El Paso judgments

Maureen Lorenzetti

Judgment day is coming. But to beleaguered energy marketing companies struggling to repair investor confidence, the regulatory process is dragging on for an eternity.
The Federal Energy Regulatory Commission says it will decide whether California's complaints against El Paso Corp. are valid sometime in first quarter 2003. The agency is considering several charges made by state regulators regarding the 2000-01 California energy crisis. State officials assert, for example, that El Paso's pipeline division deliberately withheld capacity to manipulate the California natural gas market. And they maintain that El Paso committed affiliate abuse by allowing sweetheart deals between pipeline and merchant subsidiaries. California also says the merchant company attempted to corner the state energy market.

Long winter ahead
Once FERC rules, analysts anticipate either or both sides may seek a rehearing. That means a final agency decision may not come until mid-2003 or later. Then that final decision can be appealed to the DC Circuit Court.
After a Dec 2. FERC hearing on the allegations, El Paso CEO William Wise predicted his company will win, either at FERC or in federal court.

Quicker absolution
Although quick to maintain its innocence throughout the dispute, the company appears amenable to a possible settlement with California to resolve the matter and make Wall Street happy.
Last September an administrative law judge filed an initial decision in which he found evidence to support "inappropriate and punishable" behavior between the pipeline and merchant subsidiaries. And while he found no evidence to suggest the merchant affiliate withheld capacity, he did agree with California that the pipeline withheld capacity.
Two analysts who follow El Paso closely said that, in their view, the company did a good job defending itself at the December FERC hearing.
"Though both sides engaged in a fair share of rhetoric and courtroom drama, in the end we believe El Paso was able to clearly address the accusations of California and the earlier ALJ ruling, making a strong case that it had done nothing wrong," said UBS Warburg LLC analysts.
The credit rating agency Standard & Poor's downgraded El Paso's senior unsecured debt to BB- from BBB- with a negative outlook, citing the liquidity impact of an earlier downgrade by Moody's and cash flow concerns for 2003 and 2004, Warburg noted.
Christine Tezak, an energy analyst with Schwab Capital Markets LLP said FERC's questioning suggests that commissioners have not prejudged the case, despite concerns from many on Wall Street the agency is predisposed to rule against El Paso.
Tezak predicted FERC will uphold the ALJ's earlier findings there was affiliate abuse between the merchant and pipeline subsidiaries, and that there was no withholding by the merchant side of the business. But she thinks that FERC will reject the judge's assertion the pipeline company withheld gas.

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