EXHIBIT 99.2
Jonathan H. Waller
Nevada Bar # : 5538
Of Counsel:
Waller Law Group
3800 HOWARD HUGHES PARKWAY
SEVENTH FLOOR
LAS VEGAS, NEVADA 89109-0907
PHONE: (702) 693-4200
PHONE: (800) 540-1311
FAX: (702) 792-6874
COUNSEL FOR PLAINTIFFS
UNITED STATES DISTRICT COURT
DISTRICT OF NEVADA
SIERRA PACIFIC RESOURCES, and )
NEVADA POWER COMPANY, )
)
Plaintiffs, )
) Civil Action No. _______
EL PASO CORPORATION; EL PASO )
NATURAL GAS COMPANY; EL PASO )
MERCHANT ENERGY COMPANY, a )
Division of El Paso Corporation; EL PASO )
TENNESSEE PIPELINE COMPANY; )
EL PASO MERCHANT ENERGY-GAS, )
COMPANY; SEMPRA ENERGY; SOUTHERN )
CALIFORNIA GAS COMPANY; SAN DIEGO )
GAS AND ELECTRIC; DYNEGY HOLDINGS, )
INC.; DYNEGY ENERGY SERVICES, INC.; )
and DOES 1-100, )
)
Defendants. )
ORIGINAL COMPLAINT
JURY DEMAND
1. Plaintiffs Sierra Pacific Resources ("SPR") and Nevada Power
Company ("Nevada Power") (jointly "Plaintiffs") file this Original Complaint as
follows:
A. JURISDICTION AND VENUE
2. This Court has subject matter jurisdiction over this action
pursuant to 28 U.S.C. Section 1332 since complete diversity of citizenship
exists between the parties in this action and the amount in controversy exceeds
$75,000.00, exclusive of interest and costs.
3. Venue is proper pursuant to 28 U.S.C.Section 1391 because a
substantial part of the events or omissions giving rise to Plaintiffs' claims
occurred in this district.
B. PARTIES
4. Plaintiff Sierra Pacific Resources is a Nevada corporation
with its principal place of business at 6100 Neil Road, Reno, Washoe County,
Nevada.
5. Plaintiff Nevada Power Company is a Nevada corporation with
its principal place of business at 6226 W. Sahara Avenue, Las Vegas, Clark
County, Nevada.
6. Defendant Dynegy Holdings, Inc., formerly known as Dynegy,
Inc. ("Dynegy") is a Delaware Corporation with its principal place of business
in Houston, Texas and which, at all material times, was doing business in the
State of Nevada.
7. Defendant Dynegy Energy Services, Inc., formerly known as
Dynegy Marketing & Trade Hub Services, Inc. ("Dynegy Marketing") is a division
of Dynegy or is a Delaware Corporation with its principal place of business in
Houston, Texas, and which, at all material times, was doing business in the
State of Nevada.
8. Defendant El Paso Corporation, formerly known as El Paso
Energy Corporation ("El Paso") is a Delaware Corporation with its principal
place of business in Houston, Texas and which, at all material times, was doing
business in the State of Nevada.
9. Defendant El Paso Merchant Energy Company (collectively with
EPME-Gas and EPM "EPME") is a division of El Paso Corporation, or is a Delaware
Corporation with its principal place of business in Houston, Texas and which, at
all material times, was doing business in the State of Nevada.
2
10. Defendant El Paso Merchant Energy, L.P. ("EPM") is a Delaware
limited partnership owned and/or managed by El Paso Corporation with its
principal place of business in Houston, Texas, and which, at all material times,
was doing business in the State of Nevada.
11. Defendant El Paso Merchant Energy-Gas Company (EPME-Gas) is a
Delaware corporation with its principal place of business in Houston, Texas and
which, at all material times, was doing business in the State of Nevada.
12. Defendant El Paso Natural Gas Company ("EPNG") is a Delaware
Corporation with its principal place of business in Houston, Texas and which, at
all material times, was doing business in the State of Nevada.
13. Defendant El Paso Tennessee Pipeline Company ("Tenneco") is a
Delaware Corporation with its principal place of business in Houston, Texas and
which, at all material times, was doing business in the State of Nevada.
14. Defendant Sempra Energy ("Sempra") is a California corporation
with its principal place of business in California and which, at all material
times, was doing business in the State of Nevada.
15. Defendant Southern California Gas Company ("SoCal Gas") is a
California corporation with its principal place of business in California and
which, at all material times, was doing business in the State of Nevada.
16. Defendant San Diego Gas and Electric Company ("SDGE") is a
California corporation with its principal place of business in California and
which, at all material times, was doing business in the State of Nevada.
3
C. NON-PARTY CO-CONSPIRATORS
17. Upon information and belief, Enron Corporation and certain of
its subsidiary companies, including Enron North America, became co-conspirators
with the El Paso and Sempra parties in cartel arrangements designed to drive up
or control natural gas prices in the Border Market. The Enron entities are in
bankruptcy proceedings and cannot be made parties to this case because of the
automatic stay applicable to bankruptcy matters.
D. SUMMARY OF ALLEGATIONS
18. Nevada Power is a Nevada-based utility that provides electric
service to Nevada's households and businesses. SPR is the parent corporation for
Nevada Power. Nevada Power generates a substantial portion of the electricity
required to meet the needs of its customers, whom it is legally bound to serve.
Nevada Power generates electricity through gas-fired generation. Consequently,
Nevada Power uses natural gas as a primary fuel to provide the electric power it
generates and, as such, is a major purchaser of natural gas in the Southwestern
United States.
19. Defendants El Paso Corporation, El Paso Natural Gas Company,
El Paso Tennessee Pipeline Company, El Paso Merchant Energy-Gas Company, Sempra
Energy(1), San Diego Gas and Electric ("SDGE"), and Southern California Gas
Company own or control substantial quantities of natural gas transportation
capacity (or rights to such capacity) from gas production regions to Nevada and
Southern California. Collectively, they owned or controlled transportation
capacity or rights to transportation capacity on pipelines that deliver the
natural gas that Nevada Power purchases and uses to generate
- ----------------------
(1) In 1996, Sempra acquired SDGE and SoCal Gas through a merger of SDGE's and
SoCal Gas' parent companies.
4
electricity and that other electric generators use to generate electricity that
Nevada Power must purchase in order to meet their customer obligations.
20. Defendants El Paso Merchant Energy Company, El Paso Merchant
Energy-Gas Company and Dynegy Energy Services, Inc. are natural gas merchant
traders. They buy and sell natural gas as a commodity, taking advantage of
regional price differentials (arbitrage) in order to make a profit. El Paso
Corporation and Dynegy Holdings, Inc., their parent companies, also participate
in or supervise these merchant operations.
21. The Defendants, and each of them, planned and executed schemes
designed to reduce or control supplies, drive up or control prices, eliminate
competition, cause price instability, increase volatility in wholesale prices
and defraud customers in the product market for delivered natural gas in the
geographic market consisting of the California-Arizona border market and areas
of Nevada and California in which delivered gas prices are determined by, or
indexed to, prices in the California-Arizona border market (hereinafter, the
"Border Market"). Defendants' anticompetitive and fraudulent behavior in the
Border Market for delivered natural gas not only harmed competition for
delivered natural gas, but also produced exorbitant and illegal profits for
Defendants. Acting with the intent to harm competition in the market for
delivered natural gas, Defendants executed their schemes and achieved their
goals.
22. Each of these Defendants has conspired among and between
themselves, and with certain non-party co-conspirators and possibly others not
yet named, to engage in anticompetitive behavior designed to restrain trade and
manipulate prices in the market for delivered natural gas. As a result of
Defendants' conspiracies and fraudulent behavior, Plaintiffs entered into
contracts for the purchase of natural gas at artificially
5
high, supracompetitive prices. Plaintiffs also entered into hedging transactions
on terms directly affected by the artificially high prices, artificial supply
constraints and price volatility caused by Defendants' anticompetitive and
fraudulent conduct. These hedging transactions were entered into so as to ensure
stable gas supplies to allow Plaintiffs to serve their customers.
23. Specifically, between 1996 and 2001, Defendants El Paso
Corporation, along with its subsidiaries, El Paso Natural Gas Company, El Paso
Tennessee Pipeline Company, and El Paso Merchant Energy-Gas Company fraudulently
and wrongfully conspired among themselves and with Enron Corporation and certain
of its affiliates or subsidiaries (collectively, "Enron"), Dynegy Holdings,
Inc., Dynegy Energy Services, Inc., Sempra Energy and SoCal Gas: (i) to decrease
competition by restricting the amount of natural gas transmission capacity and
natural gas fuel available to Nevada Power and other natural gas users that
obtained their supplies of natural gas in the Border Market through a process of
illegal market allocation and the illegal coordination that prevented expansion
of pipeline facilities, (ii) to illegally withhold natural gas capacity thereby
decreasing supplies and driving prices of gas upward, (iii) to maintain control
over output and prices of natural gas by manipulating the price indexes that the
market had come to depend upon and engaging in fraudulent trading activities in
the natural gas market and (iv) pursuant to these tactics, to drive up the price
and increase the volatility of natural gas supplies for consumers in the natural
gas market, harming competition as well as Plaintiffs. Upon information and
belief, this conspiracy developed at least in part at a secret meeting held in
or near Phoenix, Arizona ("the Phoenix Meeting"). See Part I, infra.
6
24. The conspiracies were carried out in at least two phases. The
first phase consisted of Defendants conspiring to allocate markets and control a
price-determinative block of natural gas transportation rights on the physical
pipeline facilities of El Paso Natural Gas Company at the Border Market which is
hereinafter referred to as "swing capacity"(2) and to limit the output of
natural gas at the Border Market. The second phase consisted of Defendants
conspiring to maintain their control over pricing and supracompetitive prices by
manipulating the price for and supplies of natural gas at the Border Market and
other masking points in the Southwest. Such conspiracies succeeded in corrupting
Border Market natural gas prices during the period of 2000-2001.
25. A principal element of the Defendants' conspiracies was to
prevent the construction of new gas transportation capacity to deliver gas to
the Southern Nevada area. Defendants agreed and conspired to prevent the planned
expansion of the Kern River Pipeline ("Kern River"), which passes directly
through the Las Vegas metropolitan area and upon which Nevada Power, in
particular, relies for its supply of natural gas for its generation facilities.
Had this expansion occurred, Nevada Power and others would have benefited from
increased competition in the natural gas market by entry of new suppliers which
would have served as a check on the Defendants' ability to manipulate the
market.
26. Consequently, Nevada Power, among other natural gas
purchasers, would not have entered into contracts to purchase natural gas (or
associated hedging transactions) at the time or on the terms they did, and at
the supracompetitive prices produced in the corrupted market in 2000-2001. By
preventing the expansion of Kern
- ----------------------
(2) Swing capacity essentially refers to that amount of natural gas capacity
that gives the holder or holders market power or the ability to control prices.
In other words, those holding swing capacity were price setters for the
delivered natural gas market.
7
River and effectively foreclosing additional supplies of natural gas as well as
alternative suppliers and thereby creating and exploiting a bottleneck of
natural gas supplies and maintaining dependence on swing capacity controlled by
the El Paso Defendants, the conspirators' conduct unlawfully prohibited
competition and forced natural gas consumers, including Nevada Power, to pay
artificially inflated, supracompetitive prices and to take measures to protect
their customers against supply risk, price uncertainty and volatility created by
Defendants' conspiracy and fraud.
27. As explained more fully in Part I of this Complaint, the
Phoenix Meeting sealed the conspiracy between El Paso on the one hand and SoCal
Gas, SDGE and their successor parent, Sempra, on the other hand. This conspiracy
consisted of many agreements, including without limitation, an agreement not to
compete for natural gas supplies in their respective geographic areas
(essentially, illegal market division), agreements not to interfere with their
respective planned mergers, and agreements not to interfere with other
anticompetitive and manipulation activities, all of which allowed the Defendants
to control natural gas supplies and prices in the Border Market, directly
affecting Plaintiffs.
28. Defendant El Paso Natural Gas Company ("EPNG") is a regulated
natural gas pipeline company which serves as a transporter of natural gas. Its
affiliate, El Paso Merchant Energy ("EPME") sells natural gas as a commodity in
the unregulated delivered natural gas market(3). The El Paso Defendants
furthered the conspiracy to
- ----------------------
(3) Given the regulatory structure in the natural gas industry, El Paso realized
that excessive profits could be collected, artificial supply volatility and
uncertainty fostered, and supracompetitive prices maintained in the delivered
natural gas commodity market through manipulation of either pipeline
transportation capacity, prices at key market trading hubs, or both. Because the
transportation profits of EPNG were essentially fixed at FERC-regulated,
cost-of-service levels, El Paso realized that supracompetitive profits could be
realized through its affiliate EPME and EPME's gaming and manipulation of the
delivered natural gas
8
restrict supplies of natural gas through a coordinated effort that involved EPNG
withholding capacity and EPME "gaming" the capacity on EPNG's pipeline in a
manner that unnaturally affected the market for delivered natural gas.
Specifically, EPME engaged in fraudulent trades and failed to make available
capacity on the EPNG pipeline so as to reduce output and control price.
29. In addition to their participation in the conspiracy to
constrict the supply of natural gas at the Border Market, Defendants El Paso
Corporation and its wholly-owned subsidiary, EPME, as well as Enron and Dynegy
Energy Services, Inc., with whom Nevada Power specifically traded, also masked
the conspiracy, maintained control over price, maintained supracompetitive
prices and defrauded Plaintiffs and other natural gas purchasers, by purposely
disseminating false information concerning the market price and trading volumes
of natural gas.
30. Specifically, recognizing that Plaintiffs and others relied on
the market indexes published in trade reports such as Natural Gas Intelligence,
Gas Daily, and Inside FERC Gas Market Reports to help determine the price that
they agreed to pay for natural gas (and the terms of associated hedging
instruments), EPME and Dynegy Energy Services, Inc., under the control and
supervision, respectively, of El Paso Corporation and Dynegy Holdings, Inc.,
systematically supplied these publications with false information about their
natural gas trades with the intent to create the appearance that natural gas
supplies were tighter and that the prevailing market prices for gas were higher
than they were in fact. Moreover, EPME, Dynegy Energy Services, Inc. and Enron
- ----------------------
market, particularly through the basis differential spread, essentially the
delta between transportation rates and the price paid for delivered natural gas.
9
engaged in market manipulation in the natural gas market to fraudulently report
volumes and prices of natural gas.
31. As a result of the Defendants' conspiracy and related
fraudulent and anticompetitive acts, Plaintiffs were induced to enter into
contracts to purchase natural gas at artificially high, supracompetitive prices
and to make associated hedging arrangements in response to perceived supply
constraints and price volatility and Plaintiffs have been damaged as a result.
Under Nevada law, SPR and Nevada Power are entitled to relief and damages for
the Defendants' conspiracy and illegal conduct.
E. NEVADA POWER'S USE OF NATURAL GAS
32. Nevada Power is a utility that provides electric service to
Nevada's households and businesses. To provide this electricity, Nevada Power
Company generates about 50% of this electricity with Company-owned generators
("generated electricity") and purchases additional requirements ("purchased
electricity") from third-party suppliers who deliver those purchases over
high-voltage transmission lines into Nevada.
33. For the electricity that Nevada Power generates itself, a
primary method of generation is by burning natural gas. The company owns and
operates several gas-fueled generators throughout Nevada. Nevada Power purchases
the natural gas for its generators through a combination of "spot" (daily)
market purchases and forward (future) supply contracts.
34. In Nevada, natural gas must be transported by pipeline. Thus,
Nevada Power's ability to acquire natural gas for its generators depends on
having those generators connected to a natural gas pipeline. Plaintiff Nevada
Power purchases almost all of its gas from upstream suppliers and marketers,
physically delivered off the Kern
10
River Pipeline, which connects the gas-producing basins of Wyoming, stretching
across Nevada to the Border Market.
35. Natural gas constitutes a primary factor affecting the cost of
electricity(4). Accordingly, whether Nevada Power generates or purchases
electricity, it rightfully must rely upon a natural gas market reflecting true
competition in order to provide electricity efficiently and cost-effectively to
its customers. If that competition does not exist due to control or withholding
of supply or manipulation of natural gas prices, Plaintiffs are damaged.
F. DEREGULATION OF INTERSTATE NATURAL GAS COMMODITY MARKETS
36. Congress passed the Natural Gas Act ("NGA") in 1938 to
regulate interstate pipelines such as EPNG. Under the NGA, interstate pipelines
were viewed as "natural monopolies" and the Federal Energy Regulatory Commission
("FERC") was authorized to regulate these monopolies on public utility
principals.
37. For a number of years, Defendant EPNG was the monopoly
supplier of all natural gas consumed in many markets in the West, including
California and Southern Nevada. Although the large California market has
attracted some gas supplies from competitive sources, EPNG remains the dominant
transporter of natural gas to consuming markets in Southeastern California and
Southern Nevada, and its pipeline interconnection points, including the
interconnection point at or near Topock, Arizona are the price-determinative
points in the Southwest; i.e., those who purchase delivered natural gas in the
Southwestern United States pay a price determined by those selling gas at EPNG's
interconnects.
- ----------------------
(4)In this Complaint, Plaintiffs are not seeking relief based on the price of
electricity. Instead, Plaintiffs are seeking damages resulting from Defendants'
anticompetitive activities affecting the unregulated delivered natural gas
market.
11
38. EPNG's pipeline monopoly, like that of other pipelines,
traditionally covered two elements: (i) the interstate transportation of gas
from producing to consuming markets and (ii) the wholesale sales business of
purchasing gas in producing areas for resale to local retail distribution
utilities ("LDCs") like Southwest Gas. In the period from 1978 through the early
1990s, however, Congress and the FERC initiated a process of deregulation
designed to eliminate the wholesale sales monopoly of the pipelines and to
deregulate this merchant phase of the natural gas industry. The FERC required
pipelines, including EPNG, to exit the wholesale natural gas sales business and
to become open access carriers obliged to provide transportation service on a
non-discriminatory basis to qualified shippers, including LDCs, producers and
brokers. With the cessation of wholesale natural gas sales by pipelines, the
FERC ceased regulating the price of natural gas and transactions in interstate
commerce. Consequently, the "merchant" business of the purchase and sale of
natural gas in interstate markets is no longer subject to price or transactional
regulation by FERC.
39. Although the merchant or commodity side of the natural gas
business was deregulated, the pipeline transportation function remains a natural
monopoly. For this reason, the FERC's deregulatory policies relaxed, but did not
eliminate, regulation of the transportation side of the pipeline business. FERC
ceased to engage in routine supervision of individual contracts between
pipelines and natural gas shippers for transportation capacity, but continued to
have supervisory authority over the rates and terms of interstate transportation
service, and construction and abandonment of physical pipeline facilities.
12
G. THE ARIZONA-CALIFORNIA BORDER MARKET
40. Swing capacity transported on the EPNG system has become the
measuring stick for all unregulated prices in the natural gas spot market
generally referred to in the industry as the Arizona-California Border Market
and defined herein as the "Border Market." These prices are spot prices of
natural gas at the Topock, Arizona point of interconnection between the EPNG
pipeline and the California intrastate pipeline. Not only does the swing
capacity have the ability to affect the spot prices, these spot prices also
directly affect the price of natural gas in forward contracts because natural
gas suppliers will not enter into forward contracts to sell their gas at a
significantly lower price than the price they believe they will be able to
obtain for their natural gas on the spot market. Thus, the forward contract
price generally reflects the current spot price when the forward supply contract
was entered into, along with some adjustments based on what the parties to the
agreement believe will be the direction of natural gas prices in the future.
41. The Border Market came into existence and gained its
importance based on a combination of several factors. One factor is the size of
the California market in relation to other markets in the West and to the
gas-producing basins that supply markets west of the Rocky Mountains. Demand for
natural gas in the California market exceeds the demand in all other parts of
the West combined. As such, the California market is the most important factor
affecting prices in Southern Nevada and other consuming markets adjacent to
California, and the EPNG interconnection point at Topock, Arizona is the
price-determinative interconnect for this entire area. Accordingly, control over
swing natural gas transportation capacity and/or rights at the EPNG interconnect
allowed Defendants to illegally manipulate and control pricing and supply
volatility and risk at
13
the Border Market. California's intrastate market is dominated by its two
intrastate utilities, Defendant SoCal Gas and PG&E, and these utilities have
significant purchasing power as a result of their control over the gas purchase
requirements to serve California "core" residential and small commercial
consumers.
42. SoCal Gas and PG&E's purchasing power was further enhanced by
the manner in which deregulation was accomplished in the El Paso system. When
the El Paso system became an "open access" pipeline in the 1980s, SoCal Gas and
PG&E obtained priority access over some 80% of the capacity of the EPNG system.
This swing capacity held by SoCal Gas and PG&E, combined with their substantial
control over the gas purchase requirements of California consumers, gave SoCal
Gas and PG&E significant market power over delivered gas prices at the
California-Arizona border. The transition to open access pipeline transportation
thus caused a temporary transfer of EPNG's "natural monopoly" power to the two
big California natural gas utilities, SoCal Gas and PG&E (until El Paso
Defendants regained PG&E's portion of such capacity as described in more detail
in Part I below).
43. In the mid 1990s, the SoCal Gas advantage was threatened in
two general ways. A first threat arose from PG&E's plan, announced in June 1995,
not to renew its capacity contracts with El Paso upon their expiration on
December 31, 1997. PG&E's capacity block, some 1.14 billion cubic feet per day,
constituted some 35% of the total capacity of the EPNG system as a whole. SoCal
Gas' ability to influence prices depended on the market power associated with
its own capacity block in combination with PG&E's capacity block, because its
own roughly equal block of capacity would not be sufficiently large to allow
SoCal Gas to exercise the type of pricing power to which it was accustomed.
SoCal Gas' desire to preserve and continue to exercise the power over
14
natural gas pricing in the Border Market and over producers in constrained areas
of the San Juan Basin, as well as to prevent bypass of its physical pipeline
system led it to enter into certain conspiratorial cartel arrangements with El
Paso as further described in this Complaint.
44. The second threat to SoCal Gas was the bypass threat arising
from Tenneco's successful development of the Kern River Pipeline, and Tenneco's
plans and efforts to develop new infrastructure capable of competing with SoCal
Gas and limiting SoCal Gas' market power arising from its hub and storage
services in Southern California.
H. THE KERN RIVER PIPELINE AND EVENTS LEADING UP TO THE PHOENIX
CONSPIRACY
45. In the period from 1985 through the first half of 1996, units
of Tenneco Inc. (now Defendant El Paso Tennessee Gas Pipeline Co.) ("Tenneco"),
a large energy company and operator of a large pipeline in the Eastern United
States, engaged in active competition with El Paso and SoCal Gas to develop and
construct new or expanded pipeline facilities for new markets and customers and
for the expansion of markets in Southern Nevada, Southern California and in Baja
California.
46. Development of new pipeline infrastructure has many obstacles
because of the long lead times required for regulatory approvals and project
planning, financing and construction. Operators of existing pipelines have
substantial short-term advantages over new pipeline developers due to lower
capital costs for land, construction, and the lead time necessary for required
public approvals or expansion projects on their facilities. In addition, FERC
regulations and procedures, coupled with state and local requirements, create
significant opportunities for mischief and, indeed, illegal conduct by incumbent
15
pipelines to delay and raise the costs to new pipeline developers seeking to
obtain a "certificate of public convenience and necessity" from the FERC to
construct new pipelines.
47. Despite these significant barriers to the development of new
pipelines and the bitter opposition of SoCal Gas to the bypass of its pipeline
system, Tenneco succeeded in 1992 in completing development and construction of
the Kern River Pipeline ("Kern River")(5). Kern River was the first new pipeline
constructed to serve the Border Market since the early 1960s. Kern River extends
from producing areas in Southwestern Wyoming, through Southern Nevada, to
industrial markets in the Bakersfield area of central California.
48. Kern River's design was such that its capacity could be
doubled at a small fraction of its original capital cost using, among other
techniques, the common practice of adding compressors to the existing pipeline
in order to increase the total amount of gas that can be delivered. Upon
information and belief, Tenneco also planned to bring comparatively low cost gas
supplies to Kern River from Canada and Northern Montana and to take other steps
that would have provided storage, trading and other services in competition with
SoCal Gas and SDGE with respect to the Border Market, thus adding significant
new output and new competitors to the natural gas market. One of Tenneco's
proposed projects involved constructing an additional pipeline, called the
Altamont Pipeline, that would have brought relatively lower cost gas supplies to
Kern River from Canada and Montana.
- ----------------------
(5) Tenneco developed the Kern River pipeline through a joint venture company.
Interestingly, just nine months before the Phoenix meeting, in January 1996, its
joint venturer bought Tenneco's interest in the Kern River pipeline.
16
49. Defendant SoCal Gas had bitterly opposed Kern River's
development and construction, and actively opposed any further bypass of the
SoCal Gas system through Kern River's expansion and extension into Southern
California. El Paso had supported the development of the Kern County area as an
expansion opportunity for its own interstate pipeline. However, upon information
and belief, El Paso was opposed to, and worked to prevent, further expansion of
Kern River to preserve Southern Nevada and Southeastern California as a captive
market of El Paso's interstate pipeline between 1992 and 1996.
50. For the proposed Altamont project and Tenneco's other
expansion projects to succeed, Tenneco needed new downstream customers. In the
period from 1992 through early 1996, Tenneco actively sought expansion markets
and customers in Southern Nevada, Southern California and in Baja California. A
key player in this phase of the conspiracy was Defendant San Diego Gas &
Electric Co. ("SDGE"). Like Las Vegas and Southern Nevada, the pipeline
configuration of the incumbent pipeline companies made the San Diego area a
physically isolated captive market of SoCal Gas. Thus, like Nevada Power, SDGE
was another attractive potential "anchor customer" for a Tenneco expansion
project because of the consistent daily gas demand of SDGE's natural gas
customers. In addition, the proximity of San Diego to the emerging Baja
California market meant that the cost of amortizing the necessary construction
expenses could potentially be shared by additional gas demands from emerging
operators of new electric generation projects planned for Baja California.
51. SoCal Gas succeeded in repelling Tenneco's competition for
SDGE by exploiting conflicts of interest between SDGE's customers and
shareholders. SoCal Gas and SDGE also entered into a secret revenue-sharing
agreement in which SDGE would
17
receive essentially all incremental revenues from the new business in Mexico as
compensation for SDGE's agreement to refrain from contracting with a "bypass"
pipeline competitive with SoCal Gas. In this way, SDGE's management traded the
benefits to its ratepayers of actual competition from Tenneco for an opportunity
to share in SoCal Gas' monopoly power in the Baja California expansion market.
52. California passed legislation to restructure its electric
industry in August 1996 which was signed into law September 23, 1996. This
legislation created important new opportunities for expansion of Kern River and
other opportunities Tenneco planned to pursue because it was expected to lead
(and ultimately did lead) to the sale of California's natural gas-fueled
electric power generation plants to independent non-utility generators. These
new participants in California's gas purchasing market were expected to seek
competitive natural gas supply arrangements more aggressively than the electric
utilities regulated by the California Public Utilities Commission ("CPUC") which
were routinely permitted to pass through to consumers SoCal Gas' high gas costs.
In addition, California's electricity restructuring law was expected to increase
gas demand in Southern Nevada for new electric generation that would be
available to sell into the California market, as well as selling to Nevada
Power's rapidly growing system.
53. Tenneco, however, did not get the chance to pursue its
expansion plans in the restructured energy market because it lost its
independence. Defendant El Paso acquired Tenneco in a merger announced in June
1996 and completed in December 1996. This placed El Paso in charge of Tenneco's
proposed bypass and expansion projects. This also gave SoCal Gas and SDGE the
opportunity and incentive to conspire with El Paso to eliminate Tenneco's
competition to bypass their systems.
18
I. THE PHOENIX CONSPIRACY
54. El Paso, SoCal Gas and SDGE entered into a conspiracy to
eliminate competition in the Border Market. This conspiracy was sealed at a
secret meeting held on or about September 25, 1996 in or near Phoenix, Arizona
("Phoenix Meeting"). The participants at the meeting included the Presidents of
EPNG and SoCal Gas, and the Executive Vice-President of SDGE.
55. Plaintiffs are informed, believe and therefore allege that the
Phoenix meeting was only one of a number of surreptitious meetings and
communications in which the conspiracy was planned and carried out. On
information and belief, Plaintiffs also allege that this conspiracy was just one
of the pieces of El Paso's conspiracy with the Defendants to control output and
increase prices in the delivered natural gas market.
56. The anticompetitive aims of the conspirators are reflected in
a written "agenda" for the Phoenix Meeting that Defendant SoCal Gas prepared and
transmitted to El Paso by facsimile. A copy of said agenda is attached hereto as
"Exhibit A" and incorporated herein by reference. The agenda listed the four
areas of discussion as: (a) joint venture for Samalayuca pipeline service; (b)
an "alliance" for gas distribution in Northern Mexico; (c) "realignment" of
Tenneco assets; and (d) opportunities resulting from electric industry
restructuring. The discussion and conspiratorial agreements of the Defendants is
further reflected in handwritten notes attached hereto as Exhibit B and
incorporated herein by reference.
57. Plaintiffs are informed, believe and therefore allege that the
Phoenix Meeting resulted in or was part of the formation and/or performance of
an illegal agreement among SoCal Gas, SDGE and El Paso in which SoCal Gas, SDGE
and El Paso reciprocally agreed not to compete with one another, not to
interfere with one
19
another's economic interests, and to kill off competitive pipeline development
projects that would threaten the dominance of the Defendants in Southern Nevada
and Southeastern California over the transportation, distribution, and pricing
of natural gas.
1. AGREEMENT TO ELIMINATE TENNECO PROJECTS
58. Plaintiffs are informed, believe and therefore allege that the
reference to "Tenneco asset realignment" in the agenda for the Phoenix Meeting
refers to elimination of certain proposed Tenneco projects to expand or build
additional pipeline infrastructure, including Kern River. Elimination of such
projects prevented increased competition among transporters of natural gas. In
any event, discussion of a Tenneco asset realignment was an improper point of
discussion among the participants at the Phoenix Meeting and creates an
inference of collusive, anticompetitive conduct.
59. Tenneco's elimination of its Altamont expansion project to
expand the Kern River pipeline, pursuant to El Paso's instructions, and its
abandonment of its Baja California expansion project in exchange for El Paso's
exclusive rights to the Samalayuca project (as described below in Part H.2), was
done pursuant to an unlawful agreement by El Paso, SoCal Gas and SDGE to
perpetuate the artificial geographic isolation of the gas markets at the border
of Arizona and Southern California. Preservation of the isolation of markets
subject to prices determined at the Border Market preserved the market power of
SoCal Gas and later, El Paso in this market and perpetuated the exposure of
Nevada Power to exploitation through destruction of gas deliveries and
artificial price increases. It further preserved Nevada Power's historic
dependence on the gas-producing basins in the Southwestern United States because
the Altamont expansion project termination removed the economic impetus for the
expansion of Kern River. This agreement
20
eliminated potential price competition and allowed El Paso and SoCal Gas to
retain their unchallenged market dominance in the Border Market.
60. Plaintiffs are informed, believe and therefore allege that El
Paso carried out its part of the quid pro quo among the conspirators by causing
its newly acquired subsidiary, Tenneco, to kill certain proposed expansion
projects, including Kern River, thereby minimizing the potential of creating
"gas on gas" competition between Southwestern gas and Canadian gas in Southern
Nevada and Southern California and limiting gas supply at the Border Market.
2. EL PASO'S AGREEMENT NOT TO COMPETE WITH SDGE AND
SOCAL GAS
61. The Phoenix agenda also included as its first and second items
references to a "discussion of service to Samalayuca Generating Plant" and
discussion of "Joint Venture/Alliance for distribution service in Northern
Mexico." The Samalayuca reference is to a competitive bidding process for a
proposed gas distribution project in Northern Mexico initiated by Mexico that
was pending as of the time of the Phoenix Meeting. Plaintiffs are informed,
believe and therefore allege that the Phoenix Meeting resulted in an illegal
agreement in restraint of trade, in which, among other things, SoCal Gas agreed
to withdraw from competition with El Paso with respect to the Samalayuca
pipeline project. In exchange, El Paso agreed to withdraw its own and Tenneco's
competition (which El Paso now controlled) with SoCal Gas and SDGE to supply gas
and pipeline transportation to markets in Baja California. By agreeing to
prevent construction of Tenneco's expansion projects, El Paso and Sempra, (a
parent company successor in the merger of SoCal Gas' and SDGE's then-parent
companies) allocated between
21
themselves both the upstream and cross-border natural gas transportation and
supply markets for both the Samalayuca and Baja California markets.
62. Plaintiffs are informed, believe and based thereon allege that
soon after the Phoenix Meeting, SoCal Gas and El Paso successfully implemented
their plan to carve up the California and Northern Mexico markets. With El
Paso's withdrawal of competition from bypass projects, Sempra was the sole
bidder to construct a pipeline to Baja California and associated projects and
was awarded the projects and long-term fuel supply contracts without
competition.
63. With SoCal Gas' withdrawal as a competitor, El Paso was the
sole bidder on the Samalayuca Project and was awarded the project without
competition.
3. AGREEMENTS NOT TO INTERFERE WITH MERGERS
64. Three weeks after the Phoenix meeting, Pacific Enterprises and
Enova Corp. the then-parent companies of SoCal Gas(6) and SDGE(7) announced,
respectively, their agreement to merge, resulting in the formation of Sempra
Energy. The parties knew that opposition to the announced merger from Tenneco/El
Paso would have jeopardized the planned merger. As a potential competitor of
SoCal Gas, which wanted to provide natural gas to SDGE, Tenneco's opposition
particularly would have forced regulators to inquire whether the merger would
injure competition in the Southwest.
65. At the time of the Phoenix meeting, El Paso's merger with
Tenneco was still under consideration by regulatory authorities. The senior
representatives of SoCal Gas and SDGE at the Phoenix meeting knew of the planned
(but unannounced) merger of
- ----------------------
(6) SoCal Gas is the nation's largest natural gas distribution company and is a
subsidiary of Sempra Energy.
(7) SDGE is a public utility providing both gas and electric services to
consumers and is a subsidiary of Sempra Energy.
22
SoCal Gas and SDGE. Based upon the companies' long experience with each other
and their extensive knowledge of each other's business, El Paso, SoCal Gas and
SDGE knew that they were among the few entities with the knowledge and
experience in Southwestern gas markets to complain effectively to regulatory
authorities about their respective merger plans. Each knew the other could
materially jeopardize the necessary regulatory approvals of their respective
mergers.
66. Plaintiffs are informed, believe, and therefore allege that
one of the purposes and motives of El Paso, SoCal Gas and SDGE in making the
unlawful agreements reflected in the agenda and discussions at the Phoenix
Meeting was to secure each other's agreement not to oppose each other's merger
deals and to cooperate in completing their respective acquisitions. Just as the
co-conspirators wanted to avoid competition, they also sought to limit the risk
that their illicit plans could be exposed through informed governmental scrutiny
of their respective mergers.
J. THE CONSPIRATORS' USE OF SWING CAPACITY MARKET POWER AGAINST
NEVADA POWER
67. Once the conspirators achieved their goal of preventing the
risk of new competition from development of new pipeline capacity to serve
Southern Nevada and Southern California markets, the conspirators agreed to act
as a cartel to exploit their dominance over the transportation facilities from
Southwestern producing basins to Southern Nevada and other isolated consumption
markets and manipulate those markets to maintain control over prices. This
exploitation was brought to fruition through the swing capacity transactions
described below.
23
1. EXPIRATION OF PG&E'S CONTRACT WITH EL PASO
68. Until the end of 1997, PG&E held 1.14 billion cubic feet per
day of capacity amounting to approximately 35% of El Paso's capacity for the
California Border Market. This capacity was subject to firm transportation
contracts between PG&E and El Paso. In the early 1990s, PG&E exercised the
market power arising from its control over Northern California markets to cause
underutilization of this capacity in favor of Canadian supplies transported
through its wholly owned pipeline in the Pacific Northwest.
69. PG&E's restrictive practices benefited SoCal Gas because
PG&E's 35% of El Paso's California capacity, combined with SoCal Gas' roughly
equal block of capacity, gave SoCal Gas market power over prices in the Border
Market. Under this structure, pricing was determined by the conduct of the
dominant purchasers, principally SoCal Gas because PG&E favored its Canadian
supplies.
70. In 1995 PG&E announced that it would not renew its firm
transportation contracts with El Paso upon their expiration at the end of 1997.
This created a risk for SoCal Gas because its own capacity was insufficient to
perpetuate its dominant position absent El Paso's under-utilization of its
capacity. That is, if the PG&E capacity was sold piecemeal to small shippers, it
would create competition and this dominance would be lost.
71. Plaintiffs are informed, believe and therefore allege that
SoCal Gas/SDGE and El Paso agreed in the Phoenix Meeting, and in concert with an
ongoing conspiracy thereafter, to preserve the PG&E capacity in a single block
after PG&E's contracts with El Paso expired in order to maintain the
conspirators' dominance over the Border Market. The conspirators did in fact
preserve the PG&E block intact.
24
2. THE CONSPIRATORS TRANSFER PG&E'S SWING CAPACITY: THE
DYNEGY EXAMPLE
72. In 1997, El Paso negotiated a transaction with Natural Gas
Clearinghouse (now named Dynegy) in which Dynegy took over the PG&E capacity and
some additional capacity aggregating some 1.3 billion cubic feet per day
("Bcf/d") of firm capacity on El Paso's pipeline. Dynegy took this capacity
(approximately 40% of El Paso's capacity to California and 31% of the total
capacity of the El Paso system) for a two-year period commencing January 1, 1998
and ending December 31, 1999.
73. Upon information and belief, the El Paso Defendants, with the
consent and agreement of the Sempra parties, formulated its Dynegy transactions
in accordance with the parties' agreement at the Phoenix Meeting to "link up
supply, transportation, generation and sale of electricity" and to "think/plan
position now to be ready when the opportunity comes."
74. Subsequently, Defendants recognized and sought to preserve
their control over the Border Market by steering the PG&E/Dynegy block of
capacity into the control of El Paso Merchant Energy. In this situation, Sempra,
El Paso Merchant and the El Paso Pipeline could continue to exploit their
superior access to low-cost gas supply basins while imposing a higher cost
structure on Nevada Power and other downstream purchasers lacking access to such
low-cost supplies.
75. By late 1999, the Border Market for natural gas had become
ripe for exploitation through the exercise of market power by Sempra and El
Paso. On information and belief, Defendants knew this and intended to reap the
benefits of their market power, which is supported by a number of facts known to
the conspirators. First, the conspirators had the experience of the Dynegy
transaction. Dynegy had withheld
25
firm capacity from the California market in concert with EPNG, which withheld
interruptible capacity from the market. In addition to the uncertainty of supply
and price volatility or uncertainty created by the conspirators' withholding,
these actions had raised the cost of capacity to shippers and increased the
price spread between natural gas prices in producing zones on the El Paso system
and the natural gas prices at the Border Market. This experience showed the
conspirators that a single holder of the El Paso swing capacity could exercise
market power with respect to the Border Market. This swing capacity could be
used to manipulate prices and cause artificial supply and price volatility.
EPNG's failure to make any additional firm or interruptible capacity on its
pipeline available to others solidified the power of the swing capacity and
further evidenced the conspiracy.
3. THE ENRON TRANSACTIONS: A STRAW-MAN CONSPIRACY WITH
EL PASO
76. Upon information and belief, Enron North America and/or other
units of the now-bankrupt Enron Corporation joined in with the El Paso-Sempra
conspiracy beginning no later than December 1999, and played an essential role
in assisting the conspirators in preserving their market power in the Border
Market and in steering the PG&E/Dynegy capacity block into the control of EPME,
EPNG's unregulated affiliate.
77. In the Fall of 1999, as the expiration of the Dynegy capacity
transaction approached, EPNG announced that it had reached an agreement with an
"undisclosed shipper" to take over substantially all of the Dynegy capacity for
calendar year 2000. Under FERC regulations, EPNG had to post the terms of the
transaction on its electronic bulletin board to permit other shippers to attempt
to match or exceed the bid. EPNG posted the "undisclosed shipper" deal for a
period of four days in December 1999. At the
26
end of the posting period, El Paso announced that Enron North America had outbid
the "undisclosed shipper" by matching the revenue guarantees of the "undisclosed
shipper" and adding a profit sharing mechanism, which the "undisclosed shipper"
had not done. El Paso awarded the capacity (now reduced slightly to 1.226Bcf/d)
to Enron for calendar year 2000.
78. El Paso's agreement with Enron included a provision that
allowed Enron to nominate all of 1.226 Bcf/d capacity to the SoCal-Topock
delivery point on El Paso's system, the price-determinative Border Market point.
Upon information and belief, Enron and El Paso put this provision into the
Enron-El Paso agreement as a "poison pill" to guarantee that the contract would
be disapproved by the FERC and to permit the premature termination of the
contract. The provision was certain to be disapproved by the FERC because the
FERC had unambiguously ruled in cases challenging the earlier Dynegy transaction
that customers in Northern California had special "recall" rights to 500 million
cubic feet per day ("MMcf/d") of the former PG&E capacity if this capacity was
nominated to Southern California delivery points.
79. On its face, this contract provision presented a clear and
obvious conflict with this ruling of the FERC. It was no surprise that the FERC
ruled that the provision was in fact invalid in January 2000, when Enron had the
capacity for less than a month. The parties then announced their agreed
termination of the agreement.
80. Upon information and belief, Plaintiffs allege that the
Enron-El Paso agreement was a sham in which Enron submitted a rigged bid for the
former PG&E capacity so that El Paso, through EPNG, could transfer the capacity
to EPME and could point to in the transaction that followed, in which El Paso's
own affiliate, EPME (through
27
Defendant El Paso Merchant Energy-Gas Company) would gain control over the
former PG&E block of capacity.
4. THE SWING CAPACITY RETURNS TO EL PASO: EPME
81. With the passage of the PG&E/Dynegy capacity into the
possession of the unregulated EPME, the cartel agreements of the El Paso and
Sempra parties came to fruition. Dynegy and then Enron had been mere
placeholders or "straw men" to keep the former PG&E capacity available for
ultimate allocation to El Paso. This became clear when, in February 2000, EPME
"purchased" the same capacity held by Dynegy from EPNG -- in reality, from
itself. This transfer, which was the product of El Paso's illegal joint plan
with the Sempra parties as reflected in the Phoenix Meeting, has allowed the El
Paso Defendants, in conspiracy with the other Defendants, to manipulate Border
Market prices and create supply uncertainty and volatility by withholding
pipeline capacity from the Border Market, by reducing natural gas supplies
available to the market and consumers like Nevada Power, by engaging in false or
manipulative gas trade transactions and by reporting false trade information.
Through these activities, the El Paso Defendants, in conspiracy with the other
Defendants, have artificially driven up natural gas prices at the Border Market
to supracompetitive levels and reaped excessive profits from the exercise of
this market power through their unregulated affiliate, EPME.
82. The fulfillment of improper conspiracy to transfer the former
PG&E swing capacity to EMPE has damaged Plaintiffs. The earlier Dynegy
transaction had substantially raised Border Market prices during calendar years
1998 and 1999, but after EPME took over, gas prices in the Border Market
skyrocketed and supply forecasts were grim, forcing Nevada Power to alter its
purchasing strategy to preserve adequate supplies of gas so as to generate
sufficient quantities of electricity to meet consumer demand
28
obligations. Ultimately, once the EPNG-EPME contract expired and the Defendants'
various market manipulations were exposed, prices in the gas market decreased,
and it became apparent that the contracts entered into by Nevada Power were not
the products of valid market conditions. This caused a financial crisis for
Plaintiffs, as both companies have struggled to pay for this natural gas or
suffered the fallout resulting from the inevitable financial deterioration.
83. The entire sequence of negotiation and execution of the Enron
agreement and Enron's brief period of control gave Enron and El Paso cover for
an extended price-fixing negotiation. In essence, under the guise of negotiating
a profit-sharing agreement, El Paso and Enron in fact set in place a
conspiratorial scheme for the enormous run-up in natural gas prices in
California, Nevada and contiguous Western markets that occurred in the period
from May 2000 to June 2001.
84. Of great significance is the fact that when the EPME contract
expired in June 2001, and approximately fourteen separate shippers gained
control of the former PG&E block of capacity, the price difference between
prices in the field and the price at the Border Market dropped approximately 96%
within a week.
85. On information and belief, Enron, Dynegy, Sempra and El Paso
entered into physical and/or derivative trading contracts through which they
exchanged literally hundreds of millions if not billions of dollars of illicit
revenues derived fundamentally from their illicit agreements to act as a cartel
in natural gas in the Border Market.
86. The concerted action of Enron, El Paso, Dynegy, and Sempra
produced exorbitant profits for the conspirators during the period from March
2000 through June 2001 when EPME and EPNG controlled, and abused, the market for
natural gas in the Border Market.
29
87. Plaintiffs allege, upon information and belief, that the
conspirators have engaged and continue to engage in acts and practices between
and among themselves, as well as with third parties, designed to carry out the
agreements reached at the Phoenix Meeting and in other communications and
meetings. The effects of these acts in furtherance of the conspiracy continue to
the present day as Defendants enjoy the illicit and exorbitant profits at the
expense of consumers of natural gas such as Plaintiffs.
K. MANIPULATING PRICES AND EXTRACTING SUPRACOMPETITIVE PROFITS BY
FALSELY REPORTING PRICES TO INDUSTRY PUBLICATIONS AND PRICE
INDEXES
88. In early 2000, EPME explained to its parent corporation in a
memo from Greg Jenkins at EPME to Bill Wise, the CEO of El Paso Corporation, the
manipulation phase of the conspiracy. The memo stated, "We will make money two
ways: 1) increase the load factor, 2) widen the basis spread." The "basis
spread," also referred to as "basis differential" essentially constitutes the
implied value of transporting gas from a producing basin to the Border Market.
Clearly, El Paso evidenced its intent to further benefit from the conspiracy
through a second phase of the conspiracies involving market manipulation to
maintain supracompetitive natural gas prices. It is noteworthy that EPME
essentially admitted in this memo that it had the market power to control prices
in the gas market.
89. In carrying out this phase of the conspiracies to maintain
control over prices in the natural gas market, Defendants EPME, El Paso, and
Dynegy Marketing and non-party co-conspirator Enron harmed Plaintiffs and
natural gas market competition by systematically misrepresenting the prevailing
market price and availability of natural gas to Plaintiffs and other natural gas
buyers and the volumes of natural gas being traded in
30
an effort to maintain artificially inflated, supracompetitive prices in the
natural gas market.
90. The natural gas trading market is a decentralized and opaque
market. There is no central market location where buyers and sellers of natural
gas gather to trade. Thus, market participants generally do not see what terms
other parties may reach in the buying and selling of natural gas.
91. To overcome the difficulties created by this lack of market
information and create transparency in the market, energy industry publications
such as Natural Gas Intelligence, Gas Daily, and Inside FERC Gas Market Reports
publish price "indexes" for the previous day's natural gas trades. Reporters for
these publications compile this information by contacting energy companies like
EPME and Dynegy Marketing and asking for data on certain recent transactions at
different price points. They then average this data to produce indexes that
report pricing, volume, and other information regarding recent natural gas
trades at different natural gas price points and markets. This information is
held out to reflect accurately prevailing market pricing and other information
regarding natural gas.
92. It is a common and well-known industry practice for Nevada
Power and other natural gas purchasers to rely on this information when entering
into purchase transactions. In fact, Nevada Power entered into contracts to
purchase natural gas where the price paid was expressly tied to the index prices
listed in Natural Gas Intelligence.
93. This system has functioned effectively for many years as an
accurate source of market information for buyers and sellers of natural gas.
Starting in 2000, however, EPME, Dynegy Marketing, Enron and possibly others,
began systematically misrepresenting the price and volume information of their
trades to the publishers of
31
these indexes. On information and belief, this was done with the knowledge and
consent of EPME's parent, El Paso Corporation. This effort continued through
2001 and at least the beginning of 2002.
94. Specifically, in addition to their participation in the
antitrust conspiracy, Defendants EPME, El Paso, Dynegy, and Dynegy Marketing
(with whom Nevada Power directly traded) in the second phase of the
conspiracies, independently harmed Plaintiffs by systematically misrepresenting
the prevailing market price and availability of natural gas to Plaintiffs and
other natural gas buyers in an effort to induce the them to enter into contracts
for the purchase of natural gas at artificially inflated prices and associated
hedging transactions.
95. Plaintiffs have been informed, believe, and therefore allege
that EPME and Dynegy Marketing misrepresented natural gas prices and trading
volumes as part of an intentional effort to defraud the Plaintiffs by inducing
them to agree to artificially inflated natural gas prices in their purchase
contracts. EPME and Dynegy Marketing knew that Nevada Power and other purchasers
relied on the information in these indexes to determine market price and
realized that it could convince them to agree to higher prices, thereby
illicitly increasing their trading profits, by providing false information to
publishers of price indexes to create the appearance that prevailing market
prices at various natural gas price points were higher than they actually were.
96. As intended by Defendants, Nevada Power relied on the
information in these indexes and thereby was fraudulently induced to enter into
contracts to purchase gas at artificially inflated prices. Plaintiffs have been
damaged as a result.
97. Plaintiffs have been informed, believe, and therefore allege
that EPME, Dynegy Marketing and Enron did this as part of intentional efforts to
maintain control
32
over prices for gas in the Border Market by controlling the basis differential
or spread. EPME and Dynegy Marketing as well as Enron knew that Nevada Power and
other purchasers relied on the information in these indexes to determine market
price and realized that it could convince them to agree to higher prices,
thereby illicitly increasing their trading profits, by providing false
information to Natural Gas Intelligence, Gas Daily, and/or Inside FERC Gas
Market Reports to create the appearance of supply volatility and escalating
prices.
98. The market manipulation was carried out by Defendants through
wash trades, market gaming strategies (both schemes in which actual trades
appeared to occur but no gas changed hands) and false reports (a scheme in which
trades, prices, and volumes were fabricated and exaggerated to control the index
price and influence the average in beneficial ways for conspirators).
99. As intended by Defendants, Nevada Power relied on the
information in these indexes and thereby were caused to enter into contracts to
purchase gas (and associated hedging instruments) on terms not determined by
market forces, but instead by the conspirators' illicit activities and market
power. Plaintiffs have been damaged as a result.
100. While Defendants were able to manipulate the markets following
the public outcry over the Western energy crisis, resulting governmental
intervention, and the end of the EPNG/EPME contract, and prices at the Border
Market began to decrease, Plaintiffs' reliance on a market infected by
Defendants' collusive manipulation and fraud resulted in harm to Plaintiffs.
101. The Defendants' manipulative conduct had the effect of
corrupting the market for delivered natural gas to the Border Market. This
corruption manifested in
33
numerous ways, including artificially inflated pricing levels, exacerbated
volatility, and artificial gas supply shortages. As a practical matter, Nevada
Power is required to pay the market price for gas delivered to the Border Market
in order to induce sellers to supply gas to them, as opposed to selling gas to
customers in Southern California. Nevada Power was, therefore, subject to the
market for natural gas delivered to the Southern California border, and that
market was manipulated and corrupted by Defendants.
L. NEVADA POWER'S HEDGING TRANSACTIONS
102. Nevada Power operates a fleet of power plants that generate
electricity from natural gas and then sells that electricity at cost to
customers in Southern Nevada. Nevada Power engages in this activity pursuant to
a duty to serve established under Nevada law and regulations and incident to its
retail electric service franchise.(8)
103. Part and parcel of Nevada Power's duty to serve is a
responsibility to manage its supply and price risks associated with the
procurement of natural gas necessary to generate electricity at its gas-fired
power plants. Nevada Power and retail consumers of electricity in Nevada simply
could not take the risk that prices for natural gas at the Border Market (and
hence to Nevada Power) would continue to swing wildly and remain at very high
levels relative to other gas markets. Therefore, Nevada Power entered into a
number of hedging transactions to manage the risk associated with the wild
swings in price levels and perceived supply constraints created by Defendants.
As a result of these hedging transactions, and with the return to decreased
price levels
- ----------------------
(8) It should also be noted that the State of Nevada had abandoned its plans to
deregulate retail electric service during this timeframe. This meant that Nevada
Power would continue to be required to provide electric service in Nevada.
34
observed since the Defendants have ceased their unlawful activity, Nevada Power
has been damaged.
104. Plaintiffs were damaged as a result of Defendants' actions to
divide markets, prevent pipeline expansion projects, and thwart competition
which, in turn, assisted Defendants' efforts to manipulate prices and created
supply uncertainty. Plaintiff Nevada Power, and necessarily its holding company,
SPR, were damaged through the artificially inflated prices for delivered natural
gas paid by Nevada Power in transactions with various conspirators and with
others where the prices were determined by the index prices manipulated by the
Defendants. In addition, Nevada Power entered into the hedging transactions
described above as a direct result of the market manipulations carried out by
the Defendants. Such damages were proximately caused by Defendant's unlawful
activities because it was their activities that created the market distortions
and volatility against which Nevada Power's hedge transactions were designed to
protect.
M. FIRST CAUSE OF ACTION
(Restraint of Trade in Violation of Nevada Unfair Trade
Practices Act - Natural Gas Market)
105. Plaintiffs incorporate by reference paragraphs 1 through 104,
inclusive, of this Complaint as if fully set forth.
106. At all relevant times, all Defendants, and each of them,
violated the Nevada Unfair Trade Practices Act, Nev. Rev. Stat. Chapter 598A.
107. The actions of the Defendants, and each of them, constitute
prohibited restraints on competition within the meaning of Nev. Rev. Stat.
Section 598A.060 in that the alleged conduct unreasonably restrained trade or
commerce.
35
108. The actions of the Defendants, and each of them, violated Nev.
Rev. Stat. Section 598A.060(1)(a)(b)(c) in that, by allocating customers and
markets in Southern Nevada and Southern California, restricting sources of
natural gas supply to Southern Nevada and Southern California, eliminating
competition, and manipulating price indexes, the Defendants' actions increased
the prices of delivered natural gas to the Plaintiffs.
109. The actions of the Defendants, and each of them, violated Nev.
Rev. Stat, Section 598A.060 in that Defendants combined and/or conspired to
elevate and/or manipulate the price of natural gas and natural gas
transportation services in a manner that directly or indirectly has precluded
and restricted competition in the purchase, sale, and transportation of natural
gas.
110. The specific actions of the Defendants, and each of them, that
constituted prohibited conduct under Nev. Rev. Stat. Section 598A.060 include,
without limitation:
a. the illicit agreement between El Paso and Sempra
entities to hinder or prevent expansion of the
competitive Kern River Pipeline and the potential
competition that it would generate in Southern Nevada
and Southern California;
b. the illicit agreement between El Paso and Sempra
entities to eliminate the proposed Tenneco projects
which were designed to provide natural gas merchant
services in competition with the Sempra Defendants;
c. refraining from competition with respect to the
Samalayuca II and Baja California pipeline projects;
36
d. agreeing to refrain from competition that would have
caused regulators to question the Sempra merger and
El Paso's acquisition of Tenneco;
e. allocating rights to transportation and natural gas
business opportunities in Baja California thereby
preventing the development of competitive pipeline
projects that would have created competition within
Southern California and lowered prices in the Border
Market;
f. limiting the supply of low-cost Canadian gas to the
Southern Nevada and Southern California markets;
g. preventing expansion of new interstate pipeline
capacity to Southern Nevada and Southern California
by illicit agreements and boycotts;
h. the illicit agreement with Dynegy to limit output and
raise prices; and
i. manipulating the natural gas price index by engaging
in false trades and reporting false information to
maintain supracompetitive natural gas prices.
111. The unlawful actions of Defendants, and each of them, have
caused and continue to cause injuries to Plaintiffs and damage in a sum in
excess of the jurisdictional limits of this Court, according to proof.
Plaintiffs seek a direct award of damages for the excess natural gas costs
(including those resulting from hedging transactions) arising from the illegal
restraints of trade imposed on Plaintiffs. Plaintiffs also seek treble damages
and reasonable attorney fees and costs under Nev. Rev. Stat. Section 598A.200.
37
N. SECOND CAUSE OF ACTION
(Fraud)
112. Plaintiffs incorporate by reference paragraphs 1 through 111,
inclusive, of this complaint as if fully set forth.
113. With the knowledge and agreement of Defendant El Paso,
Defendant EPME and Defendant Dynegy Marketing knowingly made false
representations concerning natural gas price and volume information to Natural
Gas Intelligence, Gas Daily, and Inside FERC Gas Market Reports. EPME and Dynegy
Marketing did so with the intent to induce Nevada Power and other natural gas
purchasers to enter into contracts to purchase natural gas (and associated
hedging instruments) at higher prices than they would have agreed to if they had
known the actual prevailing market price of natural gas at the time of the
agreements. Defendant Dynegy Marketing also made such false representations
directly to Plaintiffs.
114. Plaintiff Nevada Power justifiably relied on these falsified
indexes and were thereby induced to agree to purchase natural gas (and
associated hedging instruments) at artificially inflated prices. Plaintiff has
been damaged as a result.
115. The unlawful actions of Defendant EPME and Defendant Dynegy
Marketing have caused and continue to cause injuries to Nevada Power and damage
in a sum in excess of the jurisdictional limits of this Court, according to
proof. Nevada Power seeks a direct award of damages for the losses it has
suffered and will suffer because of EPME's and Dynegy Marketing's
misrepresentations caused it to purchase natural gas and wholesale electricity
(and associated hedging instruments) at inflated prices. Pursuant to Nev. Rev.
Stat. Section 42.005, Nevada Power further seeks punitive damages in the
38
amount of three times compensatory damages for EMPE, El Paso's and Dynegy
Marketing's fraud.
O. THIRD CAUSE OF ACTION
(Violation of Nevada's Racketeering Influenced Corrupt Organizations
Act)
116. Plaintiffs restate and incorporate herein Paragraphs 1 through
115 of its Complaint as if fully set forth.
117. The El Paso and Dynegy Defendants constitute an "enterprise"
under Nevada Revised Statute 207.380. Specifically, on information and belief,
the El Paso Defendants and the Dynegy Defendants constitute an association in
fact in connection with the misrepresentations that were made to the Natural Gas
Intelligence, Gas Daily, and Inside FERC Gas Market publications, as alleged
herein.
118. Upon information and belief, the El Paso and Dynegy Defendants
have, with criminal intent, participated in the affairs of the enterprise
through racketeering activity, received or conspired to receive proceeds
derived, directly or indirectly, from racketeering activity, and used the
proceeds, or the proceeds derived from the investment or use thereof, in the
acquisition of property.
119. Defendant's racketeering activity includes, without
limitation, the use of false pretenses to obtain money or property valued at
more than $250. Specifically, the El Paso and Dynegy Defendants made numerous
false representations to the Natural Gas Intelligence, Gas Daily, and Inside
FERC Gas Market publications with the intent of obtaining money and property
through those false pretenses. The Defendants' actions all involve the same or
similar pattern, intents, results, accomplices and victims.
120. The predicate acts alleged herein constituted substantially
more than the two predicate acts required by NRS 207.350-NRS 207-520 in that
Defendants made
39
multiple false representations to these publications as part of their effort to
manipulate the published energy indexes and thereby the markets for natural gas
and electricity. These misrepresentations constituted an integral part of the
racketeering activity engaged in by the El Paso and Dynegy Defendants between
2000 and 2002.
121. Plaintiffs Nevada Power and SPR have been injured in their
business and property by reason of these violations. Plaintiffs entered into
contracts to purchase natural gas at artificially inflated prices (and
associated hedging instruments) as a direct result of Defendants' racketeering
activity.
122. Plaintiffs accordingly seek an award of three times the
damages they sustained, and the recovery of reasonable attorney's fees and costs
of investigation and litigation, as authorized by statute.
P. FOURTH CAUSE OF ACTION
(Conspiracy to Violate Nevada's Racketeering Influenced Corrupt Organizations
Act)
123. Plaintiffs restate and incorporate herein Paragraphs 1 through
122 of this Complaint as if fully set forth.
124. The El Paso and Dynegy Defendants, and each of them, conspired
between themselves, to knowingly provide false information to natural gas market
publications with the intent to obtain money through those false pretenses in
violation of Nevada's Racketeering Influenced Corrupt Organizations Act.
125. This conspiracy between the El Paso and Dynegy Defendants
independently violated Nev. Rev. Stat. 207.400(1)(h) as a conspiracy to violate
Nev. Rev. Stat. 207.400
126. Plaintiffs Nevada Power and SPR have been injured in their
business and property by Defendants' conspiracy in violation of Nev. Rev. Stat.
207.400(1)(h). Such
40
conspiracy caused Plaintiffs to enter into contracts to purchase natural gas at
artificially inflated prices (and enter into associated hedging instruments).
127. Accordingly, Plaintiffs seek an award of three times the
damages they sustained, and the recovery of reasonable attorney's fees and costs
of investigation and litigation, as authorized by statute.
Q. FIFTH CAUSE OF ACTION
(Civil Conspiracy)
128. Plaintiffs incorporate by reference Paragraphs 1 through 127,
inclusive, of the Complaint, as if fully set forth.
129. Defendants, and each of them, agreed and conspired with each
other to divide markets, eliminate competition, limit supply, and control and
manipulate prices and to knowingly report false and fraudulent natural gas price
and volume information, through the natural gas indexes, with the intent to
manipulate and control the market price of natural gas for their own financial
gain in violation of NRS Section 598A.060 and NRS 42.001 and 42.005.
130. Pursuant to their agreements, Defendants, and each of them,
acted in concert to limit supply of natural gas and to manipulate and control
the price of natural gas for the purpose of affecting the natural gas markets.
131. Further, Defendants and each of them, made false and
fraudulent representations regarding natural gas price and volume information,
which Defendants and each of them caused to be published, and upon which
Defendants knew would be reasonably relied.
132. Plaintiffs relied upon the natural gas market controlled and
manipulated by Defendants, and each of them, and have been damaged thereby.
Plaintiffs seek a direct
41
award of damages for the excess natural gas costs (including those resulting
from hedging transactions) arising from the illegal conspiracy.
WHEREFORE, Plaintiffs Nevada Power and Sierra Pacific Resources pray
for judgment against all Defendants , and each of them, jointly and severally,
in such amount as proof at trial may show in excess of $150,000,000, trebled to
$600,000,000 as follows:
1. On the First Cause of Action:
a. For compensatory damages, trebled, in a sum
according to proof;
b. For special damages, including, but not
limited to, attorneys' fees;
c. Other costs and expenses of suit incurred in
prosecuting this action;
d. Interest as permitted by law;
e. For such other and further relief as this
Court deems just and proper.
2. On the Second, Third and Fourth Causes of Action:
a. For compensatory damages, in a sum according
to proof;
b. For punitive damages;
c. For attorneys' fees incurred to obtain the
relief;
d. For all costs and expenses of suit incurred
in prosecuting this action;
e. For interest as permitted by law; and
f. For such other and further relief as this
Court deems just and proper.
42
3. On the Fifth Cause of Action:
a. For compensatory damages, in a sum according
to the proof;
b. For attorneys' fees incurred to obtain the
relief;
c. For all costs and expenses of suit incurred
in prosecuting this action;
d. For interest as permitted by law; and
e. For such other and further relief as this
Court deems just and proper.
DATED this ______ day of __________________, 2003.
WALLER LAW GROUP
__________________________________________
Jonathan H. Waller
Nevada Bar No.: 734550
Waller Law Group
3800 Howard Hughes Parkway
Seventh Floor
Las Vegas, Nevada 89109-0907
Phone: (702) 693-4200
Phone: (800) 540-1311
Fax: (702) 792-6874
Attorneys for Plaintiffs
Nevada Power and Sierra Pacific Resources
43
JURY DEMAND
Plaintiffs respectfully request trial by struck jury.
__________________________________________
Jonathan H. Waller
OF COUNSEL:
Peter J. McNulty
McNulty Law Firm
827 Moraga Drive
Los Angeles, California 90049
Phone: (310) 471-2707
Fax: (310) 472-7014
Edward S. Allen, Esq.
Alan T. Rogers, Esq.
Matthew F. Carroll, Esq.
Balch & Bingham, LLP
1710 Sixth Avenue North
Birmingham, Alabama 35201
Phone: (205) 251-8100
Fax: (205) 226-8798
44