More bad press.

 -----Original Message-----
From: 	"Tracey Bradley" <tbradley@bracepatt.com <mailto:tbradley@bracepatt.com>>@ENRON [mailto:IMCEANOTES-+22Tracey+20Bradley+22+20+3Ctbradley+40bracepatt+2Ecom+3E+40ENRON@ENRON.com] <mailto:[mailto:IMCEANOTES-+22Tracey+20Bradley+22+20+3Ctbradley+40bracepatt+2Ecom+3E+40ENRON@ENRON.com]> 
Sent:	Tuesday, August 07, 2001 12:41 PM
To:	jlimone@aeglobalmarkets.com <mailto:jlimone@aeglobalmarkets.com>; Charles Shoneman; Kimberly Curry; Randall Rich; susan.ginsberg@elpaso.com <mailto:susan.ginsberg@elpaso.com>; Cantrell, Rebecca W.
Cc:	Paul Fox
Subject:	California Newspaper Articles re: El Paso Hearing

None of the news reports I've seen are favorable to El Paso.

LA Times
August 7, 2001

THE NATION
El Paso Rests Its Case in Gas Hearing
 Energy: Firm accused of price gouging ends arguments, though judge warned there's evidence it manipulated market.

By RICARDO ALONSO-ZALDIVAR, TIMES STAFF WRITER


WASHINGTON -- A Texas natural gas conglomerate accused of price gouging in California unexpectedly rested its case Monday, even though a judge warned that the state has presented credible evidence the company attempted to take unfair advantage of the energy crisis.

Judge Curtis L. Wagner Jr. of the Federal Energy Regulatory Commission said he had wanted El Paso Corp. to present witnesses to explain tape-recorded phone calls that he says raised suspicions of an inside deal to manipulate California's natural gas market.

The California Public Utilities Commission is alleging that El Paso created artificial natural gas shortages last year, helping drive electricity prices to record levels. The state wants FERC to order refunds of at least $184 million. But the company said its critics had not presented any new evidence and had failed to prove their allegations. FERC's governing board had initially dismissed complaints of insider dealing, but it recently authorized Wagner to take a closer look.

"If anything happens here, I am sure it is going to be all political," said El Paso spokeswoman Norma Dunn. "There is absolutely no new evidence. FERC already looked at this the first time and found that El Paso did not violate any rules. How can they come back and say we did?"

Kevin Lipson, a lawyer for plaintiff Southern California Edison, called El Paso's decision "one of the dumber moves I've ever seen": valid from a legal standpoint but "a public relations disaster. . . . The judge is saying we're going to have to draw our own conclusions if they don't present witnesses."

The case is considered the closest thing to a full-blown trial of allegations that corporate scheming--not merely an imbalance of supply and demand--contributed to California's energy woes.

At issue is a controversial contract between two subsidiaries of the Houston-based company: El Paso Natural Gas Co., a pipeline regulated by FERC; and El Paso Merchant Energy, an energy marketing company.

The marketing company last year acquired the right to ship 1.2 billion cubic feet of natural gas a day through a critical pipeline serving Southern California. CPUC alleges that Merchant used inside information to win the deal and later withheld supplies of gas to drive up prices. Once the contract expired May 31 and some 30 other companies acquired the shipping rights, natural gas prices plunged.

Wagner, FERC's chief administrative law judge, has until early October to render an initial decision to the agency's governing board. FERC has the power to order the return of any ill-gotten profits, but the company would likely appeal such a penalty to the federal courts.

A few weeks ago, Wagner dismissed Gov. Gray Davis' demand for $8.9 billion in electricity refunds from out-of-state suppliers. In the El Paso case, however, he has been a thorn in the side of industry.

El Paso chief executive William Wise had been expected to take the stand Monday afternoon, when the company abruptly shifted its strategy in a dramatic legal gambit.

Dan Collins, an El Paso attorney, told the judge that the company would rest its case. Collins held out the possibility that Wise might yet testify, but only to answer questions from the judge, not from plaintiff's lawyers.

After a short recess, Wagner returned to the hearing room and ruled that CPUC had met its initial burden of proof--akin to finding probable cause in a criminal trial.

"I do find that the complainant has made a prima facie case and the burden of proof now shifts to El Paso," Wagner said. When El Paso's lawyers tried to respond, Wagner ordered them to "please be seated."

Wagner said he was disturbed by transcripts of conversations taped in February 2000 between Robin Cox, an official of El Paso Merchant, and Harvey Rodman, an official of yet another El Paso subsidiary, Mojave Pipeline Co.

Cox was seeking a shipping discount from Mojave a few days before Merchant finalized its bid. The Mojave pipeline would provide an alternative route into Southern California in case of shipping bottlenecks.

Securing the Mojave discount made the El Paso contract more valuable for Merchant, the plaintiffs allege. In one taped conversation, Cox asks Rodman to refrain from publicly posting the discount for a few days. Plaintiffs allege that other shippers might have competed with Merchant for El Paso's capacity had they known a discount was available on Mojave.

But Merchant official Mark Mitchell testified that the Mojave discount was of no real importance in the company's decision to enter into the deal.

The judge wanted to know more. He urged El Paso Corp. to produce Cox and Rodman as witnesses.

"If ever a deal was being made . . . the words are clear," said Wagner. "It's all buddy-buddy stuff."

The judge said he was concerned that the Cox-Rodman conversations violated FERC rules that require pipelines to maintain arm's-length relationships with marketing affiliates.

CPUC attorney Harvey Morris, who has spearheaded the case against El Paso, said the judge's ruling made it clear that Merchant obtained preferential treatment.

Morris said he was baffled that El Paso chose not to bring on more witnesses, despite the judge's warning.

"If I were in their shoes," said Morris, "unless I had something to hide, I'd call my witnesses and give them another chance to defend themselves."

Responded William Scherman, a lawyer for Merchant: "You make a judgment that you have produced evidence that is sufficient to win your case, and we believe we have done that."

*

Times staff writer Nancy Vogel in Sacramento contributed to this story.

Copyright 2001 Los Angeles Times

************************************
Price gouging case strong, judge says
El Paso Corp. executives decline to testify -- hearing cut short

Bernadette Tansey, Chronicle Staff Writer
Tuesday, August 7, 2001
?2001 San Francisco Chronicle

URL: <http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2001/08/07/MN173922.DTL>


A federal regulatory judge buoyed California's hopes for a major refund on energy costs yesterday when he said the state had presented credible evidence that a giant Texas natural gas company broke the rules against favoring an affiliate.

Curtis L. Wagner, the chief administrative law judge for the Federal Energy Regulatory Commission, said lawyers for the state had made a convincing case that the El Paso Corp. acted improperly. He urged El Paso executives to rebut the allegations.

But they declined, bringing an unexpectedly sudden end to the evidentiary hearing in Washington, D.C., and boosting the spirits of California officials who have asked the regulatory commission to order El Paso Corp. to refund up to $200 million.

Wagner plans to file a recommended decision to the Federal Energy Regulatory Commission by Oct. 9.

At issue is an allegation by the state Public Utilities Commission that El Paso rigged the bidding for use of its natural gas pipeline in Southern California last year. The PUC said El Paso steered a huge block of crucial pipeline space to its own marketing affiliate, effectively freezing out competitors.

The PUC, utilities, say that El Paso's pipeline division and its marketing arm then cooperated to choke off the flow of gas to the state, setting off increases in the price of natural gas -- as well as in the price of electricity from gas-fired power plants.

Wagner said internal El Paso memos and transcripts support the first part of the state's allegations: that El Paso violated federal regulations that prohibit coordination between regulated natural gas pipelines and their unregulated affiliates, which are required to operate independently.

"The California Public Utilities Commission had shown a prima facie case, and the burden of proof shifted to the other side," Wagner told The Chronicle yesterday. "Now I have to look at the whole record and decide the case."

El Paso denies the allegations that it improperly shared information about the bidding process with the marketing affiliate and arranged discounts.

Top executives, including El Paso Corp. chief executive officer William Wise, had flown to Washington to testify at Wagner's suggestion.

"I told them what I thought they needed to do to show there was no affiliate abuse or no (market manipulation)," Wagner said. But he said the company had the right to cut the hearing short and rely on the evidence already presented. "That's up to them."

Whatever penalties the commission might impose, they could be dwarfed by damages sought in a series of private ratepayer lawsuits against El Paso. Those suits claim the company is largely responsible for billions of dollars in skyrocketing energy costs suffered by Californians over the past 18 months..


AMOUNTS TO CONCESSION
The decision to keep executives off the witness stand yesterday amounted to a concession that El Paso violated Federal Energy Regulatory Commission regulations against affiliate abuse, asserted PUC attorney Harvey Morris.

"I infer from their actions it was not going to get any better (if executives testified)," Morris said. "They were doing damage control."

El Paso spokeswoman Norma Dunn denied that the company has conceded wrongdoing.

"That's absolutely insane," said Dunn.

Wagner said transcripts of a telephone conversation between an employee of El Paso's marketing arm, El Paso Merchant Energy, and one of its pipeline affiliates "tend to show there was communication between the marketing agency and the pipeline." The two were discussing discounts.

"It looked like hanky-panky," Wagner said. The judge said he was also influenced that a memo outlining El Paso Merchant Energy's strategy for boosting profits from its pipeline contract was shared with the top executive for the company's pipeline division.

E-mail Bernadette Tansey at btansey@sfchronicle.com <mailto:btansey@sfchronicle.com>.

?2001 San Francisco Chronicle   Page A - 1