San Diego Union-Tribune

October 10, 2001

State loses natural-gas pricing case

By JOE CANTLUPE 
COPLEY NEWS SERVICE 

WASHINGTON -- A Federal Energy Regulatory Commission judge
yesterday rejected claims by California officials that El Paso Corp. improperly drove up natural gas prices.

But Administrative Law Judge Curtis Wagner found that El Paso violated a FERC rule that prohibits pipeline companies and their affiliates from sharing information.

Wagner's decision was a setback for the California Public Utilities
Commission, which charged that El Paso used manipulative practices to drive up California's energy costs by $3.8 billion.

State officials said they would appeal to FERC to overturn Wagner's finding on prices.

The state also will seek a refund of $200 million from El Paso, said Harvey Morris, principal counsel to the PUC.

The judge "didn't go the full distance and missed the boat" by not linking his finding that El Paso's affiliates shared information to the state accusations that the company improperly drove up natural gas prices, Morris said.

"Californians were paying double and triple for natural gas, and then when El Paso's contract wasn't renewed, prices plummeted," he said.

Lawyers for Pacific Gas and Electric Co. and Southern California Edison also contended that El Paso subsidiaries worked to drive up prices in sweetheart deals.

Wagner disagreed.

"The issue in the complaint concerning whether El Paso Pipeline and/or El
Paso Merchant may have had market power and, if so, exercised it to drive up natural gas prices at the California border should be dismissed," Wagner said.

Wagner reached his decision after listening to weeks of testimony last
summer.

A spokeswoman for El Paso said yesterday the company is "gratified" by
Wagner's finding that it did not drive up prices. But the company will ask
FERC to overturn Wagner's ruling that the company violated regulations
involving sharing information, the spokeswoman said.

Company officials blamed the problems on lack of capacity in California's
pipelines.

California officials insisted during the hearings that they had proved their case, especially because natural gas prices fell dramatically after El Paso contracts on the pipeline expired May 31.

But there was no piece of evidence that indicated El Paso officials sought to manipulate the market, said Wagner, who is the FERC chief administrative law judge.

However, Wagner found the company guilty of "affiliate abuse" in the sharing of information. Under FERC rules, pipeline companies and their marketing units are not allowed to communicate with each other.

"There was a dialogue between the pipeline affiliates and the marketing
affiliate that gave an unfair advantage to the bidding," Wagner said.

Last year, El Paso's marketing subsidiary, El Paso Merchant, won a $38.5
million bid to market natural gas on 30 percent of the pipeline owned by
another El Paso Corp. subsidiary, which serves about 17 percent of
California's market.

Wagner's decision in the El Paso case was his second setback for California officials this year stemming from the power crisis.

In July, the judge rejected California's request for billions of dollars in refunds from power sellers.