EL PASO GUILTY --NY Times: "Judge Concludes Energy Company Drove Up Prices"
nytimes.com
LINK TO FERC ADMIN JUDGE'S DECISION: CalPUC v. El Paso et al:
news.findlaw.com
Judge Concludes Energy Company Drove Up Prices
By RICHARD A. OPPEL Jr. with LOWELL BERGMAN
[[Note Lowell Bergman was a CBS 60 Minutes and PBS Frontline producer, among other excellent investigative credentials.]]
WASHINGTON, Sept. 23 — An administrative law judge concluded today that the El Paso Corporation illegally helped to drive up prices for natural gas in California during the state's power crisis in 2000 and 2001, the first time any federal regulatory official has determined there was widespread manipulation of energy supplies.
In the ruling, Curtis L. Wagner Jr., the chief administrative law judge at the Federal Energy Regulatory Commission, essentially validates the suspicions of California officials that El Paso, the nation's largest natural gas company, withheld natural gas from the state, thus driving up the cost of electricity that was generated by gas-fired turbines.
"El Paso Pipeline withheld extremely large amounts of capacity that it could have flowed to its California delivery points," Judge Wagner said in the ruling. El Paso's actions significantly increased the price of natural gas flowing to California, he added, and "substantially tightened the supply of natural gas at the California border."
Executives at El Paso, which is based in Houston, said the ruling "is unsupported by the evidence and is inconsistent with FERC policy."
Judge Wagner recommended that the energy agency begin determining penalties against El Paso for violating federal rules and "for the unlawful exercise of market power."
The ruling sent shares in El Paso down $4.16, or 36 percent, to $7.51.
California officials and one of the state's major utilities, which argued the case in hearings at the energy commission, said they would seek to recover nearly $4 billion in what they contended were higher power and gas prices caused by El Paso's actions.
The company also faces a number of lawsuits, which will be aided if the ruling is upheld.
But the decision faces review by the four-member energy regulatory commission and, if upheld there, an almost certain appeal to a federal appellate court.
El Paso predicted that the ruling would be reversed. In a statement, the chairman and chief executive of El Paso, William A. Wise, said: "We are disappointed that today's proposed decision does not recognize the substantial record evidence supporting El Paso Natural Gas's position that the pipeline was operated properly. We are confident in the strength of our position."
"Given the critical safety and deliverability concerns associated with operating a natural gas pipeline," Mr. Wise said, "it is inappropriate and without precedent to second-guess a pipeline's day-to-day operations."
The California Public Utilities Commission filed a complaint at the FERC against El Paso in early 2000, but the case languished for close to a year. In March 2001, The New York Times, as part of a reporting project with the PBS program " Frontline," disclosed that internal El Paso documents showed senior executives discussing a plan to give them more control of gas markets, including the "ability to influence the physical market" to benefit the company.
One document discussed how a deal in which one subsidiary, El Paso Natural Gas, sold pipeline capacity to a sister company, El Paso Merchant Energy, would allow the company to "widen" the difference between what gas could be bought for in Texas and New Mexico and what it could be sold for in California. Shortly after the report by The Times, FERC voted to open hearings into the matter.
El Paso has dismissed claims of manipulation, saying that California officials, who deregulated the state's power markets four years ago, created a flawed market that was easily susceptible to price spikes. The state now faces a $24 billion budget deficit, part of it because of the costs of buying high-priced wholesale power during the energy crisis.
Today, Loretta Lynch, the president of the California utilities commission, said, "Finally, after two and a half years, we have justice from the administrative law judge, but it remains to be seen whether the full commission will provide Californians with the justice they deserve."
In making its case before the energy commission, the utilities commission was joined by the Southern California Edison unit of Edison International and the Pacific Gas and Electric unit of the PG&E Corporation, each of which lost billions of dollars during the power crisis.
The two utilities provided much of the evidence heard by Judge Wagner.
Kevin Lipson, a lawyer at Hogan & Hartson in Washington who served as lead counsel for Edison, said Edison calculated that El Paso's actions drove gas and power prices higher by $3.7 billion, money he said the state and the utilities would seek to recover either through FERC or in civil lawsuits. Potentially, Mr. Lipson said, the amount of damages sought could be tripled. "Absent the trebling," he said, "you're still looking at a multibillion-dollar exposure."
"This is really the first time the federal government has identified a party who drove up the price of natural gas," Mr. Lipson added, "and also had the effect of driving the price of electricity up in California."
Analysts scrambled this afternoon to assess the impact the ruling could have on El Paso.
Gordon Howald, who tracks El Paso for Crédit Lyonnais Securities, said: "There isn't a near-term liquidity risk, but it's a situation where if the ratings agencies react negatively to this, their cost of capital will rise and they may have to post additional collateral with trading partners, all the things that got Williams and Dynegy into trouble."
"The real risk here is that they get caught in the same slippery slope that a lot of their peers have," Mr. Howald said. "The litigation risk is huge," he added, saying the ruling, if upheld, could give private lawsuits much greater traction in court.
Mr. Howald, who was one of the first analysts to raise concerns about the FERC case, said El Paso would be able to rely on "the best balance sheet" in its sector. But he said that if the company did eventually face billions of dollars in penalties, either at FERC or from lawsuits, then "it's throw everything out the window."
Tonight, Standard & Poor's said it was considering downgrading its rating on El Paso in light of the ruling. First, though, the ratings agency said it would review El Paso's "response to regulatory pressures" as well as its projected cash flow and future capital spending requirements.
The chance for a downgrade "reflects the market uncertainties regarding sustainable cash flow and the current regulatory environment," John Whitlock, a Standard & Poor's credit analyst, said in a statement. But he noted that El Paso had an "adequate liquidity cushion" that included a "$4 billion credit facility backstopping commercial paper, and cash and cash equivalents of $1.8 billion."
Last year, Judge Wagner ruled that while El Paso had the ability to manipulate prices, he was not convinced that such manipulation had occurred. He also found "blatant collusion" in the deal between the El Paso subsidiaries.
But FERC ordered the case reopened and instructed Judge Wagner to review whether the company's pipeline made all of its capacity available from Nov. 1, 2000, to March 31, 2001. In that period, the price of gas in Southern California soared to as high as $60 a thousand cubic feet, more than five times what it cost in other parts of the nation.
Most of that increase was because of the widening of the basis differential — the difference between what natural gas cost at one end of the pipeline, in the producing areas of Texas and New Mexico, and what it could be sold for on delivery to Southern California. That differential is normally less than $1, but during the energy crisis it reached $50.
After further hearings, Judge Wagner found that the pipeline only used 79 percent of its capacity, leaving roughly 700 million cubic feet a day of unused capacity.
He also found that half of that unused capacity was caused by factors including a failure to operate the pipeline at a high enough pressure and nonessential maintenance that could have been done at other times.
This "new evidence," the judge said, "shows a clear withholding of substantial capacity during the relevant period, which clearly indicates an exercise of market power by El Paso Pipeline."
El Paso's actions, he added, "significantly broadened the basis differential." |
