FERC considers whether to bless El Paso-California agreement

Pipeline & Gas Journal, May, 2003

It would seem like the curtain is ready to drop on the long running El Paso-California drama; but don't rule out surprises at the end of this last act. The $1.7 billion El Paso agreed to pay to California and some of the other California-based litigants who have been dogging the company since the California energy crisis of 2001 will go a long way toward putting those lawsuits and the Federal Energy Regulatory Commission (FERC) investigation to rest.

But all El Paso and California signed was a memorandum of understanding. That is not a legal document. That document will be submitted to FERC by the end of April. So FERC isn't even thinking about whether the settlement passes muster and won't until the legal language hits the Commission's inbox, according to a source there. That source also notes that the settlement does not cover any of the "East of California" parties in the FERC case.

Those involved jointly sent a letter to former El Paso CEO Bill Wise on Feb. 28 basically telling Wise that they knew settlement talks were going on between EP and the California parties, and that they wanted to be included. The East parties never heard back, according to a Washington attorney who represents two of them--Apache Nitrogen and Phelps Dodge. Some of the others are Southwest Gas, Public Service of New Mexico and the Arizona Corporation Commission.

The East parties may decide to contest the EP California settlement once they see the legal language. If they do, it complicates FERC's job immeasurably. The attorney in Washington says that there is a very high standard for FERC to meet if it wants to accept what she calls a "unilateral" settlement even though there are complaints from other parties left out in the cold, "I'm not saying FERC has never accepted a contested settlement," she explains, "but it makes it more difficult."

Timothy Snider, president of Phelps Dodge Mining Company, wrote the Feb. 28 letter. "Phelps Dodge believes that El Paso, if it is serious about settlement of this case and not merely interested in attempting to delay a FERC decision, should invite all, not just selected, parties to such settlement talks." He went on to say Phelps' concerns are shared by other "East" parties.

When he announced the EP-CA settlement a few weeks later, Ronald Kuehn Jr. chairman and chief executive of EP said. "This agreement in principle is positive news for all stakeholders in El Paso--our employees, customers, shareholders, bondholders, vendors and all those with whom we do business."

Asked about the absence of the "East" parties from the settlement, Mel Scott. an El Paso spokesman, says, "The absence of settlements with other parties should not affect the FERC's approval of this settlement. FERC has encouraged the settlement of the cases involving the California energy crisis, and we believe that this settlement resolves this litigation."

The California parties seemed satisfied, too. "This is very good news for California ratepayers," Gov. Gray Davis said. "This is more evidence that the energy crisis was not a California created problem, but rather market manipulation by the energy pirates that FERC was ready to sweep under the rug." The agreement calls for El Paso to give California consumers $1 billion in discounts on natural gas and power purchases over the next 20 years.

Other components of the settlement include: El Paso will pay $665 million, of which $225 million will be paid up front in cash and stock. The remaining $440 million will be paid over 20 years. Of the $665 million, $505.6 million will be set aside for utilities' business and residential customers. The remainder is split between three states, two California counties and three cities and two oil companies. The company will provide California with $900 million worth of natural gas over the next 20 years.