WASHINGTON - An administrative law judge concluded yesterday that the El Paso Corp. illegally drove up prices for natural gas in California during the state's power crisis in 2000 and 2001, the first time any federal regulatory official has determined there was widespread manipulation of energy supplies.
In the ruling, Curtis L. Wagner Jr., the chief administrative law judge at the Federal Energy Regulatory Commission, essentially validates the suspicions of California officials that El Paso, the nation's largest natural gas company, withheld natural gas from the state, thus driving up the cost of electricity that was generated by gas-fired turbines.
"El Paso Pipeline withheld extremely large amounts of capacity that it could have flowed to its California delivery points," Wagner said in the ruling. El Paso's actions significantly increased the price of natural gas flowing to California, he added, and "substantially tightened the supply of natural gas at the California border."
Executives at El Paso, which is based in Houston, said the ruling "is unsupported by the evidence and is inconsistent with FERC policy."
Wagner recommended that the energy agency begin determining penalties against El Paso for violating federal rules and "for the unlawful exercise of market power."
The ruling sent shares in El Paso down $4.16, or 36 percent, to $7.51.
California officials and one of the state's major utilities, which argued the case in hearings at the energy commission, said they would seek to recover $4 billion in what they contend were higher power and gas prices caused by El Paso's actions.
The company also faces a number of lawsuits, which will be aided if the ruling is upheld.
But the decision faces review by the four-member energy regulatory commission and, if upheld there, an almost certain appeal to a federal appellate court.
El Paso predicted that the ruling would be reversed. In a statement, the chairman and chief executive of El Paso, William A. Wise, said: "We are disappointed that today's proposed decision does not recognize the substantial record evidence supporting El Paso Natural Gas' position that the pipeline was operated properly. We are confident in the strength of our position."
"Given the critical safety and deliverability concerns associated with operating a natural gas pipeline," Wise said, "it is inappropriate and without precedent to second-guess a pipeline's day-to-day operations.'
The California Public Utilities Commission filed a complaint at the FERC against El Paso in early 2000, but the case languished at the commission for close to a year. In March 2001, The New York Times, as part of a reporting project with the PBS program Frontline, disclosed that internal El Paso documents showed senior executives discussing a plan to give them more control of gas markets, including the "ability to influence the physical markets" to benefit the company.
One document discussed how a deal in which one subsidiary, El Paso Natural Gas, sold pipeline capacity to a sister company, El Paso Merchant Energy, would allow the company to "widen" the difference between what gas could be bought for in Texas and New Mexico and what it sold for in California.
Shortly after the Times report, the FERC voted to open an investigation.
El Paso has dismissed claims of manipulation, saying that California officials, who deregulated the state's power markets four years ago, created a flawed market that was easily susceptible to price spikes. The state faces a $24 billion budget deficit, much of it because of the costs of buying high-priced wholesale power during the energy crisis.
Analysts scrambled yesterday to assess the impact the ruling could have on El Paso.
Gordon Howald, who tracks El Paso for Credit Lyonnais Securities, said: "There isn't a near-term liquidity risk, but it's a situation where if the ratings agencies react negatively to this, their cost of capital will rise and they may have to post additional collateral with trading partners, all the things that got Williams and Dynegy into trouble.
"The real risk here is that they get caught in the same slippery slope that a lot of their peers have," Howald said. "The litigation risk is huge," he added, saying that the ruling, if upheld, could give private suits much greater traction in court.
Howald, who was one of the first analysts to raise concerns about the FERC case, said El Paso would be able to rely on "the best balance sheet" in its sector. But he said that if the company did eventually face billions of dollars in penalties, either at the FERC or from lawsuits, then "it's throw everything out the window."