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The state of California is approaching a massive settlement with El Paso Corp., the Texas-based natural gas company accused of artificially driving up prices during the state’s 2001 power crisis. El Paso CEO Ronald Kuehn Jr. recently told his employees that the company was “moving forward” in settlement negotiations with the state, a switch from the company’s hard-line stance in the past. The company denies an agreement is imminent. But one source familiar with the negotiations said an agreement was close and outlined a $1.7 billion deal. Others contacted declined to comment, citing a protective order. In a statement that was submitted Tuesday as part of a Securities and Exchange Commission filing, Keuhn said, “The political realities and hostile public sentiment environment in California is such that, if it is possible to do so, on reasonable terms, we would like to achieve a settlement of this issue, as distasteful as that is. “I believe we are making very good progress, in moving forward, toward a settlement that will not impair the company’s ability to get back on track and get this issue behind us. If we are not able to reach a settlement on reasonable terms, we will continue to defend our position before the [Federal Energy Regulatory Commission] and the courts.” El Paso would not elaborate. “I can’t confirm anything. We don’t have a settlement,” spokeswoman Norma Dunn said Wednesday. The California attorney general’s office similarly was tight-lipped. “We have no comment,” spokesman Tom Dresslar said. Thomas Greene, the deputy attorney general in charge of the case, could not be reached. The source familiar with the negotiations said $1 billion of the settlement will come in the form of future natural gas rebates, which should benefit consumers in the form of lower rates. An additional $700 million, less attorneys fees, will form a claim pool. Various municipalities, government agencies and businesses will be eligible to apply for refunds. The state alleged that El Paso cost California consumers as much as $3.7 billion in excess charges. The settlement is expected to cover claims by several Western states besides California, including Nevada and Oregon. Several lawyers will be up for a big payday. Three Northern California law firms filed suit against El Paso, with the cases pending before San Diego Superior Court Judge J. Richard Haden, who must approve any settlement. Lieff Cabraser Heimann & Bernstein partner William Bernstein represents a class of plaintiffs; Steefel, Levitt & Weiss partner Mark Fogelman represents a group of dairy producers; and Cotchett, Pitre, Simon & McCarthy partner Joseph Cotchett represents E.&J. Gallo Winery, the world’s largest wine producer. El Paso is represented by Morrison & Foerster’s James Brosnahan, who referred calls to company headquarters. A group of Southern California natural gas customers is represented by Girardi and Keese’s Thomas Girardi. The state case in the FERC proceedings was handled by California Public Utilities Commission lawyer Harvey Morris. El Paso would be the second major energy provider to settle claims stemming from the 2001 power crisis. In November, Attorney General Bill Lockyer announced a $417 million settlement with Williams Energy Marketing & Trading. That deal also called for significant future rebates in the price of power provided to the state. The case is set for trial in September. In a 23-page ruling issued in November, FERC Judge Curtis Wagner Jr. found that El Paso “tightened the supply of gas” by operating its pipeline at significantly less than capacity. The result was artificially inflated prices. Prior to his ruling, he had urged the parties to settle.

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