Documents, Handwritten Notes Led to Energy Suits.

Energy: Lawsuits Allege Sempra, El Paso Energy Colluded to Raise Prices

Documents turned over to an attorney during an earlier lawsuit are what led a team of attorneys to file two class-action suits against San Diego-based Sempra Energy and Houston-based El Paso Energy last month.

The handwritten notes and typed meeting agenda allegedly reveal a "conspiracy" to keep energy prices artificially high, according to the attorneys who filed the suit Dec. 19 in Los Angeles County Superior Court.

A team of lawyers from Los Angles and elsewhere named Sempra and El Paso Energy, and some of their subsidiaries as defendants in the suit. The action is seeking to recoup billions of dollars the attorneys say has been siphoned out of California due to what they call collusion by the energy companies to divide up the state and keep competition at bay.

The suits allege the two energy giants conspired to drive up natural gas costs 1,700 percent this year, in turn helping to push electricity costs to record levels. Most electric generation plants in California are powered by natural gas.

All "non-core" users of natural gas from Sempra or El Paso can become parties to the class-action lawsuit, as are all California users of electricity not currently under the rate freeze originally implemented in 1996 -- that is, customers of San Diego Gas & Electric Co.

The two class-action lawsuits, filed by eight lawyers from three firms in Los Angeles, one from Hermosa Beach and one from Denver, alleged that El Paso Energy, with the collusion of Sempra officials, conspired to limit natural gas supplies.

No Mincing Words

The lawsuits do not mince words: In the preliminary statement accompanying the two lawsuits, the words conspire, conspiracy and conspirators appear a total of 14 times in 3 1/2 pages of text.

Lance Astrella, attorney from the Denver-based law firm of Astrella & Rice, P.C., alleges that on Sept. 25, 1996, high-ranking officials from El Paso Energy held a secret meeting in Phoenix with high-ranking officials from SDG&E and Southern California Gas Co.

At that secret meeting, utility officials allegedly discussed strategies to rig the natural gas market, Astrella said.

The meeting was revealed through testimony and documents uncovered during the discovery phase of an earlier case filed in Houston, Astrella said.

According to Astrella, the utilities discussed the actions of one of their former competitors, Tenneco Inc. In 1992, Tenneco had completed the Kern River Pipeline, which brings natural gas from Wyoming to Bakersfield.

Before the secret meeting in September 1996, Tenneco had been looking to expand that pipeline northward into Canada, and southward to Southern California and Baja California. The company was also looking to build another pipeline to Southern California and Baja from Arizona, Astrella said.

Had either of these pipelines been completed, gas customers -- including generators of electricity -- would have seen not only lower gas prices but also a more stable supply, he said.

But this never happened. El Paso acquired Tenneco in June 1996, Astrella said.

Projects Withdrawn

"This placed EPNG in charge of Tenneco's proposed by pass projects, and SoCal Gas and SDG&E saw the opportunity to make a deal with EPNG to eliminate them .... Top officers of EPNG agreed that EPNG would withdraw Tenneco's Southern California and Baja California bypass projects," the complaints state.

That helped assure SoCal Gas' continued dominance of the market. At about the same time, the parent companies of SoCal Gas and SDG&E merged, forming Sempra Energy, Astrella said.

Officers from the two merging companies knew that El Paso could bring the whole arrangement down by raising objections to the merger, citing potential anti-trust violations. So the companies formed a "gentleman's agreement," under which SoCal Gas would withdraw from competition against El Paso in yet another area, he said.

Both SoCal Gas and El Paso were looking to build a lucrative pipeline to Samalayuca, Mexico. Due to an earlier arrangement, these were the only two companies vying for the contract, Astrella said.

SoCal had a large cost advantage over El Paso, but withdrew from the project, he said.

California Split Into 'Teams'

Other deals also came out of the September 1996 meeting. Minutes obtained from the meeting allegedly show that attendees had sought to carve up California, keeping control over Southern California as "Team 1," while ceding control of the northern half of the state to Pacific Gas & Electric and natural gas providers throughout the Northwest as "Team 2," Astrella said.

The plan took a few years to implement, but once all the elements were in place, customers got squeezed, Astrella said. El Paso bought up power plants in Southern California, and used those plants to purchase natural gas at artificially high prices. That caused the prices of electricity to jump, which was ultimately passed along to the power customer, he alleged.

Also, as El Paso was buying up the capacity on its own pipeline, that led to an artificial shortage in the state. In the past four years, the price of natural gas increased from roughly $2 per thousand cubic feet to $9 at its source, but jumped from $3 to $60 once it crossed the border into California, Astrella said.

"So they basically pocketed the very high profits on the gas, measured by the difference between the purchase price and the California border price, and then passed along the additional electric generation costs to the consumers," he said.

This amounts to a restraint of trade and a monopoly, both violations of the Cartwright Act, and of the unfair competition and unlawful business practices provision of the California Business and Professional Code, said Albro Lundy III, who is joining the lawsuit with Astrella as an attorney representing Hermosa Beach-based Baker, Burton & Lundy.

This lawsuit follows on the heels of similar accusations against El Paso from the California Public Utilities Commission. Harvey Morris, public utilities council for the CPUC, filed a complaint with the Federal Energy Regulatory Commission alleging that El Paso gave its affiliates preferential treatment in hoarding the amount of space in its pipeline, artificially driving up the price for other buyers at the Southern California border.

The original complaint was filed in April, along with a request that the FERC void the contracts El Paso entered into with its own affiliates. In August, the CPUC applied to the FERC for summary disposition of the complaint, which is still pending, Morris said.

What makes the current lawsuits different from the move by the CPUC is that California regulators are looking only to stop El Paso and Sempra from what they're doing right now. The two class-action lawsuits seek to recoup billions of dollars in what they call illegal profits, returning the money to San Diego ratepayers, said Brad Baker, also from the law firm of Baker, Burton & Lundy.

The two Dec. 19 lawsuits came on the heels of two earlier class-action lawsuits filed Nov. 28 and 29. Those suits, against Duke Energy, Dynegy, Inc., Enron, PG&E, Sempra and others, alleged collusion and market manipulation among electricity producers and energy marketers trading in California.

The earlier lawsuits have no specific examples of market manipulation, however. The new lawsuit makes specific accusations, and has already assembled a paper trail, Lundy said.

Doug Kline, spokesman for Sempra, denied the allegations in the two most recent lawsuits.

"Any allegations that the company or its subsidiaries violated antitrust or other laws are completely false," he said. "On Dec. 7, SDG&E filed for emergency relief from the Federal Energy Regulatory Commission asking federal regulators to impose a price cap on natural gas transportation prices to the California border that, if approved, would lower costs for California gas customers."