Judge Hints at Gas Deal’s Impropriety

Subsidiaries of a Texas energy conglomerate may have broken federal rules against insider dealing as they structured a complex and controversial California natural gas contract, a regulatory judge suggested Friday.

Chief Judge Curtis L. Wagner Jr. of the Federal Energy Regulatory Commission is holding hearings on whether El Paso Corp. gained monopoly power over the Southern California natural gas market last year, driving up the state’s energy costs. If the company is found to have acted improperly, it could be ordered to return ill-gotten profit.

The judge’s attention focused on transcripts of February 2000 conversations in which officials from two El Paso subsidiaries--a gas-selling operation and a natural gas pipeline--shared what critics say was insider information about a shipping discount.

“If that’s not hanky-panky, there’s no such thing,” said Wagner in comments initially reported by Bloomberg News and later confirmed by the federal agency’s spokeswoman. “This is the kind of stuff we passed the affiliate standards to prevent, and now it’s out in the open. I want to know if this sort of thing goes on every day, and I think the commission wants to know too.”

Commission spokeswoman Tamara Young-Allen said the comments should not be interpreted as an indication that Wagner has prejudged the case before he makes his recommendation to the agency’s board, probably sometime this fall. The board also is considering tightening its rules on dealings between pipelines and affiliated companies.

In most businesses, affiliates freely share information. But pipelines are considered monopolies and are subject to requirements that they treat all shippers equitably, without giving their affiliates an advantage.

The California Public Utilities Commission is alleging that the El Paso companies violated a section of the federal commission’s rules that requires pipelines to let all potential shippers know of information pertinent to the transportation of natural gas, such as any discounts.

But Patricia Shelton, a senior El Paso official, testified that another section of the rules gives affiliates leeway to discuss details of a given contract. In written testimony, Shelton said that the PUC is mistaken in its reading of the federal agency’s rules and that there was no insider dealing in this case.

The larger controversy revolves around a contract last year in which one subsidiary, El Paso Merchant, won the right to ship a large volume of gas to Southern California through a pipeline owned by another subsidiary, El Paso Natural Gas Co.

At issue Friday were taped conversations between officials of Merchant and a third El Paso subsidiary, Mojave Pipeline Co. The conversations came just before Merchant’s successful bid for the El Paso Natural Gas Co. deal.

Such conversations between traders routinely are tape-recorded, and the transcripts were introduced as evidence months ago by PUC lawyers. Initially, the federal agency’s governing board had found the evidence unpersuasive and dismissed the allegations of insider dealing.

But recently the board changed course, agreeing with Wagner that a closer look at the controversy is needed and authorizing him to render a second opinion.

The Mojave angle is considered important because that pipeline provides an alternate route for moving natural gas to Southern California when bottlenecks develop on the larger line owned by El Paso Natural Gas Co.

In the taped conversations, an official of El Paso Merchant sought and received a discount for shipping gas through Mojave. The Merchant official then asked his Mojave counterpart to wait a few days before publicly posting the discount.

Critics say the hidden discount would have made the El Paso Natural Gas Co. capacity more valuable and might have enticed other bidders to compete against Merchant for the contract at the last minute. But Shelton said the federal agency’s rules do not require immediate notification.

The PUC alleges that the El Paso companies eventually used the market position gained through the contract to create artificial shortages that sent natural gas prices zooming and contributed to high electricity costs.

Separately, Wagner is considering the role played by William Wise, chairman of El Paso Corp., in approving Merchant’s bid. The subsidiaries have called the transaction a “plain Jane” deal that they entered into on their own initiative with only routine approval from Wise.

But critics say the companies ultimately had only one set of shareholders--represented by Wise. They charge that his involvement circumvented the spirit, if not the letter, of federal rules designed to prevent insider dealing.

Southern California natural gas prices have dropped dramatically since the El Paso contract expired at the end of May, although the company says that is because of broader market forces.