Tuesday, July 17, 2007

Enron Refuses To Die, Bites Utility in the Ass... AGAIN

Remember back in June of 2004 when a Washington State utility authority uncovered, and publicized, tapes of Enron government affairs employees scheming, and bragging, about gouging Western customers during periods of energy shortage?

Here's a brief re-cap, for posterity's sake:

"He just f---s California," says one Enron employee. "He steals money from
California to the tune of about a million."

"Will you rephrase that?" asks a second employee.

"OK, he, um, he arbitrages the California market to the tune of a million
bucks or two a day," replies the first.


"They're f------g taking all the money back from you guys?" complains an
Enron employee on the tapes. "All the money you guys stole from those poor
grandmothers in California?"

"Yeah, grandma Millie, man"

"Yeah, now she wants her f------g money back for all the power you've
charged right up, jammed right up her a------ for f------g $250 a megawatt


Before the 2000 election, Enron employees pondered the possibilities of a
Bush win.

"It'd be great. I'd love to see Ken Lay Secretary of Energy," says one
Enron worker.

That didn't happen, but they were sure President Bush would fight any
limits on sky-high energy prices.

"When this election comes Bush will f------g whack this s--t, man. He won't
play this price-cap b------t."

The utility authority who came into possession of the tapes, and released them to the media, is the Snohomish County Public Utility District, to whom, by the way, my father has made payment for utilities since the early 1980s. SnoCo PUD has been in a legal struggle with Enron for the last five years over price gouging, and has, paradoxically, paid $18 million to the former titan of energy as part of a legal settlement.

Oh yes, that's right. The public utility who got screwed by Enron has been forced to pay them money, which will be sucked up by creditors.

So, wtf? Seriously.

The PUD, which provides power to 290,000 people, portrayed the settlement as a
victory, noting that it will pay only 10 percent of the $180 million Enron was
seeking. PUD General Manager Steve Klein said the settlement, to occur within
the next 90 days, will be paid out of reserves and won't have any effect on
Snohomish county residents or businesses.

A victory!?

In a conference call Friday morning, Klein said that the alternative to
settling would have been to enter binding arbitration Monday, which could have
resulted in a non-appealable order to pay the entire $180 million Enron

Arbitration panels "don't have to consider nuances," he said.

"They can simply look at this as a contract issue: 'Snohomish (PUD) signed
and entered into a contact. Did they have the right to walk from this contract?
Do the Enron creditors have the right to claim damages for that unilateral
termination?' "

He added, "This doesn't change anything in our hearts about whether we're
right or wrong. For 10 cents on the dollar, this pencils out to be a very good
business decision."


The utility initially said it didn't have to pay [the $180 million] because Enron's
manipulations of the West Coast power market in 2000-01 kept the contract from
being "just and reasonable," as required by the Federal Power Act.

Evidence later revealed that Enron had fraudulently asserted that it was
financially viable when it entered the contract. Contracts induced by fraud
usually can be voided, so fraud became an additional basis for the PUD to defend
against having to pay on the contract.

The contract called for the PUD to pay $109 per megawatt hour -- more than
four times as much as it was used to paying for such contracts.

According to the Snohomish County Herald

Why did the PUD agree to pay $18 million when federal regulators said last
year that it doesn't owe Enron anything?

Even though federal regulators ruled that the PUD doesn't owe Enron a dime,
a New York bankruptcy court ordered that the case be heard by a three-judge
panel beginning Monday, Klein said. That panel could have agreed with federal
regulators, or it could have ordered the PUD to pay Enron the full $180

So, even though it has been established that the PUD got screwed by Enron, and that the PUD owes Enron absolutely nothing, the risk that an arbitration panel might rule $180 million in Enron's favor was high enough that shelling out $18 million made more sense.


This stinks. Although I think that the PUD got screwed, I have to agree with the Snohomish County Herald's Editorial Board and say that it was a wise decision. The fact that the arbitration board, allegedly, does not take nuance into consideration puts the PUD at a considerable disadvantage; they did break the contract. However, Enron drafted the contract in bad faith, and even lied about its financial health in such a way as to create incentive for the PUD to parlay. Perhaps someone with more significant legal training can illuminate some of the specifics, but it seems to me that the PUD would have had more than a fighting chance in arbitration, especially considering Enron's track record. $18 million is a trifle, though, when compared with the PUD's financial reserves, and all accounts indicate that this will not result in a rate hike for Snohomish County PUD customers, while a ten-fold increase certainly would. This is a bitter pill that those in the Puget Sound region are just going to have to swallow, as the risks of losing in arbitration are simply too high.

Thems the breaks.