By Robb Fulcher
Easy Reader, August 14, 2003
Attorney Lance Astrella was sitting in a Houston office sifting through about 40 boxes of documents in early 1999 when he stumbled upon conspiracy gold.
Among the piles of paperwork passing under his eyes was a hand-written note by a high-level executive telling of a hotel-room meeting in which, it appeared to Astrella, competing energy companies agreed to commit antitrust violations.
He couldn’t yet know that the note would lead to allegations that the firms illegally agreed to kill pipeline projects, artificially raising the price of natural gas coming into California, deliberately causing electricity prices to soar, and contributing to California’s energy crisis of 2000 and 2001. What Astrella did know right away is that high-powered, specialist attorneys would be needed to pursue the matter, so he rang up a Southern California lawyer with the wherewithal to round up such a team. He didn’t call a sleek-suited warrior in a skyscraping office in Century City or downtown Los Angeles. He called Brad Baker in the ground-scraping storefront of Baker, Burton & Lundy, on Pier Avenue in cozy Hermosa Beach.
From Hermosa, Baker put together a team of Erin Brokovich attorneys and others who would build the case—laughed off at first by many insiders—into a class-action antitrust lawsuit that has been tentatively settled by one of the energy companies for a dizzying $1.7 billion.
Settlement Among Highest
With a San Diego Superior Court judge’s preliminary seal of approval last Wednesday, the antitrust settlement ranks among the largest in California history, although it is expected to be appealed to a higher court. California Senior Assistant Attorney General Tom Greene, the settlement’s chief negotiator and head of the AG’s energy task force, said the antitrust settlement ranks as the second largest in California history. The largest, he said, came in a nationwide tobacco industry case that was settled in California for $26 billion payable over 20 years.
“Brad did good,” Greene said of Baker.
The company that agreed to settle, El Paso Natural Gas Corporation, has admitted no wrongdoing. But if the settlement survives its challenges, El Paso is expected to refund about 90 percent of the $1.7 billion to California’s private electricity and natural gas consumers, numerous city governments, and large industrial users of electricity and gas. A portion of the remainder, up to a maximum of $60 million, would be split among batteries of attorneys at 11 law firms. However, a legal challenge to the settlement could be mounted by any one of California’s 25 million ratepayers. If the settlement fails, the attorneys would get nothing.
“Almost every person in California has standing in this case,” Baker said. “Don’t you think at least one of them will appeal?” The settlement calls for El Paso Gas to pay out the $1.7 billion total over 15 years, Greene said. Part of the money is to be raised by the sale of El Paso stock, Baker said. Diane Pritchard, an attorney for El Paso Gas, declined comment on the lawsuit and its settlement. “It’s a matter of policy that our firm does not comment on pending litigation,” Pritchard said. Phone calls to a second El Paso attorney were not returned.
Casting The Net
The lawsuit contends that in September 1996 top executives of Southern California Gas Company, San Diego Gas & Electric and the El Paso Gas met at the Embassy Suites Hotel near Sky Harbor Airport in Phoenix, Ariz., and illegally agreed to refrain from competing against each other in the natural gas delivery markets of Southern California and Baja California.
A hand-written agenda for the Phoenix meeting called for the 11 executives to discuss “opportunities resulting from electric industry restructuring,” referring to California’s electric industry deregulation that had become law just a month earlier, according to the lawsuit.
The lawsuit claims that an agreement reached at the “secret Phoenix meeting” went this way:
Top officers of El Paso Gas agreed to kill pipeline projects by a company El Paso had purchased three months earlier, called Tenneco Energy. Tenneco had planned to use the pipelines to bring Canadian natural gas into Southern California and Baja, making it cheaper and more plentiful in those markets.
In exchange, Southern California Gas and San Diego Gas would agree not to compete with El Paso on a separate pipeline project to bring natural gas from Texas to a plant in Chihuahua, Mexico, even though SoCal Gas enjoyed “a tremendous cost advantage” over El Paso.
Within a month of the Phoenix meeting SoCal Gas announced that it would not compete for the Chihuahua pipeline, and two weeks later El Paso refunded money from companies that had paid to receive Canadian gas delivered through the now-dead Altamont pipeline, the lawsuit contends.
Electricity prices are tied to gas prices largely because gas is used to fire over half of California’s electric plants. In addition, when gas prices rise, the electric companies are allowed to charge more for all their power, including power generated by non-gas fired plants, the lawyers said. So a spike in gas prices has “a multiplier effect” on the price of electricity, allowing power companies to make profits beyond offsetting their costs of buying more expensive gas, Baker said.
Baker’s Billion, Part 2
“The agreement eliminated potential price competition and allowed El Paso and SoCal Gas to retain their unchallenged market dominance,” the lawsuit claims. ¨SoCal and El Paso discussed a long-term plan to “link up supply, transportation, generation and sale of electricity” and to “think/plan position now to be ready when the opportunity comes,” the lawsuit contends, quoting from the alleged agenda.
Following the meeting El Paso Gas launched a “shopping spree” for electricity generating facilities serving California, to take exploit its own advantages that had been created in the natural gas market, the lawsuit claims. In addition, the lawsuit contends, the companies agreed not to challenge each other’s mergers—El Paso earning regulatory approval to complete its purchase of Tenneco, while SoCal Gas and San Diego Gas merged to become Sempra Energy.
In one instance of a possible merger challenge, the lawsuit claims, San Diego Gas could have fought the El Paso-Tenneco deal, claiming that the killing of Tenneco’s California pipeline plan would prevent cheaper gas from reaching the San Diego area. San Diego Gas could have claimed that the merger would harm potential competitors of SoCal Gas, who would want to sell the cheaper natural gas to San Diego Gas, according to the lawsuit. “The last thing that any of the coconspirators wanted was legitimate competition,” the lawsuit claims.
“Soon after the meeting SoCal Gas and El Paso successfully implemented their plan to carve up the California and northern Mexico markets,” the lawsuit claims.
SoCal Gas was the sole bidder on the Baja pipeline, El Paso was the sole bidder on the Chihuahua pipeline, and SoCal Gas was protected from potential competition by El Paso’s ending of the pipeline projects that would have significantly lowered prices in Southern California, the lawsuit claims.
The lawsuit also claims that the alleged collusion exacerbated the energy crisis at the turn of the decade by driving up the price of electricity in California, through an artificial hike in the price of natural gas coming into the state, caused by reducing the number of pipelines to carry the gas.
“Southern California’s ‘energy crisis’ is not simply the result of ever-increasing demand for energy by a growing population,” the lawsuit claimed in December 2000. “Rather, it is the direct result of a conspiracy among the natural gas industry’s most powerful Southern California players to preserve and maintain the market dominance that they enjoyed for many years as monopolies subject to regulation.”
“Their unlawful collusion has contributed significantly to the recent astronomical increases in the price of gas and electricity,” the lawyers contended. “As a result Southern California customers have had and will have to pay billions of dollars extra for their natural gas and electric needs.”
In December 2000, newspapers reported a 16-fold rise in gas prices at the California border. Defenders of the rising prices said they were at least partly explained by colder weather, heavy gas use by California power plants and an explosion along an El Paso Gas pipeline that limited its flow.
According to the lawsuit, increases in the price of natural gas at the Arizona-California border well outpaced those throughout the rest of the country, going from $2.40 to $4.40 for a unit called an MMBtu over a one-year period ending in June 2000, then leaping to $25 per MMBtu during 2001.
Greene said it is difficult to tell how much of the energy crisis could be blamed upon the alleged conspiracy of the energy companies. “It affected the price of every kilowatt in California,” he said. With the El Paso Gas portion of the lawsuit tentatively settled, the action against SoCal Gas and San Diego Gas & Electric is expected to go to trial soon enough that it can conclude before 2005. Phone calls to attorneys for SoCal Gas and San Diego Gas, now merged into Sempra Energy, were not returned.
In Hermosa, the handsome and tidy yet modest storefront occupied by Baker, Burton & Lundy gives no indication why Brad Baker was given the lead role in building a lawyer team that included Tom Girardi and Walter Lack of Erin Brokovich fame. (In the Julia Roberts movie about the corporate whistle blower, Girardi and Lack appear as a composite character played by actor Peter Coyote.
Astrella, who had stumbled upon the hand-written note that started the whole thing, turned to the Hermosa lawyers because he knew they had won the respect of fierce courtroom attorneys across the state, in part with their prowess on the football field and the basketball court.
The 53-year-old Baker, once a hard-working guard on the University of California, Irvine basketball team and his partners, also active athletes, have fielded teams that dominated countywide law firm competitions that are taken almost as seriously as their legal battles. “Many of the top litigation firms knew Baker, Burton through our athletic teams,” said Baker as he stretched out his 6-foot-2 frame in the firm’s conference room, his Hermosa-friendly sneakers crossed atop the table.
He traces the importance of the athletic contests to the competitive nature of lawyers, at least the ones who actually argue in the courtroom. Lawyers who pore over contracts aren’t as keen for the contests, it seems. “Litigators are warriors, competitors,” Baker said. “You don’t get a lot of transactional guys on the football field.”
At Irvine, Baker was a floor-burn player, a “slow white guy” who passed the ball and tightened the screws on defense. He showed up at 6 in the morning to work out with the water polo team, lifting weights, running stairs and performing murderous calisthenics in the “combat room” to stay in especially good shape for basketball. “I was not a physically gifted guy,” he said. “I had to work harder.”
Baker clung tenaciously to his spot on the basketball team as his playing minutes dropped each year. “I think I set the record for minutes sitting on the bench,” he said. Astrella, who used his smaller, wirier frame to earn spots on his college wrestling and gymnastics squads, believes Baker’s pass-the-ball, help-the-team outlook served him well in building his team of antitrust lawyers and helping to manage hour after hour of 30-attorney conference calls as the El Paso settlement progressed.
Baker’s Billion, Part 3
Not that Baker’s skills are all on the athletic fields. In 1985 he reached the peak of courtroom litigation when he argued a case before the U.S. Supreme Court, twice. After lower courts failed to settle the issue, Baker brought a pension case concerning a Los Angeles retiree named Doris Russell to the black-robed justices of the nation’s highest court. With Justice Lewis Powell out sick, Baker argued the case to a 4-4 tie. “I got a postcard saying come back and do it again,” he said.
From the first question he was asked by Powell, Baker said he knew his case was lost. The court wound up issuing a unanimous opinion that the retiree had no standing to press her case, although the justices’ individual analyses showed an unofficial 5-4 split on the merits of the case. “I’m the only person I know of who can say I turned a 4-4 tie into a 9-0 loss,” Baker said with the same easy self-effacement he used to describe his basketball career. Baker said he was excited but not nerve-wracked in anticipation of his Supreme Court appearances.
“It was so well organized, and they asked very intelligent questions,” he said. “For the most part.”
For The Team
When Astrella–the discoverer of the alleged secret Phoenix meeting–sought out Baker, Burton & Lundy, he was turning to the firm as a whole as much as to Baker himself. Baker stressed that the task of heading up the antitrust team fell to him because he had the time for it.
All the while he has concentrated on that effort he has been “subsidized” by his 27-year partner Kent Burton, a contract lawyer who provides “the backbone of the firm,” Albro Lundy, a “tenacious litigator” who joined the partnership nine years ago, and associate attorney Anne McWilliams.
Since Lundy joined the firm Baker has eased away from litigation, spending most of his time in estate planning and probate, when he’s not dealing with massive antitrust cases. Astrella said he’s happy with the El Paso settlement and with the fact that much less than 10 percent of the refund money will be used to pay the lawyers, even though he considers them the good guys.
“You hear about class action lawsuits where the money goes into the attorneys’ pockets,” Astrella said. “This one is neat because it’s the way the system is supposed to work.” As a byproduct, Baker’s work has raised by another notch or two the profile of Baker, Burton & Lundy. “For a sleepy little firm in Hermosa Beach, we’ve had a lot of interesting things happen,” Baker said.