Sierra Pacific wins round in fight with Enron

Kevin Rademacher

Monday, Oct. 11, 2004 | 11:10 a.m.

Nevada's two major electric utilities won their first significant legal battle against Enron Corp. with a weekend order vacating a bankruptcy court judgment against the utilities for $336 million.

U.S. District Judge Barbara Jones, of the Southern District of New York, issued a ruling Sunday that threw out an August 2003 summary judgment on behalf of Enron. That judgment upheld contracts signed with Nevada Power Co. of Las Vegas and Sierra Pacific Power Co. of Reno during the Western energy crisis of 2000-01.

"We are very pleased with this favorable ruling," Walter Higgins, chief executive of Sierra Pacific Resources, parent company of the Nevada utilities, said in a statement. A company spokeswoman declined further comment, saying the utilities needed time to review the ruling more thoroughly.

Enron spokeswoman Jennifer Lowney said the company had seen the new ruling but declined to comment.

In upholding the dubious contracts in August, New York Bankruptcy Court Judge Arthur Gonzalez ruled that the Nevada utilities owed $336 million in termination payments to Enron Power Marketing Inc. The contracts with the Nevada utilities were canceled by Enron in 2002 after Sierra Pacific Resources saw its credit decimated after a $437 million rate case increase request by Nevada Power was disallowed by the state Public Utilities Commission.

Richard McIntire, an economist and utilities consultant with the law firm of Jones Vargas in Reno, was a PUC commissioner during the Western energy crisis. The latest ruling turns the tide on a curious series of decisions regarding Enron's dealings in Nevada, he said.

"Finally, the law seems to be making sense," McIntire said.

The Nevada companies had argued that Enron -- which was already in bankruptcy -- would not have been able to fulfill the contracts and that the power trader was scheming to cancel the deals.

In Sunday's order, Jones wrote that the summary judgment in favor of Enron was improper because it failed to account for several facts of the case called into question by the Nevada companies.

Jones ordered the case back to bankruptcy court for review of those facts.

Key facts that must be reviewed in the bankruptcy court include claims by Enron that the Nevada companies did not provide adequate assurances that they would be able to meet contract terms after their credit rating was cut.

In her ruling, Jones indicated that a more thorough look at the Nevada companies' financial state at the time of the credit downgrade is necessary.

"The seller's dissatisfaction with the defendant's financial standing must not be false or arbitrary," Jones wrote, emphasizing that Enron must use reasonably exercised discretion when demanding additional assurances. "Nevada argues that a genuine issue of fact exists as to whether their performance viability was affected."

The order also indicates that Enron's demand for the entire amount of its termination payment clause could have been overreaching as an assurance payment.

"The assurance mechanism ... was designed to assuage insecurity, not provide a windfall for one party," Jones' order said.

The order also acknowledges claims on the part of the Nevada companies that Enron, had it not canceled the deals, would not have been able to fulfill the contracts.

The questions raised could bode well for the Nevada utilities.

"It's certainly, I would say, a major step forward," said Nevada Consumer Advocate Tim Hay. He said that getting the Enron judgment settled will be a key move in improving the company's credit rating. That would lead to lower interest charges and could lower rates in the future.

"It's certainly not the end of the story, but it is a major step forward," Hay said.

In the original order, Gonzalez had ruled that the bankruptcy court had no authority to decide on the matter of power contracts, instead deferring to a decision handed down earlier in 2003 by the Federal Energy Regulatory Commission that upheld the contracts despite findings by FERC staff that the power markets had been artificially inflated by widespread fraud on the part of several power traders, including Enron.

In the days following the August 2003 ruling, Sierra Pacific Resources had warned of possible bankruptcy should the utilities be forced to pay Enron. A deal was reached in bankruptcy court that allowed the Nevada companies to post collateral instead of paying the $336 million during the appeals process.

In addition to the District Court appeal, FERC is scheduled to conduct hearings beginning Oct. 25 on the Nevada companies' argument that Enron violated market rules in terminating the contracts.

Sierra Pacific Resources' stock was up 23 cents, or 2.48 percent, on the news this morning, to $9.52.