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Energy Dealings Ruled Illegal

Regulation: El Paso Corp. created an artificial natural gas shortage in California, a judge says. Finding could bolster case for refunds.


WASHINGTON — 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.

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