HomeMy WebLinkAboutStaff Report 245-05TO:
FROM:
DATE:
SUBJECT:
City of Palo Alto
City Manager's Report
3
HONORABLE CITY COUNCIL
CITY MANAGER DEPARTMENT: UTILITIES
JUNE 6, 2005 CMR:245:05
APPROVAL OF A BUDGET AMENDMENT ORDINANCE FOR
SETTLEMENT AGREEMENT BETWEEN CITY OF PALO ALTO
AND ENRON FOR A TOTAL AMOUNT OF $21.5 MILLION WITH
$18.06 MILLION OF THE TOTAL COMING FROM THE ELECTRIC
ENTERPRISE SUPPLY RATE STABILIZATION RESERVE AND
$3.44 MILLION COMING FROM THE GAS ENTERPRISE SUPPLY
RATE STABILIZATION RESERVE
RECOMMENDATION
Staff recommends that the City Council adopt the attached Budget Amendment Ordinance (BAO)
for the purpose ofthe settlement agreement between the City and Enron for a total amount of$21.5
million with $18.06 million ofthe total coming from the Electric Utility Supply Rate Stabilization
Reserve and $3.44 million coming from the Gas Utility Supply Rate Stabilization Reserve.
DISCUSSION
In 2001, the City entered into several contracts with Enron Power Marketing Inc and Enron North
America (Enron). The City cancelled these contracts in November 2001. Enron filed for bankruptcy
protection on December 2, 2001. In 2003, Enron filed two complaints against Palo Alto. In its
complaints, Enron contended that the City was required to make payments, including interest, in
excess of $50 million, in connection with Palo Alto's termination of power and gas contracts that
were negotiated in 2001.
On March 28th, 2005, the City entered into a settlement agreement with Enron and on April 21,
2005, Judge Arthur Gonzalez of the United States Bankruptcy Court for the Southern District of
New York approved the settlement. The settlement, reached through a Bankruptcy Court-ordered
mediation process, fully resolves the respective claims of the parties. The news release related to
this issue is attached (Attachment B).
CMR:245:05 Page 1 of2
RESOURCE IMPACT
The City has agreed to pay $21,500,000 to Enron in two installments. The first installment of
$15,000,000 was paid on May 4, 2005. The second installment of $6,500,000 is payable on or
before October 1, 2005. In accordance with generally accepted accounting principles, the entire
$21,500,000 will be recognized as an expense during the current fiscal year 2004-05.
I The Electric Fund Supply Rate Stabilization Reserve will cover 84 percent ofthe settlement amount,
and the Gas Fund Supply Rate Stabilization Reserve will cover 16 percent. This transaction will
reduce the Supply Rate Stabilization Reserve in the Electric Fund by $18,060,000 from $52,954,000
to $34,894,000. This transaction will also reduce the Supply Rate Stabilization Reserve in the Gas
Fund by $3,440,000 from $6,652,000 to $3,212,000.
POLICY IMPLICATIONS
These recommendations do not represent a change in existing City policies.
ENVIRONMENTAL REVIEW
The adoption of the resolution does not constitute a project under the California Environmental
Quality Act, therefore, no environmental assessment is required.
ATTACHMENTS
A: Budget Amendment Ordinance
B: News Release
PREPARED BY:
DEPARTMENT HEAD:
htfish--Balachandran ~~#'"
......--Assistant Director, Resource Management
lIl'
JO .lIT tor of UtilitIes .
CITY MANAGER APPROVAL: ~. do , . Q
EMIL HARRISON -
Assistant City Manager
CMR:245:05 Page 2 of2
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ORDINANCE NO.
ORDINANCE OF THE COUNCIL OF THE CITY OF PALO ALTO
AMENDING THE BUDGET FOR THE FISCAL YEAR 2004-05 TO
PROVIDE AN ADDITIONAL APPROPRIATION 0F $21,500,000 FOR
THE SETTLEMENT AGREEMENT WITH THE ENRON COMPANIES
The Council of the City of Palo Al to does ORDAIN as
follows:
SECTION 1. The Council of the City of Palo Alto finds and
determines as follows:
A. Pursuant to the provisions of Section 12 of Article III of
the Charter of the City of Palo Alto, the Council on June 28, 2004
did adopt a budget for fiscal year 2004-05i and
B. On March 28, 2005, the City and the Enron Companies entered
into a settlement agreement intended to be a compromise, release and
settlement of all claims related to the City's cancellation of its
contracts and other related documents with the Enron Companiesi and
C. Judge Arthur Gonzalez of the United States Bankruptcy Court
approved the settlement a~reement on April 21, 2005i and
D. The City has agreed to pay to Enron Companies the sum of
Twenty-One Million Five Hundred Thousand Dollars ($21,500,000) in
two installments. The first installment of $15',000,000 is due and
payable on or before May 6, 2005. The second installment of
$6,500,000 is due and payable on or before October 1, 2005i and
E. In accordance with generally accepted accounting principles,
the entire $21,500,000 will be recognized as an expense during the
fiscal year 2004-05i and
F. Additional appropriations from the Electric Fund and the Gas
Fund are necessary to fulfill the terms of the settlement agreement.
The Electric Fund Supply Rate Stabilization Reserve will cover 84
percent of the settlement amount. The Gas Fund Supply Rate
Stabilization Reserve will cover 16 percent of the settlement
amounti and
G. City Council authorization is needed to amend the fiscal
year 2004-05 budget to make additional appropriations of $18,060,000
and $3,440,000 as hereinafter set. forth.
SECTION 2. The sum of Eighteen Million Sixty Thousand Dollars
($18,060,000) is hereby appropriated to non-salary expense in the
Supply Resource Management Division in the Electric Fund. The sum
of Three Million Four Hundred Forty Thousand Dollars ($3,440,000) is
hereby appropriated to non-salary expense in the Supply Resource
Management Division in the Gas FUnd.
SECTION 3. This transaction will reduce the Supply Rate
Stabilization Reserve in the Electric Fund by $18,060,000 from
$52,954,000 to $34,894,000. This transacti'on will also reduce the
Supply Rate Stabilization Reserve in the Gas Fund by $3,440,000 from
$6,652,000 to $3,212,000. .
SECTION 4. As specified in Section 2.28.080(a) of the Palo Alto
Municipal Code, a two-thirds vote of the City Council is required to
adopt this ordinance.
SECTION 5. As provided in Section 2.04.330 of the Palo Alto
Municipal Code, this ordinance shall become effective upon adoption.
INTRODUCED AND PASSED:
AYES:
NOES:
ABSTENTIONS:
ABSENT:
ATTEST:
City Clerk
APPROVED AS TO FORM:
City Attorney
APPROVED:
Mayor
City Manager
Director
Services
of Administrative
CMR:245:05 Attachment B
NEWS RELEASE FOR IMMEDIATE RELEASE
Media contacts:
Bern Beecham, Council Member, (650) 324-1692 bern@beechal11.org
Grant Kolling, Senior Assistant City Attorney (650) 329-
21 71 grant.koIIing@cityofualoalto.org
CITY OF PALO ALTO SETTLES LITIGATION WITH ENRON
PALO ALTO, CA, May 2, 2005. On April 21, 2005, Judge
Arthur Gonzalez of the United States Bankruptcy Court for
the Southern District of New York approved a settlement by
Enron and Palo Alto. The settlement, reached through a
Bankruptcy Court-ordered mediation process, fully resolves
the respective claims of the parties.
Enron, currently a liquidating concern that is
recover~ng amounts owed to the bankruptcy estate for the
benefi t of its creditors, filed for bankruptcy protection
on December 2, 2001. In 2003, Enron filed two complaints
against Palo Alto. In its complaints, Enron contended that
the City was required to make payments, including interest,
in excess of $50 million, in connection with Palo Alto's
termination of power and gas contracts that were negotiated
in 2001.
The City contended based on defenses it had asserted
that Enron was not entitled to any payment.
Notwithstanding these defenses, in view of the risk that
the Bankruptcy Court would find the City must pay a higher
amount to Enron, the City has chosen to settle with Enron.
By securing this settlement, the City is now relieved of
the risk and cost of defending itself in the bankruptcy
court litigation as well as participating in proceedings
the Federal Energy Regulatory Commission initiated in 2003.
The settlement obligates the parties to take the
following actions:
• The City will pay Enron $21. 5 million; $15
million is payable when the bankruptcy court's
order approving the settlement becomes final and
non-appealable. $6.5 million is payable on or
before October 1, 2005. No interest will be
payable if the amounts are paid on time.
050502 gk 0072526
CMR:245:05 Attachment B ~
• Enron will obtain dismissal of the complaints in
the Bankruptcy Court.
• The City will withdraw from participation in
ongoing proceedings before FERC and the District
of Columbia Circuit Court of Appeals.
I The settled disputes stem from the energy crisis of
2000-01. Wi th blackouts occurring, energy prices
skyrocketing and PG&E in financial distress, the City
awarded contracts for gas, gas services and power to Enron
after soliciting competitive bids in the winter and spring
of 2001. News of Enron's financial difficulties and rumors
of Enron's questionable accounting practices surfaced after
the parties began performing under the contracts. In late
November 2001, when Enron's financial distress became
apparent and its ability to continue to deliver energy carne
into question, the City terminated the Enron contracts.
FERC has scheduled hearings on Enron' s role in the
alleged manipulation of the energy markets and parties will
be providing testimony and submitting evidence in that
regard. In March 2005, FERC determined that long-term
power contracts (such as Palo Alto's terminated power
contract with Enron) are within the scope of the FERC
proceedings "subj ect to any applicable bankruptcy
restrictions." In settling with Enron, the City will cease
its participation in these proceedings, which may take
years ,to fully resolve.
050502 gk 0072526
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