Enron seeks payment for power never delivered

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Enron Seeks Millions for Power Never Delivered to Sierra Pacific

By KURT EICHENWALD

Published: October 6, 2003

he Enron Corporation collapsed into bankruptcy proceedings after revealing that it had reported earnings that never really existed. Now, a major Nevada utility stands on the brink of a bankruptcy filing because Enron is demanding hundreds of millions of dollars of payments for electricity that it never really delivered.

And so far, the courts say Enron is right.

The dispute between two electric utility units of Sierra Pacific Resources has been bubbling along for several months, as Sierra and Enron battled in bankruptcy court about whether the amount of money owed by Sierra was nothing — or what is now more than $330 million. After having lost there, Sierra is expected today to file an emergency request with the Federal Energy Regulatory Commission, asking it to take charge of the controversy and invalidate the payment requirement.

At issue are a series of long-term energy contracts entered into in 2000 and 2001 by the Sierra units, through a broker, with Enron Power Marketing. Under the contracts, Enron committed to delivering power to the Sierra utilities, known as the Nevada Power Company and the Sierra Pacific Power Company, in future months and years.

By the time Enron collapsed into bankruptcy proceedings in December 2001, Sierra was struggling with its own financial problems. The contracts were entered into during the electricity crisis in the West that led to blackouts in California and huge increases in the price of power. Under the rules governing western utilities, Sierra was restricted from passing on the costs of energy to ratepayers, and its financial position was weakened. Soon, credit agencies, concerned about the situation, downgraded Sierra's debt.

That action set in motion a series of outcomes, which now result in Sierra being responsible for hundreds of millions of dollars worth of power that Enron never delivered.

In response to the credit downgrade, in April 2002, Enron demanded that Sierra post more than $300 million in collateral to protect its position in the contract — a demand that Sierra refused. In response, Enron terminated the contracts with Sierra, relying on terms contained under what is known as the Western Systems Power Pool Agreement — a standard tariff filed with the regulatory commission that was incorporated as part of the contracts between Sierra and Enron. That tariff contains terms protecting both sides of the transaction, to ensure that if one party's financial condition changes, the other party can protect itself.

Under the terms of the termination clause of the tariff, Enron demanded the full value of the contract as of that date, which is allowed to ensure that one side of the contract does not walk away from its obligations for little reason.

Why didn't Sierra simply terminate the contract? Because, under the rules of bankruptcy, it did not have the authority to do so. Enron would have had to release Sierra from the contract, or a bankruptcy court judge would have had to declare it invalid. Instead, Enron invoked the termination clause of the agreement, a move upheld on Aug. 28 by the Federal Bankruptcy Court in New York that is hearing the Enron case.

"The filed rate must be collected despite its sometimes harsh consequences because it incorporates the policy which Congress has adopted in regulating interstate commerce," Federal Bankruptcy Judge Arthur Gonzalez wrote in his decision.

In the end, Sierra will have to pay for power that it never really received.

"This whole experience is Kafkaesque. It really is," said Stephen Ryan, a lawyer representing Sierra. "Enron is gaming the system."

In truth, though, the rules afford Enron few options. After all, the charge to its current management, under the bankruptcy laws, is to maximize total payments to its creditors. And few creditors would willingly allow a bankrupt estate to walk away from an asset — in this case, a contract — worth what is now $336 million.

Indeed, Enron maintains that Sierra is in its difficult financial position because of its own maneuverings.

"If they had posted the collateral, we simply would have performed under the contract," said Brandon Wax, a vice president of Enron Power Marketing. "We knew if we terminated, it was going to turn into a legal fight, and a much longer, more painful row to hoe."

Mr. Wax also disputed Sierra's claims that Enron did not have the ability to deliver power anymore. "We were delivering power to a number of others at the time," he said. "It would have been cheaper and easier for the estate to serve the contract as an ongoing business."

Under the terms of the termination clause, Sierra and Enron could have reached alternative agreements. For example, Sierra committed to many of its suppliers to pay 110 percent of the market price for the power delivered in the future — but, since the market price had dropped from the time of the contract, that essentially would result in lower payments than were originally required.

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At this point, the issue in bankruptcy court is whether the judgment for immediate full payment will be stayed. If so, the obligation would remain on Sierra's books as it pursues the case through the legal system. If not, according to filings with the Securities and Exchange Commission, Sierra would almost certainly have to file for bankruptcy protection.

The dispute has already attracted the attention of members of Congress. On Sept. 9, Senator Harry Reid, Democrat of Nevada, and Senator John Ensign, Republican of Nevada, submitted a statement on the dispute to the Senate Committee on Energy and Natural Resources.

In it, the senators criticized the federal regulator's decision in June not to modify contested contracts with wholesale electricity suppliers that were struck during the electricity crisis — a period F.E.R.C. has found the suppliers were engaged in market manipulation.

"Regardless of what standard is used, the only just result, the only result that doesn't reward criminal behavior, the only result that protects rather than punishes the victim is a result that frees Nevada ratepayers from the unjust and unreasonable consequences of its contracts with Enron," the senators wrote in their statement.

In its application to the commission, Sierra is asking the agency to invoke its exclusive jurisdiction over the termination of contracts by bankrupt power suppliers. Then, it asks the commission to rule that Enron had not only violated the terms of the contract, but that the requirements of early termination payments were against the public interest. Besides the consequences to Nevada, the complaint says that since Enron was found by F.E.R.C. to have manipulated the Western power market during the electricity crisis, enforcing the contract would ultimately be paying the company for breaking the rules.

"Much of the $336 million windfall early termination payment at issue in this complaint involves the attempted recovery by Enron of the fruits of its unlawful schemes," the complaint says. "This alone is contrary to the public interest."