if any,” should be assessed.

He noted he has not dismissed the prospect of reaching a settlement with the California Public Utilities Commission and other parties on the affiliate issue. “[I am] not averse to settling this matter,” Wise said, adding that he would have to first see “how much reality [has been] put into the formula” in the wake of Wagner’s decision.

Wise said he was “very pleased” with Wagner’s ruling that El Paso Merchant did not appear to flex its market power to drive up prices for gas delivered to southern California beginning in mid-2000. Although the judge found that El Paso had market power, he said there was no evidence to suggest that the company exercised it to manipulate prices. Wagner recommended that the full Commission dismiss these charges.

Wagner’s decision on the market-power issues was “well reasoned and supportable,” said Wise, adding that he “completely agreed with our position.”

In an analysis of the ALJ decision, Credit Suisse Equity Research concluded that the rulings on both the affiliate and market-power issues were “enormously positive for [El Paso] in that they greatly minimize the risk of civil lawsuits or other actions that could have resulted in liabilities of billions of dollars.”

At this stage, “we consider the ‘worst case’ for [El Paso] to be a ‘disgorgement of profits’ plus other fines in the range of $180-$200 million,” according to analyst Curt Launer.

UBS Warburg reached similar conclusions. “Though not a clean sweep, we believe the net outcome from his [Wagner’s] decisions are a substantial positive for El Paso, and have significantly reduced the company’s limited exposure to the highly politicized California mess,” said analyst Ronald Barone in a “Research Note.”

Barone said he expects a “minimal fine or settlement” of the affiliate-abuse charges in the worst-case scenario. “This is particularly true, now that the FERC is issuing new affiliate rules which should help minimize situations where abuse may appear to occur.”

As for Wagner’s market-power ruling, Barone said he’s not discounting the possibility that the CPUC and California utilities will appeal the case to the U.S. Court of Appeals for the D.C. Circuit, after exhausting the rehearing process at FERC. “If this were to occur, we would not rule out El Paso settling out of court for a reasonable amount in order to put this ordeal behind it. If the plaintiff’s requests were moderate to substantial…we would expect a legal battle with El Paso emerging as the clear victor,” he said.

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