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Western Utilities Score Win as FERC Agrees to Review Enron Power Contracts

Western utilities have scored a major victory in their effort to get out from under their multi-million-dollar power contracts that they negotiated with Enron Corp. affiliates during the power crisis of 2000-2001.

In a March 11 order, the Federal Energy Regulatory Commission granted the request of California, Washington and Nevada utilities to put the long-term contracts that they signed with Enron under microscopic review in the ongoing gaming and partnership proceedings at the Commission [EL02-113-007, EL03-180-007, EL03-154-004].

What this means is that the Commission has decided to take another look at the western power contracts -- including those with disputed termination payments signed by Sierra Pacific Power Co. and the Snohomish County Public Utility District (PUD) -- that are being adjudicated in Enron's bankruptcy proceeding, said energy analyst Christine Tezak.

In August 2004, the Western parties asked FERC to confirm that the terminated wholesale power contracts between Enron and the various utilities -- executed between Jan. 16, 1997 and June 25, 2003 -- for which Enron continues to demand termination payments (as well as the retention of profits already collected) are within the scope of show-cause proceedings looking into gaming activities of power sellers.

"The Commission finds that Enron's profits under these disputed contracts are within the scope of, and have common issues of fact with, the show-cause proceedings," the agency said in its order. FERC further directed that the matters be reviewed in an ongoing consolidated hearing before an administrative law judge (ALJ) in a related docket [EL03-180]. The hearing is scheduled to begin on June 13. An initial decision from the ALJ isn't expected until September of this year.

Sierra Pacific Resources (SPR), parent of Sierra Pacific Power and Nevada Power Co., said it believes the FERC ruling will have "positive implications" with respect to the ongoing dispute between its two Nevada utilities and Enron Power Marketing Inc. over more than $300 million in terminated power contracts. "This ruling should help ensure that Enron will not be allowed to capture unjust profits through its wrongful termination of contracts from which it never even delivered the power," said SPR Chairman Walter Higgins.

The Western utilities want FERC to declare their long-term contracts with Enron invalid in light of the energy supplier's fraudulent activity, which would release the utilities from any liability to Enron and could force Enron to disgorge profits.

The western parties that urged FERC to review the contracts included Nevada Power.; Sierra Pacific; Snohomish County PUD No. 1; City of Palo Alto, CA; the Office of the Nevada Attorney General's Bureau of Consumer Protection; the attorney general of the State of Washington; and the California Public Utilities Commission.

The gaming/partnership dockets stem from a case in which FERC determined that Enron illegally controlled assets owned by El Paso Electric Co. The violation led to the FERC rescinding Enron's market-based rate authority and establishing two subsequent dockets in 2003. Under these dockets, Commission staff estimated that between 1997 and 2003, up to $1.87 billion in profits may be eligible for disgorgement by sellers for tariff violations, said Tezak of the Stanford Washington Research Group in Washington, DC.

"By the time the long-term contracts were signed between Enron and its counterparties in late 2000 and 2001, it's not clear that the margins were as rich as transactions earlier in the California [power] crisis period. Enron's [contract] signatories may find out the relief they seek winds up being less than they expected," she noted.

"Specifically, if the FERC changes the value of the contracts, they [western utilities] may still owe termination payments to Enron in the bankruptcy proceedings. Nevertheless, we would expect that termination payments may be smaller than they are estimated to be at this time," Tezak said.

Buyers of Enron's long-term contracts had sought to have FERC's decision upholding all long-term contracts in 2003 reversed by the U.S. Court of Appeals for the Ninth Circuit. "This [latest] move by the FERC may accomplish the same thing for signatories of the Enron contracts," but it's still not clear what the ultimate impact will be on the pending appeals at the Ninth Circuit, she noted.

"Enron was not the only seller who signed long-term contracts contested by buyers in late 2000. We had viewed the action of the appellate court to be the protesting buyers' best hope for redress. It appears that in the case of Enron's buyers, resolution will take a different procedural path."

The U.S. Supreme Court also has expressed an interest in the activities of power sellers during the California crisis. In late February, the high court gave some attention to an appeal by the Snohomish County PUD that seeks relief from Dynegy and a number of western wholesale electricity suppliers that allegedly ripped off customers in 2000-2001.

The Supreme Court invited the acting U.S. solicitor general to file a brief expressing the federal government's view of the Snohomish case, which challenges the Ninth Circuit's contention that FERC is the only place the PUD can seek relief in its dispute with power suppliers. The utility sought review by the high court after having its claims rejected by a federal district court in Southern California and the Ninth Circuit.

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