Battle heats up between El Paso, California PUC

Jim Greer Houston Business Journal Energy giant El Paso Corp. has fired another salvo in its ongoing battle with the California Public Utilities Commission.

In a press release highlighting legal briefs it filed Aug. 24, El Paso CEO, President and Chairman William Wise says the Houston company "violated no laws or regulations" -- refuting the California regulatory agency's allegations of wrongdoing.

Allegations against Houston-based El Paso include the claim that its merchant energy unit withheld capacity in an effort to drive up natural gas prices. That allegation is "fantasy," El Paso retorts.

"Natural gas price increases in California were caused by market forces -- not the withholding of pipeline capacity, as alleged by the CPUC," says El Paso leader Wise. "The record is clear and uncontroverted that as California natural gas prices rose, 95 to 100 percent of the El Paso Natural Gas pipeline system was being utilized -- the opposite of withholding."

Given its substantial involvement in the key West Coast market, El Paso is among the energy companies that were pulled into the finger-pointing game after California power costs soared last winter. The California power crunch was severe enough to force the state to implement rolling blackouts.

El Paso operates pipelines that draw natural gas from wells in states such as Colorado, New Mexico, Oklahoma and Texas, notes Morningstar equity analyst Roz Bryant. She points out that a primary market for the gas is made up of utilities and industrial end-users south of Sacramento, Calif.

In mid-July, the Federal Energy Regulatory Commission re-opened hearings on whether the Houston energy conglomerate violated federal regulations in the awarding of a natural gas contract, and whether the company manipulated natural gas prices in California last winter.

The FERC's order for a rehearing came at the request of the California Public Utilities Commission and other plaintiffs who targeted the actions of El Paso affiliates.

The plaintiffs have alleged that El Paso Merchant Energy was privy to "secret and material information" that was unavailable to competitors during open-season bidding for capacity on El Paso Natural Gas Co.'s pipeline to California.

But, in a new brief, El Paso contends its natural gas and merchant energy units "sponsored testimony that directly refuted the charges that the February 2000 open season was biased" in El Paso Merchant Energy's favor. And El Paso says its merchant energy affiliate was not operating under a secret agreement during the open season.

El Paso adds, "Most telling is that natural gas consumption in California between May and December 2000 was approximately 20 percent higher than the average of the same months for the past four years. This unprecedented increase in demand, which pushed available pipeline capacity to the absolute limit, was the principle cause of higher gas prices in California. Market manipulation played no role whatsoever."

An initial decision on El Paso's dispute with the CPUC is expected from FERC's chief administrative law judge, Curtis Wagner Jr., by Oct. 9.

Two major issues have been decided in El Paso's favor by the commission: Whether El Paso Pipeline and/or El Paso Merchant engaged in affiliate abuse or violated affiliate standards in bidding for or awarding natural gas contracts; and whether El Paso Pipeline exercised monopolistic market power by skewing bidding to favor its affiliate, El Paso Marketing.

Additional briefs in the battle involving El Paso and the CPUC are due Sept. 7, notes an equity analyst at Credit Suisse First Boston.

Meanwhile, El Paso shares have suffered amid the uncertainty.

"El Paso stock was riding high in 2000, but the shares have been beaten down recently," analyst Bryant notes.

After surging to about $75 per share in late February, the stock has lost nearly a third of its value. It closed on Aug. 28 at $50.66 per share.

The FERC's upcoming decision on whether El Paso's merchant energy unit manipulated pipeline capacity is "the primary depressant" on the stock, according to a recent research report by Lehman Brothers equity analysts Richard Gross and Jim Harmon.

El Paso, notes Lehman, has seen more than $10 billion of its stock market value "wiped out" over the past several months. Its market capitalization recently was below $27 billion.

http://houston.bcentral.com/houston/stories/2001/09/03/story4.html

-- Martin Thompson (mthom1927@aol.com), September 06, 2001