San Diego Union-Tribune

May 24, 2001

Company denies it restricted gas supply
    Exec reacts hotly to California claim


WASHINGTON -- A top El Paso Corp. executive strongly denounced as "inaccurate and implausible" allegations by California officials that the Houston-based company willfully withheld supplying natural gas through its pipeline to bolster profits.

The company official testified yesterday before a Federal Energy Regulatory Commission administrative law judge examining charges that the Houston-based conglomerate cost California billions of dollars.

The company "did not have a financial incentive to withhold pipeline capacity in order to increase natural gas prices in California," said Ralph Eads, president of El Paso Merchant Energy, which markets natural gas on pipelines from Texas and New Mexico into California.

Merchant is a division of El Paso Corp., which operates a key pipeline that supplies about one-sixth of California's natural gas. Eads is a corporate executive vice president.

He said that although Merchant earned more than $180 million in pre-tax profits in selling natural gas in the past year, the company lost potentially hundreds of millions of dollars more by entering into long-term contracts under what is known as a "hedging" strategy.

During afternoon testimony yesterday, Eads repeatedly denied suggestions by an attorney for the California Public Utilities Commission that the company kept gas capacity "out of the hands of other marketers" to drive up profits between November and March.

The California PUC lawyer, Harvey Morris, suggested that Merchant failed to aggressively market its natural gas and knew that it would only use 50 percent of capacity.

Not so, said Eads.

"We bought capacity to use it," he testified.

In testimony filed with FERC, Eads said: "The allegations made against
Merchant by the (California Public Utilities Commission) and supporter
interveners are not only inaccurate, they are also implausible."

California officials have accused El Paso Corp. and its gas marketing
company of using its marketing muscle to drive up the price of gas sold in California by more than $3.7 billion. Two financially troubled state utilities -- Pacific Gas and Electric Co. and Southern California Edison -- have joined in the state's case against El Paso.

Testimony before Judge Curtis L. Wagner Jr. is expected to continue into next week. Wagner plans to make a recommendation to FERC this summer.