The energy crisis ended four years ago, but it’s echoing in two California courtrooms.
In San Diego, jury selection is set to begin this week in the $23-billion antitrust case against Southern California Gas Co. and San Diego Gas & Electric Co., along with their parent company Sempra Energy. They’re accused of squeezing natural gas supplies to California, contributing to wild price jumps during the state’s infamous energy market meltdown of 2000-01.
In San Francisco, four former employees of Houston-based Reliant Energy Inc. will go on trial Oct. 31 on federal criminal charges that they turned off power plants in June 2000 to raise electricity prices.
Each trial features an attention-grabber.
In the gas utilities’ case, it’s a meeting in a Phoenix hotel room where competitors allegedly agreed to divvy up Southwestern energy markets. In the Reliant workers’ trial, it’s a series of tape recordings in which they appear to celebrate their success in boosting electricity prices. “That was fu-un!” one said.
In both cases, the defendants insist that they did nothing wrong. They face jurors who bore the costs of the energy crisis in their electricity and heating bills, with lingering effects.
“What we need to do in a simple way is explain some complex facts,” Sempra attorney Bob Cooper said. “And we’re confident if we do that we can diffuse any anger that jurors may have.”
California’s energy fortunes took a dark turn in May 2000 as wholesale electricity prices began rising. Tight power supplies were compounded by faulty electricity market rules that opened the way for manipulation by Enron Corp. and other energy traders. Natural gas prices hit record heights after an explosion on a major pipeline, further hoisting the cost of power generated by gas.
By the end of the crisis a year later, blackouts had raked California and the state had run up huge debts buying power for cash-strapped utilities, which were buried under debts of their own. PG&E; Corp.'s Pacific Gas & Electric Co. had filed for U.S. Bankruptcy Court protection. Electricity customers were slapped with large rate increases.
Sempra had a hand in creating those problems, according to several lawsuits that were consolidated into the San Diego case. The suits were filed by large energy customers including Continental Forge Co., a Compton metals company; the state of California and a coalition of Southern California cities and counties.
Central to the antitrust case is a September 1996 meeting at an Embassy Suites Hotel in Phoenix. There, representatives from Southern California Gas, San Diego Gas & Electric and El Paso Natural Gas Co., a subsidiary of Houston-based El Paso Corp., allegedly conspired to “dominate the unregulated aspects of the natural gas and electricity markets,” the complaint says.
According to court documents, the competitors decided to cooperate in the delivery of natural gas, agreeing that Southern California Gas would stop trying to compete with El Paso to build a Baja California pipeline and that El Paso would kill a pipeline proposal to bring cheap Canadian supplies into Southern California Gas territory.
Executives who were at that meeting said in sworn depositions that there was no conspiracy. In addition, Sempra said there was no incentive to push up natural gas prices because pipeline earnings were heavily regulated.
Cooper, Sempra’s lawyer, said the jump in gas prices during the fall of 2000 was the result of soaring electricity prices caused by a combination of factors, such as a hot summer, a severe winter, nuclear power outages and a drought that squeezed Pacific Northwest hydroelectric power exports to California.
“The plaintiffs claim there was this conspiracy to restrict the supply of gas and that’s what caused the price to go sky high. They have it backwards,” Cooper said. “Electricity prices caused the gas prices to go up” because of heavy use of gas-fired power plants.
Attorneys for Continental Forge, the lead plaintiff, declined numerous interview requests.
Some analysts think the case won’t stand up in court.
“It’s going to be hard to show the linkage of these events -- these meetings -- to a gas shortage that was driven by a number of things,” said Christine Tezak, a regulatory analyst at Stanford Washington Research Group. “To suggest that some weird meeting five years prior was important -- I don’t buy their conspiracy theory.”
Sempra has been fighting the charges aggressively. The San Diego company said it has continued to negotiate to settle the matter but would never admit guilt. In 2003, El Paso, which owns the largest pipeline bringing natural gas into California, settled the case and other energy-crisis complaints for $1.6 billion and a promise to cooperate with prosecutors. El Paso didn’t admit guilt.
As of June 30, Sempra had spent $241 million on the case and other legal matters stemming from the energy crisis.
Negotiations this summer brought an agreement to limit the scope of the initial phase to Ventura County residential gas and electricity customers and all Southern California Edison Co. residential electricity customers. The plaintiffs are seeking combined damages of nearly $1.3 billion for this part of the case.
In all, Sempra is being sued for nearly $8 billion. California antitrust law allows damages to be tripled.
Potential jurors are being told to expect a complicated, six-month trial in the courtroom of Superior Court Judge Ronald Prager.
Like the Sempra suit, the Reliant case deals with accusations that supply was manipulated.
Reliant Energy Services, a subsidiary of Houston-based Reliant, and four trading executives were indicted last year on allegations that they cost Californians millions of dollars. They are accused of shutting down four of the company’s five California power plants on two days in June 2000 “to create the false appearance of a shortage,” causing electricity prices to increase, according to the U.S. attorney’s office in San Francisco.
Transcripts of routinely recorded trader telephone calls documented Reliant employees gloating when the prices rose.
Among the charges the former Reliant employees face are wire fraud and conspiracy to commit commodities manipulation. If convicted, the defendants could each be sentenced to a maximum of five years in prison and a $250,000 fine.
A spokesman for Reliant, which paid $445 million in August to settle the charges against the company but didn’t admit guilt, declined to comment. Attorneys for the Reliant employees couldn’t be reached for comment but previously had said their clients broke no laws.