Energy Dealings Ruled Illegal


The nation’s biggest natural gas pipeline company illegally manipulated the California market during the energy crisis, a federal regulatory judge said Monday in a ruling that could bolster wide-ranging claims for refunds.

El Paso Corp. used a variety of strategies in 2000-01 to withhold an average of at least 345 million cubic feet of natural gas a day from California customers, creating an artificial shortage that drove up prices, concluded Judge Curtis L. Wagner Jr. of the Federal Energy Regulatory Commission. Among the maneuvers, he said: El Paso failed to use 21% of the capacity of its pipeline to the state.

“El Paso pipeline did in fact withhold substantial capacity that it could have made available to its California delivery points--a clear exercise of market power,” Wagner wrote in a 23-page opinion.


In a preliminary ruling last year, the judge had found insufficient evidence of manipulation, but he said new evidence changed his mind. In addition to operating at less than capacity, he said, El Paso did not use all available shipment routes into California and scheduled nonessential maintenance operations that sidelined some of its facilities.

“This is a major victory for California consumers,” said Harvey Morris, the lead California Public Utilities Commission lawyer on the case. “It took us a long time, a lot of hearings, a lot of legal briefs, but today we were vindicated.”

El Paso Corp. issued a statement decrying Wagner’s decision as “an unsupported attack on the prudence of a pipeline’s operating decisions.” It said it would appeal to FERC’s governing board.

If the judge’s ruling is upheld by the board, Morris said, it could order the return of ill-gotten profit to customers, including Southern California Edison and Pacific Gas & Electric Co. The board had previously ordered limited refunds for California consumers but none approaching the potential size of refunds in the El Paso case.

State officials estimate that El Paso Corp. made as much as $900 million on its disputed California transactions. FERC could also impose fines on El Paso, but those would go to the federal treasury, not to California.

The judge’s finding is the latest addition to a growing body of evidence suggesting that California’s 2000-01 energy crisis was the result of manipulative business practices and not merely regulatory blunders and an imbalance of supply and demand.


Last week, the state Public Utilities Commission issued a report saying most blackouts could have been avoided in 2001 had California’s five big private power plant operators produced as much electricity as they were capable of generating.

This is “one more nail in their coffin,” said Richard Katz, an energy advisor to Gov. Gray Davis, describing the ruling’s effect on the energy industry.

Natural gas is the main fuel used by power plants in California, and El Paso owns one of the major pipelines into Southern California. During the energy crisis, the gas price at California’s border soared well above levels in the rest of the country and remained high even as prices elsewhere fell in response to increased supplies.

The case arose from a controversial gas shipping deal between El Paso Natural Gas Co., which owns the pipeline, and El Paso Merchant Energy Group, which sells natural gas. Both are subsidiaries of El Paso Corp., a Houston-based energy conglomerate. The deal ultimately boosted gas prices by $3.2 billion from June 2000 to May 31, 2001, the PUC’s Morris said.

El Paso’s stock plunged $4.61, or nearly 36%, after Monday’s ruling, closing at a 52-week low of $7.51 and becoming the most active stock on the New York Stock Exchange. Investors’ concerns also spread to other energy marketers, sending their share prices lower.

Standard & Poor’s Corp. put El Paso’s debt on its credit watch list. The Wall Street credit-rating service said that El Paso has enough cash to pay its bills but that potential fines by FERC could change that.


Monday’s opinion represented a sharp change of direction for Wagner, FERC’s senior judge. The case has continued for nearly 18 months, producing more than 7,700 transcribed pages of highly technical testimony and more than 730 exhibits.

In a preliminary ruling last year, Wagner found that the El Paso subsidiaries had engaged in collusion and acquired a market position that would allow them to manipulate the California market.

But Wagner also concluded that there was insufficient evidence to show that the companies followed through by taking advantage of their customers, which included the state’s largest utilities.

After his initial ruling, the FERC board directed Wagner to go back and review the operations of the pipeline. Wagner conducted extensive new hearings last spring on the pipeline operation, amassing 2,181 pages of testimony and 219 exhibits that formed the groundwork for the ruling issued Monday.

The deal between the El Paso pipeline and the same company’s marketing unit put as much as 17% of California’s daily gas consumption in the hands of one corporate entity. When the contract expired May 31, 2001, the price markup between production fields in Texas and the California border was $6.32 per million British thermal units, according to trade publication Natural Gas Week. A week later, after about 30 competitors had divided up the pipeline capacity, the markup had plunged to less than 25 cents.

The judge’s ruling now goes to the full FERC board, which can adopt or change it. Wagner recommended that the board institute a penalty proceeding to punish what he termed “the unlawful exercise of market power.” As natural monopolies, pipeline systems operate under federal rules intended to prohibit preferential treatment of any shipper.


El Paso Chief Executive William A. Wise said he expected the company to prevail. A decision by the FERC board can be appealed in federal courts, but U.S. judges have traditionally been reluctant to overturn the independent panel’s determinations.

“We are disappointed that today’s ... decision does not recognize the substantial record [of] evidence supporting El Paso Natural Gas’ position that the pipeline was operated properly,” Wise said. “We are confident in the strength of our position and believe that we will ultimately obtain a favorable ruling.”

El Paso has argued that its accusers imputed sinister motives to legitimate business decisions.

Sen. Dianne Feinstein (D-Calif.) said she would ask for a Senate Energy Committee hearing into the new evidence cited by Wagner.

“I believe any refunds should go to Californians, who were the most victimized by the scheme,” she said.

Christy Dennis, a spokeswoman for Pacific Gas & Electric of San Francisco, which joined the PUC’s complaint against El Paso, said the utility’s attorneys expected a decision from FERC early next year.


Kevin Lipson, a lawyer for Rosemead-based Edison, said he expected the board to uphold Wagner’s finding that the pipeline operator’s conduct was anti-competitive. Edison, which did much of the research to support the PUC’s complaint, will argue that the board should go further than the judge and conclude that the deal between the two subsidiaries also constituted misconduct.

“This is really an extremely clear finding that El Paso Natural Gas exercised market power,” Lipson said.

During the energy shortages in the winter of 2000-01, California officials and consumer advocates charged that the crisis was manufactured by energy companies taking advantage of the state’s deregulated market.

The companies vehemently denied any market manipulation.

But the charges gained new credence in May, when FERC released Enron Corp. memos detailing an array of trading ploys to create artificial shortages.

After those revelations, several other companies acknowledged that they engaged in sham trades to improve revenues, and FERC widened its investigation into market manipulation.


Alonso-Zaldivar reported from Washington and Vogel from Sacramento. Times staff writer Nancy Rivera Brooks contributed from Los Angeles.