Calif., El Paso Reach $1.7-Billion Deal to End Energy Pricing Probe

Times Staff Writer

El Paso Corp. has agreed to pay $1.7 billion to settle complaints that the Houston-based pipeline operator withheld natural gas supplies from California and sent prices to record levels during the energy crisis, state officials said Thursday.

The preliminary settlement came after a federal judge ruled last year that an El Paso unit pinched natural gas flows to California in 2000-01, running its pipeline at less than full capacity and doing unnecessary maintenance at times of peak demand, among other things.

"El Paso played a key role in the multibillion-dollar rip-off of California consumers by energy companies," state Atty. Gen. Bill Lockyer said in a statement. "This settlement holds the company accountable for its misconduct."

El Paso, which has denied wrongdoing, declined to comment. Company officials had said they were nearing an accord with the coalition of state agencies, utilities, private firms and others that filed regulatory complaints and civil lawsuits against El Paso.

Under the agreement, El Paso would pay with a mixture of cash, stock and natural gas over 20 years. A total of $1.4 billion would reach ratepayers, who saw their electricity rates rise as much as 40% during the state's energy meltdown, according to a statement released late Thursday by Lockyer and Gov. Gray Davis.

El Paso agreed to operate its pipeline to California at full capacity for five years and to bar its subsidiaries from cutting shipping deals with one another, state officials said. They said the company also agreed to implement an antitrust training program and to cooperate in the state's investigation of market manipulation.

If formalized, the settlement would remove a significant cloud from El Paso. Its stock jumped on reports that a preliminary agreement was in the works, rising 90 cents, or 16.36%, to close at $6.40 a share on the New York Stock Exchange. The company has seen its stock plummet from a high of nearly $75 in early 2001.

The settlement "would be a pretty good deal for everyone involved," said Gordon Howald, an energy analyst with Credit Lyonnais who owns no El Paso shares. "It's a political victory for California, and it's a victory for El Paso because it doesn't push them into bankruptcy."

The California Public Utilities Commission had filed a complaint with the Federal Energy Regulatory Commission saying that the state had paid more than $3 billion too much for natural gas and electricity because of El Paso's actions. Much of the state's electric power is generated by natural-gas-fired plants.

In September, FERC Chief Administrative Law Judge Curtis L. Wagner Jr. ruled that an El Paso subsidiary restricted gas flowing to California to about 79% of average daily capacity from November 2000 to March 2001.

El Paso denied it did that, saying, among other things, that safety concerns forced the company to operate the pipeline conservatively.

The proposed settlement would end the FERC case as well as the civil lawsuits. It would require cash-strapped El Paso to hand over $100 million in cash and $125 million in stock in a lump sum, upfront payment, according to state officials.

In addition, El Paso would pay $400 million in cash and provide about $900 million in free natural gas over 20 years to the state. That time period would be reduced to 15 years if El Paso were able to win an investment-grade rating on its debt, currently assessed as "junk" by Wall Street credit-rating firms.

El Paso also agreed to reduce the cost of its long-term electricity contract with the state Department of Water Resources by $125 million. El Paso also would make a $2-million payment that represents bonuses paid to executives -- something Lockyer pushed for and El Paso resisted, people familiar with the negotiations said.

Oregon, Nevada and Washington would receive about $100 million of the settlement total. Other parties, including the Los Angeles and Long Beach municipal utilities, would receive portions of the total.

State officials said the settlement was the largest yet extracted from an energy firm. California reached an accord last year with Williams Cos. over price gouging that could reach $1.8 billion, but as much as $1.4 billion of that is to be paid in discounted long-term energy contracts -- an amount that could decline in value based on demand and other factors.

Copyright © 2019, Los Angeles Times
EDITION: California | U.S. & World