FERC rules against Enron

Kevin Rademacher

Monday, March 14, 2005 | 11:03 a.m.

Nevada's biggest electric utilities are claiming a victory in their epic battle with notorious energy trader Enron Corp.

Late Friday, the Federal Energy Regulatory Commission issued a ruling that said Enron was violating market rules while it entered into contracts signed during the 2000-01 Western energy crisis.

For Nevada Power Co. of Las Vegas and its Reno-based sister utility, Sierra Pacific Power Co., a subsequent hearing could lead to the dismissal of $336 million in termination payments Enron has sought for canceled contracts.

"The termination payments are based on profits Enron projected to receive under its long-term, wholesale power contracts executed during a period when Enron was in violation of conditions of its market-based rate authority," the FERC ruling said. "The commission finds that these matters would benefit from a full examination at hearing."

A hearing is expected to begin June 13, and the reaction from the Nevada utilities was positive this morning.

"We're delighted," said Russ Campbell, an attorney representing the Nevada utilities. "We have had a consistent message that bad actors can't profit. This order affirms that message."

Campbell said the direct language of the new order did not come as a surprise.

"I think everybody's patience is being exhausted with their legal maneuvering," he said, adding that the Enron's attempts to stall proceedings could be backfiring by giving their opponents more opportunity to sift through evidence.

"The more parties dig the more they find," Campbell said. "There's a lot to find out about Enron ... It's mounting."

The new order stems from a 2004 FERC ruling that required Enron to be disgorged of $32.5 million it made through improper sales involving El Paso Electric Co.'s facilities.

"Enron potentially could be required to disgorge profits for all of its wholesale power sales in the Western Interconnect for the period," said FERC financial analyst Randolph Barlow in testimony filed following the El Paso ruling.

The Nevada termination payments have, thus far, been upheld by FERC, which has cited the sanctity of contracts over any possible market manipulation. A bankruptcy court ordered the Nevada utilities to make the termination payments based on FERC's initial stance, but an appeals court remanded the case back to bankruptcy court for a rehearing, which is currently scheduled to begin April 18.

Richard Burdette, energy adviser for Gov. Kenny Guinn, said that getting a positive decision out of FERC would be a key development.

"FERC is the agency that, under federal law, has the authority to identify market manipulation and has the authority to remedy those actions," he said. "It has to start there. It is clear to everybody that FERC has jurisdiction. If FERC says it's not important enough to do anything about it, the utilities are going to have an uphill battle."

In recent FERC testimony Walter Higgins, chief executive of Sierra Pacific Resources, parent company of the Nevada utilities, blasted the actions of Enron. He claimed that Enron's fraudulent business practices amounted to a "false front" of financial stability.

"(Enron) used this false front of credit quality and financial stability as a tool to market its services, to gain market share and generally as a key means to facilitate its various wrongful acts," he said in testimony.

Higgins and other Nevada executives have argued on several legal and regulatory fronts that they should be freed from the termination payment demands because Enron's true financial crisis would have made it impossible to ever deliver on the contracts in question.

"The Nevada companies wanted and needed reliable, ethical and healthy suppliers," Higgins testified. "We have an obligation to provide service to retail customers and must assure over both the short and long-term that we have sufficient resources to meet loads ... We entered into contracts with Enron relying on the integrity of the trading markets in the West and believing that Enron was what it purported to be."

In other recent FERC testimony, Kirby Lampley, director of regulatory operations for the state Public Utilities Commission, testified that Enron's actions during the Western energy crisis damaged Nevada ratepayers.

"Enron's unjust and unreasonable trading practices resulted in artificially inflated wholesale market prices of energy," he said in testimony. "The artificially high prices for that energy were ultimately passed on to Nevada ratepayers."

Lampley went on to say that barring Enron from profiting from those actions is the only way to ensure that "future market participants will be adequately discouraged from engaging in similar harmful behavior."