Energy Shares Fall on Fears of Lawsuits
Stocks of most energy merchants tumbled Tuesday amid growing fears of lawsuits and investigations following a ruling that El Paso Corp. illegally manipulated the California energy market.
El Paso, the nation’s largest natural gas pipeline company, was particularly hard hit for a second day, with its shares dropping nearly 30%. That followed a 36% plunge Monday, when a federal administrative law judge ruled that El Paso drove up California natural gas and electricity prices in 2000-01 by withholding gas supplies.
The ruling was another blow to an energy sector beaten down for alleged accounting shenanigans, market gaming and sham trades to pump up revenues.
In the latest development on that front, Dynegy Inc. agreed to a $3-million settlement with the Securities and Exchange Commission, which was investigating alleged sham trades that Dynegy made with CMS Energy Corp.
Dynegy’s shares rose 3 cents to close at $1.20 on the New York Stock Exchange.
Dynegy also said, after the market closed, that an internal review had found that some of its employees provided inaccurate information on natural gas trades to energy industry publications, which compile indexes that influence electricity prices.
Also Tuesday, California Atty. Gen. Bill Lockyer asked a federal court in Sacramento to overturn a recent ruling by the Federal Energy Regulatory Commission that tossed out claims that California is owed $2.8 billion in refunds for sales of power between May and October 2000. FERC has refused to consider electricity sales during those months as part of a larger refund case California is pursuing.
Those moves followed Monday’s ruling by FERC Judge Curtis L. Wagner Jr. that El Paso used a variety of strategies, such as scheduling downtime for maintenance, to “withhold substantial capacity” on its major natural gas pipeline to Southern California.
El Paso disputed Wagner’s findings and vowed to appeal to the full FERC board.
Bolstered by the El Paso ruling, California politicians and regulators vowed to press forward with claims against any firm suspected of withholding power supplies or manipulating the market during the state’s costly energy crisis.
“It’s a horrific environment and that’s why investors are bailing,” said Jon Kyle Cartwright, senior energy analyst with Raymond James & Associates in St. Petersburg, Fla.
In addition to several investigations into market behavior, “there’s the risk of a monster class-action lawsuit,” Cartwright said. “How do you find a jury full of people who didn’t feel that their electricity bills were too high?”
El Paso was the biggest loser in the sector, falling $2.21, or 29%, to close at $5.30 on the New York Stock Exchange. On Monday, the stock plunged $4.61, or nearly 36%. An Amex index of 19 utility stocks, including El Paso, was down 2.5% on Tuesday and has fallen 34.5% this year.
Also down was Edison International, which fell $1.35 to close at $9.15 on the NYSE, a day after a federal appeals panel said California regulators may have broken state laws in reaching an agreement with Edison’s utility to pay off its power debts.
Some analysts supported El Paso’s contention that it did not stand to make huge sums from any manipulation because it hedged its risk on the pipeline, limiting its profit potential.
“There’s definitely a political flair to the judge’s decision that sends a message that the FERC is not company-friendly,” said Carol Coale, an energy analyst with Prudential Securities.
Wagner’s decision, if upheld, is likely to strengthen California’s hand in two cases pending before FERC: the state’s demand for $9 billion in refunds for alleged electricity overcharges and Gov. Davis’ drive to renegotiate some $40 billion in long-term power contracts at lower rates.
“Finally, FERC is acknowledging what we knew more than a year ago--that the energy industry was ripping off Californians,” Gov. Gray Davis said. “But we are still waiting for FERC to order the companies to refund these ill-gotten gains. It is time for FERC to stop issuing ‘findings’ and start issuing refunds.”
The issues of California’s refunds and long-term contracts could take months to resolve.
Also pending is FERC’s investigation of alleged market manipulation by Enron Corp. and other power sellers. Although FERC Chairman Patrick Wood had said he hoped to have the investigation wrapped up by the end of the year, agency spokesman Kevin Cadden suggested it may take longer.
Sen. Joseph Dunn (D-Garden Grove), chairman of the select committee investigating price manipulation, said he hoped to convene a hearing late next month that would examine whether El Paso and Enron collaborated to control natural gas pipeline capacity.
“There is evidence in our investigation that would suggest that Enron and El Paso worked together in controlling that capacity,” he said. “If true, that ... would help explain price volatility in California and move us into the antitrust arena.”
