Sempra: Let's Make a Deal

The San Diego utility is in talks to settle an $8 billion suit alleging collusion in natural-gas pricing

By Christopher Palmeri

Sempra Energy (SRE ), the big San Diego utility that dodged financial catastrophe during the 2000 California energy crisis, could end up paying one of the largest penalties yet in connection with the crisis.

The company is in the second week of a civil trial in San Diego Superior Court, involving charges that its executives conspired to thwart competition in the Southern California natural-gas market -- moves that plaintiffs claim ignited the subsequent electricity crisis.

A Sempra spokesman has confirmed that the company is in settlement talks and had reserved $541 million to pay legal costs relating to the crisis.


  The trial has seen a level of intrigue rarely found in the natural-gas world. The suit, filed on behalf of a number of municipal, industrial, and residential customers, charges that 11 executives representing companies that would eventually become Sempra and El Paso (EP ) met in a Phoenix hotel room in September, 1996, to divvy-up natural-gas pipeline projects.

The complaint alleges that Sempra and El Paso stopped competing against each other on pipeline projects near Juarez and Tijuana, Mexico. El Paso also dropped plans to build pipelines that would have brought more natural gas from the Rocky Mountains and Canada to Southern California industrial customers.

The evidence in the case is largely circumstantial. The plaintiffs have produced a list of agenda items and meeting notes that suggest the pipeline projects were topics of discussion at the 1996 meeting. Plaintiffs' attorney Pierce O'Donnell claims the meeting was meant to be kept secret, with lawyers for the firms not present and executives not identifying other attendees in their expense reports.

All 11 executives have claimed in pretrial depositions that no collusion was involved. "Eleven execs can swear on a Bible that they never did anything improper. We think we can prove otherwise," says O'Donnell.


  Although Sempra has strongly maintained its innocence in the case, the company still has much incentive to settle. The plaintiffs are asking for $8 billion in damages, an amount that could be trebled if punitive damages are awarded. The case is being tried before a jury in San Diego, a city at the epicenter for the power crisis and one where, as in many cities, the local utility is not beloved.

Sempra, which has an active energy-trading business, prides itself on its risk-management strategies. Company Chairman and Chief Executive Stephen Baum has said he would like to have issues related to the crisis resolved by the time he retires in February.

The causes of the electricity crisis, which cost California consumers an estimated $40 billion in higher bills in 2000 and 2001, are still subject to debate. The spike in natural-gas prices that occurred at the time was almost certainly a contributing factor, since California depends on gas for much of its power generation.

The plaintiffs claim more pipeline competition would have eased gas prices. Sempra avoided much of the financial pain suffered by neighboring utilities Edison International (EIX ) and PG&E (PCG ), because local legislators had the state assume its higher power costs early in the crisis.


  Twelve plaintiffs, including Los Angeles County, agreed to settle the case with Sempra this week for an undisclosed amount. El Paso agreed in March, 2003, to settle this suit and others related to the energy crisis, in a combined package of cash payments and other givebacks, totaling $1.7 billion. The settlement involved negotiations with federal and state regulators, as well as the California governor's office. A Sempra settlement could be as far-reaching, sources say.

Attorney O'Donnell served as co-lead counsel during El Paso's settlement negotiations. "The last guy out usually has to pay more," he says. The settlement talks now under way will determine whether that's true.

Palmeri is a correspondent in BusinessWeek's Los Angeles bureau

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