FERC put an end to one of the most tortuous cases in its history Thursday, approving with one modification a $1.7 billion settlement of California’s allegations that an El Paso Corp. pipeline drove up natural gas prices in the state by withholding capacity during the state’s energy crisis, and that it gave preferential treatment to its power merchant affiliate during bidding on transportation capacity.

In giving his blessing to the settlement of the hotly disputed case, FERC Chairman Patrick Wood said it “pre-dated my arrival here, and [I am] pleased to see it out the door.”

The agreement, which was filed by El Paso and California parties last June at FERC, resolves the charges in the high-profile complaint brought by the California Public Utilities Commission (CPUC) in 2000, accusing El Paso Natural Gas of withholding its capacity to inflate gas prices delivered to the California border in 2000 and 2001.

In September 2002, FERC’s Chief Judge Curtis Wagner Jr. ruled in favor of the CPUC, finding that El Paso had kept “extremely large amounts of capacity” from the California market in the critical November 2000-March 2001 period. He called the pipeline’s action “a clear exercise of market power.”

El Paso and California regulators reached the settlement last March before the Commission could rule in the long-standing case. Parties to the agreement included private class-action litigants in California, state Gov. Gray Davis and the lieutenant governor, the attorneys general of California, Oregon, Washington and Nevada, the CPUC, the California Electricity Oversight Board, Pacific Gas and Electric and Southern California Edison.

The settlement was opposed by the Arizona Corporation Commission (ACC) and El Paso’s East-of-California (EOC) gas customers. FERC on Thursday declined to sever the ACC and the EOC customers from the settlement, however. Arizona’s Attorney General’s Office brought its own lawsuit earlier this year against El Paso on behalf of the state’s customers, alleging that the pipeline conspired with affiliates to artificially inflate prices for natural gas and electricity during the same period.

The El Paso settlement also requires court approval. Judge J. Richard Haden of Superior Court in San Diego, CA, has scheduled a hearing for Nov. 20 to decide whether the agreement is “fair” and warrants final approval.

FERC staff said the settlement calls for El Paso Corp. and its subsidiaries to pay approximately $1.7 billion in relief to California customers. In exchange, El Paso and subsidiaries will be released from all claims of misconduct in the California energy markets during 2000-2001. FERC found that the relief approved was in the public interest, ended a “heavily contested” proceeding and would provide finality.

The monies will be disbursed to a court-approved settlement class, which is comprised of residents and businesses who paid a gas or electricity bill between Sept. 1, 1996 and March 20, 2003 in California.

FERC on Thursday rejected as unduly discriminatory a proposal for dual primary firm delivery points and directed the parties to revise that part of the settlement. The settlement had granted certain customers, holding 600 MMcf/d of El Paso’s capacity, the ability to designate two primary delivery points on the El Paso pipeline. But FERC ruled that all El Paso shippers should have single primary delivery point rights.

Terms of the proposed settlement require El Paso to:

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