Without conceding any wrongdoing on its part, El Paso Electric Co. (EPE) has agreed to pay $14 million and lose the right for market-based trading for two years as part of a settlement with FERC trial staff that resolves issues arising from the agency’s investigation into the company and Enron Corp. [EL02-113-000]. The settlement was disclosed by the staff in written testimony filed Thursday.

EPE said it has settled all issues resulting from the four-month investigation, which reviewed the alleged trading irregularities of EPE and two subsidiaries of Enron in the California electricity market. However, the settlement did not resolve issues between the company and other parties in the case, including California governmental agencies and other market participants. EPE said prehearing proceedings will continue for all parties.

As part of the Commission’s ongoing review of alleged manipulation in the short-term electric and natural gas markets, FERC launched formal investigations in August into the potentially illegal actions of three Enron Corp. affiliates — Portland General Electric, Enron Power Marketing and Enron Capital and Trade Resources Corp. — and EPE, Avista Corp. and affiliate Avista Energy during the western energy crisis (see NGI, Aug. 19).

Under the terms of the negotiated settlement, EPE has agreed to refund $14 million of revenues it earned on wholesale power transactions. In addition, EPE also has been stripped of its license to sell electricity at market-based rates for the next two years, until Dec. 31, 2004. As part of the agreement, EPE did not admit to violating any statute or FERC rule when carrying out its wholesale trading activities. Going forward, the company also agreed to continue cooperating with the Commission and the staff in the ongoing investigation considering Enron.

Acknowledging that EPE is not out of the woods yet, company CFO Terry Bassham in a conference call Friday said “there are nine current intervenors, plus another entity which is seeking to intervene, whose positions on the settlement are not yet known. While we hope to convince the intervenors that they should support the settlement…there is no certainty that we will succeed there.”

Intervenors in the case will submit their testimony on December 19. As things are set up now, EPE will have a hearing with all unsettled parties including Enron on April 1. If everything remains on schedule, the company said it hopes to have a final ruling from the Administrative Law Judge (ALJ) as early as August, early September, but more likely late next year.

“If everyone was to buy into the settlement by the end of February, we anticipate that our lawyers would tell us that we could present the case to the ALJ for her findings and recommendations and then to the Commission much sooner,” said Raul A. Carrillo, Jr., senior vice president and general counsel.

Bassham noted that the settlement will reduce, but not stop EPE’s legal expenses. “We are likely to present testimony and will participate in the hearing in support of our factual and legal positions and together with the trial staff, we will support the settlement.

“The EPE believes that in light of its strong legal and factual positions this settlement will be approved by both the ALJ and then by the Commission,” Bassham said. “However, there is no certainty that will be the case. Nonetheless, we feel this is a significant step to putting our so called ‘Enron-issues’ behind us.”

The company said it expects to take the $14 million charge in the fourth quarter. Accounting for it as a refund, EPE said it anticipates a $0.17 after-tax charge for the fourth quarter of 2002.

“We believe it to be a good outcome and it is going to allow us to return to our core business of providing safe and reliable electric service to our customers in West Texas and Southern New Mexico,” said EPE’s CEO Gary R. Hedrick.

EPE said its settlement was not binding on any party other than itself and the trial staff. If FERC chooses not to approve the settlement, neither EPE nor the FERC trial staff will be bound by its terms.

“We are pleased today to announce this settlement with the FERC’s Trial Staff,” said Hedrick. “We realize that there are still many hurdles ahead to resolve this proceeding before the FERC, but this is a significant step in that direction, and we are eager to present it to the administrative law judge and the FERC commissioners for their consideration.”

EPE noted that its sales of wholesale electricity delivered to the California Independent System Operator (CAISO) accounted for less than 0.3% of the total energy delivered through the California Independent System Operator during 2000 and 2001.

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