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Winning Grandma Millie’s Vote

In announcing the $2 billion lawsuit he filed against Enron last week, state Attorney General Bill Lockyer showed that it’s never too late to get tough on fraud.

Lockyer’s timing is peculiar. The Enron scandal broke three years ago. It’s been a year since the Federal Energy Regulatory Commission took away the company’s trading rights due to “inappropriate trading schemes.”

Why is the A.G. all of a sudden trying to “get Grandma Millie’s money back”?

One obvious reason is the recent release of audiotapes in which Enron traders demonstrate a craven zeal for bilking ratepayers. Another is the state’s ongoing battle with federal regulators over energy refunds. But legal observers point to other timely reasons, which call into question the necessity of a potentially lengthy court battle and raise the perception that the A.G. is using prosecutorial power as a means to his own political ends.

Lockyer based his 20-page lawsuit against Enron on the state’s Unfair Trade Practices Act, accusing the company of charging for services not provided, evading price caps and creating bogus “congestion” along the power grid as a means to selling sham “congestion-relief” schemes.

In suing Enron, Lockyer dramatized the issue of energy deregulation, just as a legislative debate is roiling in Sacramento. Consumer advocates called his timing, a week before two critical energy bills were scheduled for a committee vote in the state Senate, a “happy coincidence.” Lockyer declined to take a public stand on the pending legislation, however. “It looks more like political posturing aimed at a potential bid for higher office,” one legal expert noted.

Using colorful imagery derived from tapes of Enron traders joking about stealing money from poor grandmothers in California, Lockyer promised to fight in state court to avoid the fallen energy giant’s gargantuan bankruptcy in federal court. Bankruptcy experts are not so sure this is possible, however, or whether it is worth the trouble.

The A.G.’s lawsuit, if successful, could do little more than put Californians in a long line of creditors in the $74 billion Enron bankruptcy winding down in federal court in New York, experts say. (An Enron spokesperson puts the liquidated amount of the estate at about $12 billion.) Even if the lawsuit leads to refunds — a big if — the money will go to business, not residential customers, according to Lockyer.

Applying a state court judgment to a federal bankruptcy action can be a dreadful, costly exercise, according to bankruptcy lawyers. Besides the state’s legal costs, Enron has to spend money fighting the action, and that is a drain on the estate. Even with a judgment in hand, the state is no better off than any other creditor, says bankruptcy lawyer Marsha Galinsky. “Maybe [Lockyer] has a fancy way of getting a higher priority for the state’s claim, but generally you end up in that slop pot of unsecured creditors,” she says. “Then you could walk away with 10 or 20 cents on the dollar after they liquidate the estate.”

Lockyer said the state could seek up to $2 billion. One way to recover such an award is to seek an exception to bankruptcy discharge rules, according to attorney Michael Reynolds, of Irvine’s Snell & Wilmer. First, a bankruptcy judge has to allow state unfair-trade law to be applied in federal court. “Some creditors’ claims for policy reasons survive the bankruptcy, as long as the company survives,” Reynolds says. “After you recover 20 cents on the dollar through the bankruptcy, you might be permitted to go after the other 80 cents from a company that is cleansed of debt.”

But Reynolds and others were at a loss for what kind of parallel legal theory gets Lockyer into federal court in the event his state court lawsuit is successful and Enron survives bankruptcy. The company’s future seems uncertain at best. The Attorney General’s Office would not elaborate on the advice it received from a private law firm specializing in bankruptcy, however, and declined to name the firm.

With California still struggling over the fallout from the 2001 energy crisis, Lockyer also seized an opportunity last week to pressure the Federal Energy Regulatory Commission into refunding the state billions of dollars lost in the fiasco. Showing his tenacious side in appealing to public outrage, Lockyer said the commission sat on its hands while Enron traders ran amok. He is appealing an order for the state to pay $270 million to energy companies, including Enron, that bailed California out of the crisis. State officials contend that energy companies overcharged by almost $9 billion. Federal officials acknowledge just a third of that, and have collected less than $100 million.

 

By now, most Californians may have figured out that blaming the federal government for the 3-year-old energy scandal isn’t bound to get them very far. Yet the attorney general’s lawsuit still serves to remind the public and lawmakers of the pernicious effects of a deregulated energy industry, according to consumer advocates: “We saw what happened in the late 1990s when the state deregulated its power industry,” says Bob Finkelstein, executive director of the Utility Reform Network. “The value of the attorney general’s action may lie less in how much the state recovers than in calling attention to how much money we lost when the state was pillaged by out-of-state energy companies.”

“The lawsuit drives home the point that an unregulated energy industry will never provide reliable and affordable power,” adds Jamie Court, president of the Foundation for Taxpayer and Consumer Rights, in Santa Monica.

Meanwhile, two bills already passed in the state Assembly that would loosen market constraints on power companies were delayed by the Senate Energy, Utilities and Communications Committee on Tuesday. Lockyer has taken no position on the bills, but in filing the Enron suit, he lashed out at a deregulated energy system, which is at the core of both. In doing so, he appears to have covered his political bases, should California experience another energy crisis.

The Reliable Electric Service Act, sponsored by Democratic Speaker of the Assembly Fabian Nunez, allows large electricity purchasers to buy directly from unregulated wholesale generators. Nunez says the bill, AB2006, provides incentives for power suppliers to develop new technology and also stabilizes prices for small customers. However, it was partially drafted by Southern California Edison, according to sources in the Legislature, and applies directly to companies that use more than 500 kilowatts of power — not residential users.

A second bill, AB428, introduced by Assemblymen Keith Richman, a Republican from Granada Hills, and Joseph Canciamilla, a moderate Democrat from Martinez, also would allow businesses to buy directly from unregulated power generators. Supporters of the Richman-Canciamilla bill, which Governor Arnold Schwarzenegger is said to favor, argue that the Nunez bill allows for less transparency in the wholesale market. They say it would set the regulatory structure back to where it was before the Legislature suspended market choice for large customers, in 2001. “Edison wants a monopoly system they can live with for the next 100 years,” says a supporter of AB428.

Advocates for both bills emphasize findings of the California Energy Commission that the state could be facing real power shortages by 2006. More generators are needed, many believe, and the short-run dilemma is whether to promote incentives for new energy technology or a stable regulatory environment that protects customers from predators like Enron. Lockyer’s lawsuit makes a weak case for the latter, critics contend, more than it ensures recovery for California ratepayers or places any real pressure on the federal regulatory commission to reverse itself on the issue of refunds.

The question remains whether the lawsuit is too little, too late. “We wish Lockyer had placed the state first in line in the bankruptcy, and we wish he would directly weigh in on the perils of a deregulated energy market,” says consumer advocate Jamie Court. At least the lawsuit sends a message of deterrence to would-be Enrons, he adds, and possibly opens doors for discovery of documents that could lead to more prosecutions. Maybe so. But for the time being, Lockyer is sticking with a more symbolic posture. “There is value to hauling Enron before a California court and getting a judgment saying they ripped us off and owe us money,” says a spokesman for Lockyer.

What Lockyer is not spelling out is the cost and anticipated duration of an Enron lawsuit, and the likelihood that a judgment will not be worth any more than the paper it’s printed on.


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