Ken Silverstein EnergyBiz Insider Editor-in-Chief

Sempra denies any wrongdoing. But, it says that the settlement is necessary so that it can get on with business. If the agreement is accepted by separate courts in California and Nevada, it would be a relatively cheap end to a potentially expensive and nightmarish experience. And from Sempra's view, it may well lead to other suits pending against it and primarily one involving California's attorney general office.

"This settlement will provide significant economic benefits to electric and natural gas consumers in California, both in lower electricity and gas costs and in the structural changes in the natural gas operations" of Sempra's subsidiaries, says Michael Peevey, president of the California Public Utilities Commission. "I hope all the parties not part of this settlement, including the state attorney general and the California Department of Water Resources, can quickly resolve their outstanding issues with Sempra."

California's attorney general's office says it will continue to pursue its case against Sempra. Meantime, the plaintiffs allege that the process to rig prices in California began in a hotel room in Arizona in 1996. They go on to say that executives from El Paso Corp. and Sempra conspired to divvy up the state's natural gas markets and then subsequently worked together to withhold pipeline capacity, all in an effort to drive up prices.

They are alleging that the actions caused natural gas prices in Southern California to spike to $23 per million BTUs at a time when others around the country were paying $7 per million BTUs. The plaintiffs, led by Continental Forge, had sought as much as $20 billion in damages. That's far more than the $2.2 billion El Paso settled for in a related price and market manipulation case -- a settlement that helped the company to escape trial in this case and all done without admitting guilt.

The $570 million breakdown occurs like this: Sempra will pay $377 million in cash to the claimants, of which $211 million will be payable in eight annual installments and $166 million will be payable in two annual installments. Sempra will also restructure its long-term power arrangement with the California Department of Water Resources and in effect, result in a unilateral price reduction beginning now. The deal will last six years and will total $300 million.

"You don't know what a jury is going to do, particularly in light of the concerns arising from the energy crisis," says Stephen Baum, chairman of Sempra until next month, in a conference call with analysts. "An adverse jury verdict would have been fatal to the company, and we're not in the business of betting the company."

Sempra says that prices shot up during the period in question because of natural gas shortages. They add that drought conditions in the Pacific Northwest and an unanticipated shutdown of a Southern California nuclear facility added to the problem.

Modest Figures

The uncertainty of the court case has not hurt the company's stock. While share prices at one low point in the court proceedings last year took a $3 hit and fell to $31, they have since rebounded. In the last year, Sempra's shares have risen from $36 to more than $47, at the time this story went to bed. At the same time, Standard & Poor's issued a statement affirming the company's credit rating, saying the payment won't affect its "strong and stable" financial position.

Indeed, the settlement is modest. It allows Sempra to preserve the strength of its balance sheet and to maintain its liquidity so that it can fund its capital expenditures. Such settlements have tended to be the norm in similar cases: The burden is often spread out over a period of years so as to not unduly burden the companies. El Paso Corp. settled a case it had with the state of California for $1.7 billion in 2003. That was all related to accusations that it withheld natural gas in an effort to drive up prices in 2000-2001.

Christine Tezak, a regulatory analyst for Stanford Washington Research Group in Washington, D.C., says there is a difference between rigging markets and maximizing profits. Withholding supplies is a risky business proposition. If the price is too high, the gas doesn't get purchased. While she says that both Sempra and El Paso were maximizing profits, she also says both were smart to end their legal battles.

"The recent suits filed by the California attorney general are not part of (Sempra's) settlement, but we do not think this detracts from the settlement's value in providing resolution to these cases that otherwise are pending or would go before unpredictable juries," says Tezak. "We believe that the California attorney general's suits are very weak on the merits, and we believe that they have a high probability of failure."

The California energy mess has taken its toll on consumers, regulators and companies. And like all legal cases, each position thinks their cause is just. In the Sempra case, both the plaintiffs and the company have gotten out their messages and in the end, they decided to settle. And most believe the deal is a fair one that allows one side to be compensated and the other to continue providing a valuable service.

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