Editorial: Hindsight is easy in city's Enron deal Editorial: Hindsight is easy in city's Enron deal (May 04, 2005)

Settlement of lawsuit for $21.5 million may be best way out of a bad situation, but Palo Alto owes public a full explanation of its decision

The only really good news out of the just-announced $21.5 million settlement by Palo Alto of the $48 million lawsuit against it by Enron Corporation is that the money is there to pay for it, in Utilities Department reserves.

Thus the settlement won't impact the city budget-cutting processes now underway, aimed at slashing $5.2 million from next year's city operating budget in the next few weeks.

Nor is the settlement related to the more than 16 percent hikes in the city-owned utilities rates, , announced this week. Those are related to the cost of energy to the city -- especially the added costs since a bargain-rate, 40-year federal energy contract ended in December.

The Enron settlement has been expected since early April, when the Weekly reported that an apparent settlement was pending approval by U.S. Bankruptcy Court Judge Arthur Gonzalez, which occurred April 21. By court order, details were kept secret until Monday, the deadline for filing appeals.

The settlement seems shockingly large for a city that was illegally victimized by Houston-based Enron Corporation by its manipulation of energy markets in 2000 and 2001. But it does remove the city from a potentially far worse situation -- the city could face nearly three times the settlement amount if the bankruptcy court, based in New York state, rejected its claims.

Anyone prone to criticize the city too harshly should revisit the situation of five years ago and make sure they have a clear understanding of how bad things then looked. In the wake of a catastrophic deregulation of California's energy market, Enron and other energy providers -- as we suspected then but now know for certain -- engaged in one of the greatest scams of history to drive up energy costs to astronomical levels.

Both Pacific Gas & Electric and Southern California Edison Co. were talking of bankruptcy, and California was struggling with ways to provide bail-out relief to try to stabilize the markets. PG&E actually filed for bankruptcy, and then claimed the bankruptcy voided a decades-old contract with the federal Western Area Power Administration -- in which PG&E had to re-sell power to publicly or municipally owned utility operations such as Palo Alto's.

PG&E ultimately failed to void the contracts. Had it succeeded, Palo Alto and its electrical customers would have been at the mercy of sky-high market rates. To fill part of the WAPA gap, the city contracted with Enron for 25 megawatts over 3.5 years.

Everything fell apart when Enron collapsed in chaos, taking refuge in bankruptcy. Energy costs plunged, leaving Palo Alto holding a huge bag of inflated and redundant contracts.

In December 2001, Palo Alto canceled four Enron contracts worth about $96 million, the largest of which was $76 million for 25 megawatts of electricity. The others were for natural gas. City officials said they didn't believe Enron could meet the delivery terms, and the city sold off some of the contracts.

Enron sued the city for $48 million it claimed it was still owed under the contracts. The bankruptcy judge ordered negotiations.

Palo Alto's position was bolstered significantly in March when the Federal Energy Regulatory Commission (FERC) ruled that Enron was engaged in illegal activity at the time it signed the contracts. But rulings on individual contracts could take more than a year, according to city officials, and the FERC ruling deferred to bankruptcy-court actions.

Palo Alto is not alone. Other municipal utilities face even greater exposure, such as the $147 million owed by Santa Clara's Silicon Valley Power and the $122 million owed by Snohomish County, Wash., under the disputed contracts.

While it is too late to do anything about this $21 million settlement, the problem with secret negotiations announced as fait accompli is that the public has no way of knowing the specific reasons for the settlement -- risks, alternatives, the relative merit of the cases.

We believe that when public monies are involved there should be a ratification process, or at least a time for sharing information openly with the public and hearing feedback, before the governing body takes final action.

In this case, we feel the city owes utility ratepayers a full, explicit explanation of its reasoning behind the settlement, even if it is after-the-fact.

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