FERC late Thursday said that it is launching an investigation as a result of allegations that former Enron CFO Andrew Fastow and Enron executive Michael Kopper created partnerships to mask the former energy trading giant’s stake in three wind power farms.

In its order, FERC noted that the Department of Justice and the Securities and Exchange Commission (SEC) have alleged in criminal and civil proceedings in the U.S. District Court for the Southern District of Texas that in 1997 Enron improperly retained qualifying facility (QF) benefits for three small power production facilities, each of which is a wind farm.

Specifically, Enron is alleged to have improperly retained QF benefits for these facilities by fraudulently transferring its ownership in the QFs to partnerships indirectly controlled by Enron.

Fastow earlier this month was charged with fraud, money laundering and conspiracy, while Kopper recently pleaded guilty to fraud and money laundering. Fastow is considered by many to have been the brains behind Enron’s off-balance sheet partnerships prior to the company’s financial collapse and subsequent bankruptcy filing.

Under the microscope are three Enron-affiliated QFs — Zond Windsystems, Victory Garden and Sky River. In May 1997, the QFs filed applications at FERC for recertification as QFs. In each filing, the applicants noted that on Feb. 27, 1997, FERC issued an order approving the merger of Enron and Portland General Corp.

Each applicant also acknowledged that as a result of the merger, Enron’s interest in affiliates that owned interests in the facilities would be considered ownership by an electric utility holding company for purposes of FERC’s regulation related to ownership requirements for QF status. In order to comply with the ownership requirements, each applicant committed that the Enron affiliates would transfer ownership interests to partnerships that they claimed would be unaffiliated with Enron.

FERC in June 1997 recertified the three Enron-affiliated facilities as QFs. In the orders, the Commission also approved the transfer of the Enron subsidiaries’ interests to so-called “RADR” partnerships. The Commission approved each of the new ownership structures, applying its standard ownership test applicable to partnerships, finding in each case that electric utility interests would not exercise greater than 50% control over the facilities and would not receive greater than 50% of the stream benefits from the facilities in question. The Commission’s recertification in each case was based on the provision that each facility “is owned and operated in the manner described in the application” and in its orders.

But FERC on Thursday noted that in the criminal complaint against Fastow, it is alleged that Fastow and Kopper created the RADR partnerships to disguise Enron’s interest in the wind farms so that the wind farms could continue to receive beneficial regulatory treatment while they secretly remained under Enron’s control. Also, according to the complaint, the partners in the RADR partnerships understood that proceeds from the partnerships were to be paid to Fastow, Kopper and their designees, FERC noted.

FERC said that “serious allegations” have been made that Enron affiliates never intended to relinquish control of the wind farms whose ownership structure changed in connection with the Enron/Portland General merger. If the allegations are true, they conflict in “material respects” to the representations made by Zond Windsystems, Victory Garden and Sky River in their applications for QF recertification, the federal agency noted.

The Commission therefore said that it would launch a proceeding to determine whether Zond Windsystems, Victory Garden and Sky River “have failed to conform with representations presented in their 1997 applications for re-certification or whether these QFs otherwise failed to meet the QF ownership criteria as a result of the 1997 RADR transactions.”

FERC pointed out that in the past, it has revoked some of the benefits of QF status in cases involving a failure to fully comply with the requirements for QF status. In cases where the failure to comply was not willful, FERC revoked the QF’s exemption from section 205 of the Federal Power Act (FPA) and determined that the QF was not entitled to charge QF avoided cost rates during the period it had failed to comply with the requirements for QF status. At the same time, FERC redetermined the applicable rates and ordered refunds for the period of non-compliance with the requirements for QF status.

Those orders left open the possibility of a greater revocation of QF benefits, including revocation of a QF’s exemption from other sections of the FPA and exemption from the Public Utility Holding Company Act and certain state laws and regulations, as well as a permanent revocation of QF benefits in more serious cases.

FERC said that a presiding administrative law judge (ALJ) will convene a conference in this proceeding within approximately 15 days after the Commission’s chief ALJ designates the judge in the hearing.

The Commission said that following a review of the initial decision resulting from the hearing, if FERC finds that Zond Windsystems, Victory Garden and Sky River have failed to conform with the QF ownership requirements, “we will then establish the appropriate remedies.”

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