El Paso Faces Foes in FERC Showdown

A pivotal market manipulation case in the California energy crisis moved toward a final decision after five hours of closing arguments Monday that delved into charges of collusion and profiteering by El Paso Corp.

The “Texas showdown” before the Federal Energy Regulatory Commission was sought by El Paso after an administrative law judge in September found that the company illegally limited natural gas shipments to California in a scheme to drive up energy prices. El Paso and its adversaries -- California regulators and utilities executives -- presented oral arguments to the commission, which is expected to either uphold or overturn the judge’s ruling early next year.

“Market manipulation by El Paso was one of the key contributors to the California energy crisis,” said Kevin Lipson, a lawyer for Southern California Edison Co. of Rosemead, one of the main plaintiffs in the case. “They have tried to hide the forest of market manipulation in the trees of technical and engineering jargon.”

Houston-based El Paso adamantly denies the allegations. Chief Executive William A. Wise told reporters after the hearing that his company was being used as a scapegoat. He vowed to appeal in federal court if the commission rules against El Paso.

“If the law prevails, we will win at FERC,” Wise said. “And if politics prevails, we will win in the courts.”

Both sides in the case have hinted that they may seek a settlement.

El Paso already is reeling, in part from the preliminary finding in September that its pipeline unit withheld capacity when California was desperate for natural gas to fuel its electricity generating plants. The company’s share price has fallen more than 80% from its 52-week high of $49.95, closing Monday at $8.26, down 26 cents, on the New York Stock Exchange. Its bond rating has been downgraded to “junk” status.

If FERC finds that El Paso manipulated the California market, it could impose fines and order the return of tens of millions of dollars in profit.

The case arose from a gas-shipping deal between two El Paso subsidiaries in 2000. The arrangement put about 17% of California’s daily gas consumption in the hands of one corporate entity.

Early Monday, a procedural ruling went against El Paso when the FERC commissioners voted unanimously to release corporate documents from February 2000, when the deal was signed. El Paso argued that the papers contained sensitive corporate information.

Under federal rules, the pipeline unit, El Paso Natural Gas Co., and the marketing unit, El Paso Merchant Energy, were supposed to operate at arm’s length. But the documents showed that Wise, as head of the corporate parent, was privy to information from both subsidiaries.

A Feb. 9 presentation for top El Paso management listed “more control of total physical market” as one of the “strategic advantages” of the deal.

Another document, previously disclosed by the administrative law judge, stated that one of the ways El Paso would make money was to widen the price spread between the producing regions in Texas and New Mexico and the delivery points in California.

Harvey Morris, lead attorney for the California Public Utilities Commission, said the memos were evidence that the company intended to manipulate the market. “The sky was the limit, and they reached for the sky,” Morris said.

But El Paso lawyer William Scherman derided what he called “a grand conspiracy theory that really does rest on a grand total of two or three documents.” Scherman said the memos contained nothing remarkable, only the kind of routine information that Wise would have needed to evaluate the pending contract.

“Those documents are part of the day-to-day business planning of a large company,” Wise told reporters. “I have a fiduciary responsibility to have an understanding of what’s going on.”

However, El Paso fought release of the documents for more than a year. And a company witness in a previous round of hearings before the administrative law judge last year sought to downplay Wise’s role in the deal between El Paso Natural Gas and El Paso Merchant Energy.

FERC commissioners asked mainly factual questions of the lawyers representing both sides. The case is complex and the evidence largely circumstantial. But the standard of proof -- a preponderance of the evidence -- is significantly lower than in criminal matters, where guilt must be established beyond a reasonable doubt.

“There’s a lot of numbers being bandied about,” observed FERC Chairman Patrick H. Wood III.

The interpretation of the numbers could decide the outcome of the case.

The El Paso pipeline had a contractual obligation to deliver 3.29 billion cubic feet of natural gas a day to California. Instead, the evidence shows that only 2.594 billion cubic feet a day flowed on average during the 15-month term of the El Paso contract in 2000-01.

The shortfall of 696 million cubic feet a day is damning evidence of withholding by the pipeline unit, the plaintiffs asserted Monday. The marketing unit also was withholding natural gas, they alleged, by not using all the capacity it acquired through its contract with the pipeline.

Specifically, the plaintiffs contended that El Paso Natural Gas operated the pipeline at less than its maximum allowable pressure, failed to help customers find ways around shipping bottlenecks to California and scheduled unneeded maintenance that shut down facilities.

But company lawyers had a different explanation for the gas shortfall. They said about 39% was due to a federal safety order after a rupture that killed 12 people in New Mexico; 32% was caused by high demand from customers east of California; 16% was due to shippers who failed to schedule all the capacity available; and the remaining 13% was attributed to maintenance that had to be performed.

Daniel Collins, an attorney for the pipeline unit, said the plaintiffs had mounted an “extreme and unprecedented” challenge to prudent operational decisions by the company’s management.

The FERC board will have to sort out the competing explanations. The agency’s staff, however, has sided with the California plaintiffs, concluding that the pipeline did not make available all of its capacity.

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The allegations

The allegations against El Paso Corp., the nation’s largest natural gas pipeline company, by California regulators and the responses from the company.

Allegation: Two units of El Paso--a pipeline company and a gas marketing firm--colluded on a big contract to ship gas to Southern California. The gas marketing firm used information not available to competitors in submitting the winning bid.

Response: The contract was a standard transaction. The pipeline company and the marketing firm did not share detailed operational information and business strategy.

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Allegation: The gas marketing firm did not use all of the capacity it had acquired, thereby squelching supply to create scarcity and drive up prices.

Response: Although not all the capacity was used, it wasn’t due to withholding, but because of complexities in the way the shipping contract was structured.

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Allegation: The pipeline operated at less than full capacity, also creating artificial shortages and helping the gas marketing firm drive up prices.

Response: The pipeline was unable to operate at full capacity because of safety issues.

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Source: Times research