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City to pay Enron $21.5 million

Settlement ends Palo Alto's role in bankruptcy litigation

The City of Palo Alto will pay the disgraced Enron corporation $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.

Enron originally sued the city for $48 million in December 2001 after Palo Alto prematurely voided energy and gas contracts with the company a month earlier.

The city's case was seemingly bolstered in March when the Federal Energy Regulatory Commission ruled that 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 over $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.

A final ruling from FERC on the various Enron contracts could have been years away, Kolling noted.

"I think this is a reasonable way to settle this in the better interests of the citizens of Palo Alto," said 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.

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 contracts were signed, the city faced uncertainties related to the state's chaotic energy crisis. The contracts were meant as insurance to ease any 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 25-megawatt contracts with Enron in November 2001, local officials argued the corporation was also nearing bankruptcy and not a reliable energy partner. "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 month after the contracts were signed.

If the city had not voided the contract, it would have paid $40 million for the energy, which Enron might have not been able to deliver, Beecham said. "We have avoided paying that $40 million and cut it back."

The funds for the new settlement will come from reserves the city has set aside for that purpose. On Wednesday night, the city's Utilities Advisory Commission will discuss the department's reserve policy.

Other California governments, including Santa Clara, 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."

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