State supporting Nevada Power’s Enron appeal

Kevin Rademacher

Tuesday, Oct. 7, 2003 | 11:08 a.m.

The state will present a unified front when it asks federal regulators to overturn a $336 million judgment against Nevada Power Co. and its sister company Sierra Pacific Power Co. of Reno.

Nevada Consumer Advocate Tim Hay and the state Public Utilities Commission are both expected to make filings with the Federal Energy Regulatory Commission supporting the Nevada utilities' case against Enron Corp.

"We are intending to file a pleading in support of (Nevada Power and Sierra Pacific)," Hay said.

PUC officials said state regulators are expected to vote on a similar pleading at an Oct. 15 hearing.

On Monday, the utilities filed an emergency request with FERC asking commissioners to stay the $336 million bankruptcy court judgment in favor of Enron. The Nevada companies also asked FERC to invalidate the ruling because notorious energy trader Enron violated market rules when it terminated contracts in 2002.

The outcome of the latest appeal to FERC will be critical because, in issuing the Aug. 28 ruling on behalf of Enron, New York Bankruptcy Court Judge Arthur Gonzalez did not affirm the contracts. Instead, he deferred that jurisdiction to the federal regulators.

Utility executives and state officials have reasoned that if FERC overturns the contracts, the bankruptcy court would have to reverse its ruling.

Meanwhile, Enron said it plans to oppose in bankruptcy court the Nevada companies' plan to issue bonds backed by the company's property to stay the execution of the judgment. Enron spokesman Mark Palmer said such a move makes no sense in light of claims that the utilities could be on the verge of bankruptcy.

"They have alternately said that they are capable of self-collateralizing for the bonds and said that they face bankruptcy," Palmer explained.

If the FERC ruling does not turn back the bankruptcy judgment and the court disallows the companies' request to post bonds during appeals, Nevada Power and Sierra Pacific Power could be ordered to pay the $336 million immediately.

Company executives have said that bankruptcy could be an option in that event.

Enron's claim could be tough to prove, Hay said, pointing to adequate company collateral to cover the bond. In a recent filing with the U.S. Securities and Exchange Commission, the companies indicated they held enough collateral to issue more than $1 billion in mortgage-backed debt.

"I don't think that approach by Enron would be all that solid," he said.

In June, FERC upheld the contracts between Enron and the Nevada companies, claiming that the public interest was best served by preserving the sanctity of contracts.

The conflict stems from a May 2002 move in which Enron exercised a clause in the contracts it claims allowed it to terminate the deals if the companies lost credit worthiness. That happened after the PUC disallowed $437 million of a proposed $922 million rate increase Nevada Power sought in 2002 to cover the cost of buying power during the Western energy crisis.

The new FERC appeal focuses on the termination clause in the contracts. The Nevada companies said in the complaint that they were denied an opportunity to provide reasonable assurances that it could meet the obligation once credit worthiness was lost.

Hay said the argument could help FERC out of a difficult position.

"It allows FERC to uphold the contracts and act on specific factors surrounding the termination clause," he said. "That would give FERC a way to rule in favor of a company that, although mismanaged, was not engaged in fraud."

Hay also said that -- with FERC already ruling against the Nevada companies once previously -- options for the utilities are running out.

"It's an all-or-nothing game now," he said. "If FERC was to reject (this) argument ... they are likely stuck with the $300 million judgment."

Walter Higgins, chairman of Sierra Pacific Resources, parent company of the Nevada utilities, has indicated that the company will exhaust all legal appeals in the case.

"The legal issues presented in this FERC case are clear," he said. "A company like Enron, that engaged in pervasive criminal wrongdoing should not be permitted to adroitly 'game' the legal system so it can benefit from its criminal and regulatory misconduct."

Palmer objected to statements from the Nevada companies that characterized Enron as a criminal entity.

"That's just false," he said. "Some former Enron managers -- which Enron fired -- have admitted to wrongdoing. Enron itself, however, has not been charged with any wrongdoing."

Palmer restated that Enron's obligation at this point is to maximize assets for creditors.

"We are in the business of liquidating and litigating," he said. "This contract is an asset and we are working to maximize the value to our creditors."