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Judge Says El Paso Withheld Gas Supplies From California by Alexei Barrionuevo and Mitchel Benson, Staff Reporters Wall Street Journal - September 24, 2002

El Paso Corp. helped drive California natural-gas and electricity prices to record levels during that state's energy crisis by withholding sorely needed supplies of gas, the top hearing judge at the Federal Energy Regulatory Commission concluded. The ruling sent El Paso shares plummeting 36% as investors feared the Houston energy concern could be forced to pay billions of dollars in refunds to California energy consumers.

Curtis Wagner, FERC's chief administrative law judge, said in a 23-page decision that El Paso's interstate gas pipeline unit withheld "extremely large amounts" of capacity that could have carried additional natural gas to its California delivery points, which substantially tightened the supply of natural gas at the California border. Under FERC procedures, the judge's findings are subject to approval of the agency's commissioners.

Mr. Wagner recommended that El Paso be forced to pay penalties for its behavior, which took place during California's 13-month energy crisis that ended in June 2001 after FERC imposed electricity-price caps throughout the West. During the crisis, California racked up electricity costs of $40 billion, more than quadruple the cost during the same period a year earlier -- dealing a blow to an economy that was central to the country's high-tech boom.

El Paso denied it manipulated market prices and said it operated its pipeline to the "extent permitted by safety and operational considerations." Peggy Heeg, El Paso's general counsel, called the judge's decision "wrong as a matter of law, as a matter of fact and as a matter of policy" and said the company was confident it will be vindicated.

The ruling crushed the stocks not only of El Paso but also its energy-trading rivals. Shares of El Paso plunged 36%, or $4.16, to $7.51 in 4 p.m. composite trading on the New York Stock Exchange. Dynegy Inc. and Williams Cos., whose energy dealings during the California power crisis also are under scrutiny, saw their shares drop as well. Shares of Williams fell 35 cents, or 15%, to $1.99 and Dynegy slipped 20 cents, or 15%, to $1.17.

High natural-gas prices dealt a blow to California's economy because gas is used to fuel a higher proportion of its electricity-generating plants than in any other state except Texas. Record-high gas prices not only drove up home-heating costs for millions of Californians, but they also contributed to record-high electricity prices that have crippled the finances of the state and its biggest utilities.

The FERC judge's decision could have broad implications for efforts by California officials to recoup billions of dollars they claim are owed to businesses and residences for inflated gas and electricity prices. The state's claim is now pending before the commission.

Doug Porter, senior counsel for utility Southern California Edison Co., a unit of Edison International, said the company had testified to FERC that El Paso's alleged withholding of natural-gas capacity cost the state more than $3 billion in higher electricity prices in the year ended March 2001, and the California Public Utilities Commission estimated that El Paso's alleged actions cost Californians $3.2 billion in increased natural-gas costs from December 2000 to March 2001.

It wasn't clear what actions, if any, FERC commissioners will take in response to the judge's finding. FERC, which hasn't faced a similar case in 15 years, has no prescribed penalties that El Paso might face, agency officials said.

Analysts said that if FERC upholds the judge's decision, it could spark more lawsuits seeking to link the higher natural-gas prices to California's dozens of blackouts and billions of dollars in inflated power prices. El Paso already faces at least 11 lawsuits, filed in California state courts, that allege the company manipulated the price of natural gas sold into California.

The ruling was unexpected. Last October, Mr. Wagner ruled that El Paso had violated codes of conduct designed to keep affiliates from favoring each other. But the judge said he didn't find convincing proof that the company had used its clout in the California market to drive up natural-gas prices. The commission directed the judge in December to resume investigating, focusing on whether El Paso made all of its capacity available to California delivery points from November 2000 to March 2001.

In his latest ruling, Mr. Wagner said he found that El Paso withheld an average of 696 million cubic feet of natural gas a day out of 3,290 million cubic feet a day it was obligated to deliver to the state. Of that, 210 million cubic feet a day of capacity wasn't made available because El Paso's pipeline unit didn't operate at its maximum pressure. All told, the judge found that El Paso only delivered 79% of the gas its pipeline was capable of delivering.

The judge also found that capacity of 35 million cubic feet a day would have been available if the company hadn't performed "non-essential" maintenance at two pipeline stations during the winter heating season. Ms. Heeg, El Paso's general counsel, called it a "dangerous precedent" for a judge to be "second-guessing about pipeline-maintenance activity."