Multiple El Paso Energy subsidiaries were hit with a major classaction lawsuit on Friday filed on behalf of all the commercial andresidential gas customers in the State of California. The law firmLieff, Cabraser, Heimann & Bernstein fired off the complaint inState Superior Court in San Francisco against El Paso Natural Gasand several marketing and pipeline affiliates for allegedly rigginga capacity auction to gain market power and then manipulating gasprices at the California border.

El Paso Natural Gas also was named in two other class actioncomplaints last week along with Sempra Energy’s two utilitycompanies (see Daily GPI, March 22). Those lawsuits were filed inLos Angeles Superior Court by the cities of Los Angeles and LongBeach and alleged that the pipeline and the utilities conspired inmid-1990s to block development of two new interstate gas pipelinesinto the state, resulting in excessively high prices at theCalifornia-Arizona border.

But the charges in this case are different. Plaintiff’s attorneyBarry R. Himmelstein said El Paso Natural Gas “basically created asituation where customers within California were not able to obtainthe amount of gas they had contracted for and that forced the[customers] onto the spot market to buy gas, including from [ElPaso Merchant Energy]. They basically created an artificialshortage and became one of the only companies that had suppliesavailable from which people could make up that shortage; that’smarket power,” he said.

The complaint alleges that El Paso Merchant Energy, a marketingaffiliate of El Paso Natural Gas and Mojave Pipeline, secretly andunlawfully obtained a 50% firm transportation rate discount fromMojave Pipeline prior to submitting a bid for 1.2 Bcf/d of firmcapacity on the upstream El Paso Natural Gas system (MerchantEnergy eventually ended up with 1.4 Bcf/d after purchasing twoother packages of firm capacity).

The Plaintiffs, which include Sweetie’s Bar – a commercial gascustomer in California -on behalf of itself and all other”similarly situated” commercial and residential customers in thestate, use as one piece of evidence a Feb. 9, 2000 e-mail fromRobert Cox, vice president of Merchant Energy, regarding thediscounts on Mojave. The e-mail was obtained in comments filed withthe Federal Energy Regulatory Commission by the California PublicUtilities Commission in a similar case involving El Paso. TheMojave discounts were significant because they allowed MerchantEnergy to bypass the bottleneck that occurs at the SoCalGasdelivery point at the California-Arizona border at Topock, AZ. Thediscounts would enable Merchant Energy to transport at reducedrates a significant amount of gas from Topock down the Mojave lineand through the Wheeler Ridge delivery point into SouthernCalifornia Gas Co.’s system, the complaint said.

Once that option was obtained, the Plaintiffs allege, MerchantEnergy was able to confidently outbid all other competitors for theEl Paso Natural Gas capacity. Furthermore, once Merchant Energyobtained the capacity rights on El Paso, it was able to use itsmarket power to drive up prices at the Southern California borderand in fact throughout the state of California.

“By controlling a substantial portion of deliverable naturalgas, [Merchant Energy] thereby controls prices and suppressescompetition in the Topock spot market,” the complaint states. “Theother capacity holders, whose allocations are reduced, suffer ashortfall in their own requirements and are forced to purchasenatural gas in the Topock spot market to make up for thedeficiencies.

“Due to this proration at California’s Southwest border, thenatural gas market becomes an inelastic market; purchasers with asupply shortfall must buy enough natural gas to meet demand at anyprice. In inelastic markets such as these, one participant thatcontrols a sizable percentage of supply can manipulate the marketand cause price spikes. By maintaining control over a substantialpercentage of the deliverable natural gas in the Topock spotmarket, Defendants have the market power to control prices andsuppress competition.”

El Paso denies any wrong doing, however. Spokesman Mel Scottsaid the company was not prepared to comment on the particulardetails of the lawsuit on Friday. He referred to prior statementsfrom the company on earlier cases. “Allegations that natural gasprices were deliberately manipulated by withholding capacity on theEl Paso Natural Gas pipeline overlook critical facts and aredemonstrably untrue,” the company said in a statement issued lastmonth. It also said the alleged “conspiracy” in 1996 to limit newinterstate pipeline capacity into California are “absolutelyrefuted by facts that no one can challenge.”

The damages in the case involving Merchant Energy amount to “alot” of money, said Himmelstein, noting that the CaliforniaDepartment of Energy estimated that ratepayer costs from last Marchthrough this winter went up by about $7 million per day for every$1/MMBtu increase in the basis differential between the SouthernCalifornia border and the San Juan Basin. “I really can’t give youa number,” said Himmelstein. “The damages calculation in anantitrust case is a very complex matter and I really can’t give youoff the cuff even a ballpark estimate but it’s a lot.” In thecomplaint the Plaintiffs state that historical basis between Topockand the southwestern supply basin has been about 25-50 cents, butin recent months has skyrocketed during bidweek to $7/MMBtu. In thedaily spot market, basis spiked above $50 in December 2000 andstill varies between $6 and $20/MMBtu. “These increases areextremely costly to consumers,” the complaint said.

Regarding the selection of the lead plaintiff in this case,Sweetie’s Bar, Himmelstein said, “They are a typical class member.They are a business that pays a monthly gas bill, and it has reallygone up.”

Himmelstein doubts his case will be consolidated with the otherclass action lawsuits. “I would expect that the defendants willattempt to have the proceedings consolidated either in state courtor in federal court as they have in the electricity cases. But thetheory asserted in our complaint is different from the theoryasserted in the other complaints that are already on file.”

He doesn’t expect a quick resolution in the this case. “I wouldexpect more than a year if the matter is litigated as we anticipateit will be.”

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