SEATTLE -- Government regulators handed a major victory to Western utilities and cities trying to get out of exorbitant contracts they made with Enron Corp. during the power crisis of 2000-01.
In an order issued Friday evening, the Federal Energy Regulatory Commission determined that Enron was engaging in illegal activity at the time it entered in the contracts. It was the first time the commission has acknowledged that the contracts were signed under fraudulent pretenses.
The regulatory agency said a hearing should be held to determine whether Enron can collect profits it would have received had those contracts been fulfilled. The hearing is expected in May, to be followed by FERC's decision late this year.
Utilities and cities ended their contracts with Enron or watched as Enron terminated them when the company's fraudulent accounting was revealed in late 2001. They include the Snohomish County Public Utility District in Everett, about 30 miles north of Seattle; Nevada Power Co. and Sierra Pacific Power Co. in Nevada; and the California cities of Palo Alto and Santa Clara.
When Enron entered Chapter 11 bankruptcy protection, it sued for the money it would have made had the contracts been fulfilled. Enron sought $300 million from the Nevada companies, and $122 million from the Snohomish district, which in January 2001 signed a nine-year contract with Enron for power at four times the usual cost.
To come up with $122 million, the Snohomish district would have to collect $400 per customer. Rather than raise the money, the district went looking for evidence of illegal activity at Enron. It searched thousands of pages of Enron documents and paid to transcribe hundreds of hours of taped conversations involving Enron traders.
On the tapes, traders joked about stealing money from California grandmothers and about the possibility of going to jail for their actions.
Early this year, Snohomish's investigators determined that Enron began honing its schemes to manipulate the market in 1997, well before rolling blackouts hit California.
The utility district took the evidence to FERC and asked to get out of its contract with Enron. The ruling issued Friday brought the utility closer to that goal.
"This is a very significant order for us," said Eric Christensen, a lawyer for the district. "We've now put in place all the essential legal groundwork to make sure Enron is not able to collect any further unjust profits from us."
FERC has already demanded that Enron give up $32.5 million in unjust profit, but Snohomish's investigators have estimated that the company gouged Western customers for at least $1.1 billion.