El Paso Corp. has formalized an agreement with officials in California, Washington, Oregon and Nevada to resolve the principal litigation and claims following the western power crisis two years ago. The formal settlement, announced on Thursday, was proposed in March (see NGI, March 24). On Friday, the participants took the final procedural step as well, which was required to ensure the settlement is completed.

California’s attorney general’s office, which hammered out the largest chunk of the deal, and the state’s governor immediately claimed victory and a $1.45 billion benefit in natural gas and electricity relief to retail utility customers in their state.

Because of accrual changes since the proposal in March, El Paso said it expects an additional pre-tax charge of between $150 million and $200 million for the second quarter of 2003. With the $1.625 billion settlement, California’s Gov. Gray Davis said his state’s cost of long-term energy contracts has been reduced by $6.3 billion.

In its Master Settlement Agreement, El Paso settled with private class action litigants in California; the governor and lieutenant governor of California; the attorneys general of California, Washington, Oregon and Nevada; the California Public Utilities Commission; the California Electricity Oversight Board; the California Department of Water Resources; Pacific Gas and Electric Co. and Southern California Edison Co. Simultaneously, a separate settlement agreement was executed with five California municipalities and six non-class private plaintiffs.

In anticipation of the Master Settlement Agreement, El Paso and the California parties had filed a Joint Settlement Agreement with the Federal Energy Regulatory Commission earlier this month (see NGI, June 9).

“One of the objectives in our 2003 Operational and Financial Plan is to resolve the company’s principal litigation and regulatory matters,” said Ronald L. Kuehn Jr., interim CEO. “Finalizing this settlement is a critical step in that effort and will help resolve the uncertainties that have surrounded El Paso in the market relating to the energy crisis in the western United States.”

California AG Bill Lockyer called the final deal with El Paso “the fifth, and largest,” his office has cut as an offshoot of its now two-year-old investigations into the state’s 2000-2001 energy crisis. The five settlements have a combined value of $2.1 billion.

Calling El Paso “one of the worst offenders,” Lockyer said in a prepared statement that the settlement “holds El Paso accountable,” and provides “justice” for California consumers who he said had their “pockets picked for billions of dollars.” Davis once again used the deal as further “evidence that the energy crisis was not a California-created problem, but rather market manipulation by energy pirates that FERC is trying to sweep under the rug.”

In the formal agreements, which provide more detail than the March 2003 proposals, El Paso admitted to no wrongdoing. It also will do the following:

To meet its principal obligations under the Master Settlement, El Paso Natural Gas Co. ultimately will make the upfront cash payments and the $250 million payment into escrow. In addition, El Paso Corp. will provide the proceeds from the common stock to the settling parties through El Paso Natural Gas Co. Also, subsidiary El Paso Merchant Energy will make the $45 million per year payments and will deliver power under the power supply agreements at reduced prices.

The agreements modified the agreement announced in March, and as a result, El Paso plans to update its initial accrual for the settlement’s cost. Incremental charges will occur because of the increase in the company’s share price since the original accrual for the obligation to issue approximately 26.4 million shares, and because of the prepayment of the $22 million per year obligation.

The Master Settlement Agreement is subject to approval by the California Superior Court for San Diego County. El Paso said it expects final approval of the agreement by late 2003 or early next year.

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