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May 04, 2005

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Palo Alto Online

Publication Date: Wednesday, May 04, 2005

City to pay Enron $21.5 million City to pay Enron $21.5 million (May 04, 2005)

Settlement ends Palo Alto's role in bankruptcy litigation

by Bill D'Agostino

The City of Palo Alto will pay the disgraced Enron corporation's debtors $21.5 million to settle a long-standing legal dispute.

City officials tried to portray the settlement, which ends the local government's involvement in the nation's largest-ever bankruptcy, as a wise decision given the financial risks in pursuing litigation further.

When it filed for bankruptcy protection in December 2001, Enron concurrently sued Palo Alto for $48 million after the city prematurely voided energy and gas contracts with the company.

The city's case was seemingly bolstered in March when the Federal Energy Regulatory Commission ruled Enron engaged in fraud and illegal practices at the time the contracts were signed. On tapes obtained by Snohomish County's utility department, Enron traders laughed about ripping off California grandmothers.

Palo Alto Senior Assistant City Attorney Grant Kolling noted the lawsuit could have cost the city more than $60 million, due to inflation and attorneys' fees. "We feel that the amount we're paying is actually a fair settlement for the city, given the potential risks," he said.

"I think this is a reasonable way to settle this in the better interests of the citizens of Palo Alto," agreed Councilman Bern Beecham, the City Council's point person on energy matters. He noted that bankruptcy court is primarily interested in the health of the bankrupt firm.

"Bankruptcy court may not have been the place where we would get the most respect for our arguments," Beecham said.

Robert Lawless, a law professor at the University of Nevada, Las Vegas, disagreed with Beecham's assessment, calling it "dead wrong."

"The bankruptcy judge is a judge like any other," Lawless said. "The judge has no interest in the bankrupt estate or the debtor's estate. That's not the bankruptcy's judge job. The bankruptcy court judge's job is to do justice in as good a manner as he or she possibly can."

An Enron spokesperson did not return a call for comment by the Weekly's deadline.

United States bankruptcy Judge Arthur Gonzalez approved the settlement, reached through private mediation, on April 21 in New York. Details were only made public on Monday, after the time to appeal had passed.

In retrospect, one could argue the city never should have signed contracts with the company, whose questionable accounting practices have become synonymous with corporate scandal. (The Enron saga is now the subject of a documentary playing across the country, including at the Guild in Menlo Park.)

But in May 2001, when the 25-megawatt energy contract was signed, the city faced insecurity related to the state's chaotic energy crisis, which infamously led to "rolling blackouts." The Enron contract was meant as insurance to ease potential impacts of Pacific Gas & Electric's bankruptcy. Industry experts expected PG&E would void Palo Alto's main 75-megwatt energy contract, according to Beecham.

When the city ended the energy and gas contracts with Enron in November 2001, local officials argued the corporation was also nearing bankruptcy and not a reliable partner. "I believe it would have been imprudent to rely on a firm that appeared near bankruptcy to deliver power if the energy market were to deteriorate again," Beecham said.

Enron filed for bankruptcy a few days after the contracts were signed.

If the city had not voided the contracts, it would have paid more than $40 million for the energy, which Enron could not have delivered, Beecham argued. "We have avoided paying that $40 million and cut it back."

Nancy Rapoport, dean and law professor at University of Houston Law Center, said the city got a good deal.

"The question is: Was Palo Alto entitled to breach the contracts? Reasonable minds can go either way," Rapoport said. "It still comes back to certainty. How much uncertainty do you want to live with?"

The $21.5 million to pay the settlement will come from utility reserves. On Wednesday night, the Utilities Advisory Commission will discuss the department's policy on such reserves.

The settlement is not proposed to affect the city's utility rates, which will also be discussed Wednesday night, according to Utilities Department Director John Ulrich.

Other California governments, including Santa Clara and Snohomish County, are still embroiled in similar proceedings with Enron.

"The city is pleased to be putting this away," Kolling said. "It's been a lot longer than I ever thought it would take."

Staff Writer Bill D'Agostino can be e-mailed at bdagostino@paweekly.com.


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