The California Public Utilities Commission is accusing El Paso-Merchant of collusion driving the cost of natural gas up by at least 10 times what Texans pay and costing the state an additional $3.7 billion over the last year.
Just under half of California's electricity can come from natural gas, but the state has only three pipelines to pump it, one of which is owned by Houston's El Paso-Merchant.
"El Paso Merchant Energy Company is a marketer that hoarded over a third of the interstate pipeline capacity in the largest interstate pipeline in California," said Harvey Morris, a PUC official.
California contends El Paso-Merchant did not release or utilize enough space on the pipeline, which caused prices to skyrocket. And the PUC claims to have an internal memo from the company that proves it.
Monday, the Federal Energy Regulatory Commission, which oversees the market, began hearings on the issue.
As the Golden State's power crunch worsened this winter and spring, state officials often blamed the companies supplying power to California's cash-strapped utilities.
"My friends, we are today at war with the energy companies, mostly from Texas and the southwest, who are charging us outrageous prices for the cost of electricity," Gov. Gray Davis has said.
But calling it the quintessential example of supply and demand, El Paso cites California's past reluctance to build more pipelines as the root of the problem.
"You've got a situation that's of California's own making," Joseph Kalt, a consultant for El Paso-Merchant. "When demand keeps growing and no more supply can get in, the price is going to go up."
A guilty ruling could mean hundreds of millions in fines for El Paso-Merchant. But it could also set back deregulation across the country, and in the end cost consumers more money.
Federal Energy Regulatory Commission administrative law judge Curtis Wagner Junior has promised to render a decision by June 30.
El Paso reported first quarter 2001 income of $500 million and a 41 percent rise in earnings per share. Its natural gas segment increased income 8 percent and boosted pipeline production 7 percent.
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