CEO Turnover - Description

Legal Eagle
By Arthur O’Donnell
12 ENERGYBIZ MAGAZINE March/April 2005
Sempra Challenged, Stakes High
They met at a Phoenix airport hotel room just two days
after California enacted its sweeping power-market
restructuring bill in September 1996. But the dozen
executives of three Western energy firms had more on
their minds than the deregulation of electricity.
According to a copy of the sketchy agenda and hand-
written notes from one participant, officials of Southern
California (SoCal) Gas, San Diego Gas & Electric
(SDG&E) and El Paso Natural Gas pipeline discussed
possible joint ventures to construct a power plant in
Samalayuca, Mexico, which would distribute natural gas
in Northern Mexico. The group also contemplated working
out a potential realignment of excess pipeline capacity as
the gas transportation customer profile for El Paso and the
utilities was shifting.
The prospective deals never reached fruition — in part
because of disinterest by the Mexican government in joint
bids. The later merger of SoCal Gas and SDG&E into
Sempra Energy also put a damper on joint deals with El
Paso, said the companies.
However, a host of plaintiffs in a pending lawsuit
claim that the companies’ real agenda that day was
to agree not to compete with each other for new
or expanded pipeline projects that would increase
gas flows into California. According to allegations in
Continental Forge v. Sempra, et al., the result was a
market-allocation conspiracy that caused the prices
of natural gas and electricity to spike upward during
the power crisis of 2000-01. They also charge that
Sempra manipulated gas prices and storage during
the crisis for its own benefit – a claim that has been
rejected by state regulators.
Besides alleging violations of California antitrust laws,
the broad alliance of plaintiffs in the multiple class-action
litigation cite the state’s unfair business practices code
Section 17,200 to seek treble damages for above market
energy costs—estimated at up to $24 billion.
Despite repeated attempts to have the case sum-
marily dismissed or removed to federal jurisdiction, the
Sempra utility defendants, SoCal Gas and SDG&E, face
a jury trial later this year in San Diego Superior Court.
El Paso is no longer a defendant in the case, having
reached a global settlement of energy crisis-related
matters in late 2003 — in which it agreed to pay about
$1.7 billion in damages without admitting any guilt for a
number of alleged market infractions.
“This is an old-fashioned, horizontal antitrust case,”
observed Gordon Erspamer, an attorney with Morrison &
Foerster. “The allegation is that people got together in a
room and carved up the market.”
Litigation over unfair competition in the modern
utilities business is rare, but not novel, said Max Blecher,
an antitrust expert from the Los Angeles firm Blecher
and Collins. “Agreements not to compete or to divide up
territories are classic antitrust violations dating back to
Addyson Pipe & Steel in 1898,” Blecher said.
Notwithstanding the massive claims for damages,
neither Blecher nor other energy litigators perceive broad
implications for the industry. “It’s a lot of money,” said San
Francisco attorney David A. Simpson. “But it doesn’t look
like anything that has particular importance nationally. This
is a standard, garden variety antitrust case.”
Although Court TV is unlikely to set up its tripods
at the San Diego courthouse, if and when the case
goes to trial (Sempra has appealed to the California
Supreme Court), the case illustrates that traditional
defenses employed by utilities do not hold up well
during a period of transition from highly regulated to
unregulated markets.
Harvey Reiter, a partner with the Washington, D.C.,
law firm Stinson Morrison Hecker, LLP, explained that
utilities usually rely successfully on two “regulatory shields”
– federal preemption of state actions when interstate
commerce is involved and application of the federal filed
rate doctrine.
“When an industry is regulated, you can take into
account the regulatory scheme,” Reiter said. In this case,
neither defense has worked for Sempra.
San Diego Superior Court Judge J. Richard Haden in a
detailed order last September saw no application of federal
preemptions against the state suit. “Congress has not
shown an intent to preempt the field, and state antitrust
and unfair competition causes of action do not conflict with
federal law,” Haden found.
He reiterated previous rulings in rejecting Sempra’s
claim that the Federal Energy Regulatory Commission
(FERC) holds jurisdiction over the case. “The case at bar is
not about regulated rates but rather the unregulated spot
market for natural gas at the California border and sky-
rocketing prices for natural gas and electricity therefrom.
There is no filed rate of natural gas spot market prices,
and retail electric rates are not FERC regulated.”