Sempra to go on Trial   

September 7, 2005

Sempra Energy is about to go on trial. The allegations: Its subsidiaries, Southern California Gas Co. and San Diego Gas & Electric Co. violated California antitrust and unfair competition laws by restricting the supply of natural gas into California and thereby contributing to the energy crisis there in 2000-2001.

Ken Silverstein EnergyBiz Insider Editor-in-Chief

The trial date is set for Sept. 12 and is expected to last several months. The starting time could get postponed as the utility is trying to get the case out of state court, where it believes it would be politicized, and into the hands of the Federal Energy Regulatory Commission that understands such complex issues. While all of Sempra's efforts to have this case dismissed have been unsuccessful, the plaintiffs would still have to convince a jury that Sempra participated in massive efforts to manipulate the markets.

That's a difficult task. The plaintiffs allege that it all began in a hotel room in Arizona in 1996. They go on to say that executives from El Paso Corp. and Sempra conspired to divvy up the state's natural gas markets and then subsequently worked together to withhold pipeline capacity, all in an effort to drive up prices. The plaintiffs, who are now just suing Sempra, must tie a series of varied events together that occurred between five and nine years ago.

They are alleging that the actions caused natural gas prices in Southern California to spike to $23 per million BTUs at a time when others around the country were paying $7 per million BTUs. The plaintiffs, led by Continental Forge, seek $9 billion in damages. That's far more than the $2.2 billion El Paso settled for in a related price and market manipulation case -- a settlement that helped the company to escape trial in this case and all done without admitting guilt.

"Plaintiffs take a single, innocuous business meeting and spin it into a fictional story about a 'massive conspiracy' that supposedly restricted the supply of natural gas to California and provoked the entire California energy crisis...," say court papers filed by Sempra. The San Diego-based company says that the purpose of the 1996 meeting was to figure out ways to reduce costs to customers.

It goes on to say that prices went up because of drought conditions in the Pacific Northwest, unseasonably hot summers followed by unseasonably cold winters and an unanticipated shutdown of a Southern California nuclear facility. The company and others have said that the state does not have a shortage of interstate pipeline capacity but rather a dwindling supply of natural gas. In fact, there is 6 billion cubic feet (bcf) per day of pipeline capacity in Southern California while there is 3.5 bcf per day consumed.

Sempra filed motions in May 2005 to have the San Diego Superior Court decide in its favor without a trial and based on agreed upon facts. In essence, it says that even if the court assumes that everything the plaintiffs have alleged is true, there is still no reason to go forward with a trial.

Settlement Elusive

It's improbable that a judge would just dismiss the proceeding. That's because there are multiple allegations and the case is quite complex. To get the case summarily dismissed, the defendants would have to prove there is absolutely nothing to what the plaintiffs are saying. And the judge has indicated he will not go that direction. Generally speaking, in such cases there is a presumption to go to trial unless the parties can settle the matter between themselves.

"Plaintiffs have alleged, and substantial evidence shows, the defendants met and agreed to eliminate competition in the newly deregulated gas industry and to reduce natural gas delivery capacity to the California market" in an effort to "exploit their market dominance in Southern California," say court papers filed by the plaintiffs.

If a jury verdict were to be rendered against it, Sempra says it would have a chance to file post trial motions that seek to have the judgment entered against the company invalidated or to have a new trial. It also says that it could appeal the case to a higher court. Still, Sempra is holding out hope that FERC will step in and say that it has jurisdiction in such cases - something in which the state court has disagreed, saying that FERC does not oversee the unregulated spot market for natural gas.

The uncertainty of the court case has not hurt the company's stock. While share prices at one low point in the court proceedings last year took at $3 hit and fell to $31, they have since rebounded. In the last year, Sempra's shares have risen from $36 to more than $44. At the same time, Standard & Poor's issued a statement affirming the company's credit rating with a stable outlook.

It's a nerve-racking process. But, so far the parties have been unwilling to settle. That's because the $9 billion figure is far more than Sempra would ever consider and much greater than the $2.2 billion in which El Paso had settled for in 2003. Sempra, meantime, wants FERC to hear the case because of its expertise in the subject. But, FERC has yet to indicate whether it believes it has the jurisdictional right to do so.

"We believe that the FERC clearly has jurisdiction over electricity rates which make up over $4 billion of the damages that the plaintiffs are seeking," says Christine Tezak, regulatory analyst with the Standard Washington Group. "However, the jurisdiction over natural gas sales ... seems to be much less straightforward."

If nothing else, the Sempra case demonstrates that the California energy crisis is still not finished. The state still faces generation reserve shortages and has endured numerous rotating outages this current summer. At the same time, natural gas is in short supply there. No matter how the Sempra case is resolved, those underlying factors that help keep supply and demand in equilibrium will not have changed -- and the state will continue to be in the eye of the energy storm.