Texas Firm’s Chief Denies Driving Up Calif. Natural Gas Prices

The head of a Houston energy company denied driving California natural gas prices to unprecedented levels and testified Wednesday that his firm actually passed up an opportunity to make nearly $700 million in additional profits.

But the company still earned a net profit of $184 million on an initial investment of $38.5 million, according to testimony by El Paso Merchant Group President Ralph Eads in a trial-like hearing before the Federal Energy Regulatory Commission.

The El Paso case is significant because it represents the closest thing yet to a full-blown trial of allegations that the actions of unscrupulous energy companies have been a chief cause of California’s energy crisis.

The California Public Utilities Commission and Southern California Edison have charged that El Paso Merchant, which sells natural gas, withheld space on a pipeline owned by an affiliated company last year to create an artificial shortage that sent prices zooming.

Edison’s experts estimate that the alleged scheme has added $3.7 billion to California’s total energy costs, since most of the state’s power plants are fueled by natural gas.

Executive Testifies About ‘Hedge’ Deals

But Eads, under oath, denied that Merchant was after predatory profits.

The strongest evidence of that, he testified, is that the company entered into long-term, fixed-price deals called “hedges” for much of the shipping rights it bought from pipeline owner El Paso Natural Gas Co. in February 2000.

When California prices spiked last November, Eads said Merchant was locked into its hedge contracts and was unable to reap the full potential profit.

Merchant made $105 million in profits from the pipeline deal last year after subtracting losses of $262 million on hedged contracts, Eads testified.

In the first three months of this year, Eads said, Merchant made an additional $79 million in profits on the deal after subtracting losses of $429 million on hedges.

Hedge contracts function like insurance against sudden swings in market prices.

In this case, Eads said Merchant entered into the deals to protect itself from a potential price drop. But he said the company lost out on a huge windfall when the market moved in the opposite direction.

“If we had thought that we could drive up prices, we certainly wouldn’t have hedged,” said Eads, 41, who holds an economics degree from Duke University and has been in the energy business for 17 years. “The hedge cost us hundreds of millions. So it’s certainly not rational to hedge if you think you can drive prices up.”

Merchant’s expert witnesses have testified that high demand for electricity, low storage levels of natural gas in California and a lack of pipeline capacity within the state are to blame for the high prices.

Eads testified that Merchant has made a profit of 76 cents per million British thermal units on gas shipped to California.

That is good by industry standards but a far cry from markups of $8 or more per million BTUs being charged at the California border.

Administrative Law Judge Curtis L. Wagner Jr. listened intently to the testimony, at times questioning Eads himself.

Hearing Is Taking Longer Than Expected

The hearing--originally scheduled to last for five days--entered its eighth day Wednesday.

Eads was the first witness with in-depth personal knowledge of the controversial transactions between El Paso Merchant Group and El Paso Natural Gas Co., both subsidiaries of El Paso Corp.

Wagner must render an initial decision to the federal commission’s governing board on whether Merchant acquired monopolistic power in California’s natural gas market and used it to harm consumers. The board can order the company to return any ill-gotten gains.

Eads also provided new details of how his company came to acquire the right to ship 1.2 billion cubic feet a day of natural gas through El Paso Natural Gas Co.’s pipeline.

Eads testified that his subordinates first proposed to bid for the publicly advertised shipping rights and settled on a price of $38.5 million. Eads said he approved the deal.

The commission has already ruled that the contract between Merchant and El Paso Natural Gas was proper.

However, questions have been raised about a briefing prepared by Merchant for a Feb. 14, 2000, meeting with William A. Wise, the chief executive of the El Paso parent company.

The presentation remains under court seal, but the New York Times has reported that the presentation discussed how the pipeline deal would give El Paso more control of the California market.

Eads testified that Wise had no role in approving the bid. Such a role would have violated commission rules.

Merchant’s attorneys, while opposing public release of the Feb. 14 presentation, say it has been taken out of context.

PUC attorney Harvey Morris, cross-examining Eads, suggested that the executive was not giving a complete picture of how El Paso Corp. might have profited from the actions of Merchant and the pipeline subsidiary. The company has other energy interests, including power generators that stood to benefit from high prices for power in California.

Senate Panel Approves 2 Board Nominations

In a related development, the Senate Energy and Natural Resources Committee unanimously approved President Bush’s nomination of state regulators Patrick Wood and Nora Brownell to fill out the energy commission’s five-member board. The nominations now go to the full Senate for consideration.

Cross-examination of Eads resumes today.