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Published Tuesday, March 13, 2001, in the San Jose Mercury News

Universities sue to keep energy deal

SCHOOLS DUMPED : ENRON BLAMES CRISIS FOR DECISION TO RETURN PUBLIC COLLEGES TO LOCAL UTILITIES AS POWER PROVIDERS

BY JOHN WOOLFOLK AND BECKY BARTINDALE Mercury News

California's public universities on Monday said energy giant Enron Corp.'s move to dump them back on local utility power could cost them nearly $300 million, frustrate conservation and black out classes and hospitals.

The University of California and California State University systems jointly have sued Enron's energy service unit, alleging the $45 billion Texas corporation is reneging on its four-year 1998 contract to supply them discounted power.

The universities allege that Enron, after profiting in the first years of the contract, now wants out so it can ``gain a huge windfall'' selling for higher prices on the open market power it has bought for the universities.

``Enron is seeking to capitalize on the energy crisis to reap enormous profits while forcing the campuses to receive power from the cash-strapped utilities,'' the universities alleged in court papers filed late Friday. The schools have asked a federal judge to block the move and are awaiting a hearing date.

Enron denied the charges, saying it continues to honor the contract price and that it has no power to resell on the market.

``It's patently false,'' said Enron spokeswoman Peggy Mahoney.

The dispute sours a relationship both the company and universities trumpeted when the state deregulated electric service in 1998.

Landmark contract

The deal with CSU, the nation's largest public university system, and UC was the biggest non-utility electricity contract in the country. It involves all of the campuses except UCLA and UC-Riverside, which are served by municipal utilities. The deal, estimated to be worth up to $500 million, was expected to save the universities nearly $16 million.

``We are honored to be the energy provider for two of the most respected educational institutions in the world,'' Kenneth Lay, Enron's chairman and chief executive officer, said at the time.

Under the contract, Enron was to provide the universities electricity at a fixed cost 5 percent below the frozen utility rate established under the state's deregulation law. Enron would help the universities manage their power at maximum efficiency through state-of-the-art meters and consulting services.

Things worked well until California's electricity market spun out of control last year. In February, Enron notified its electric customers that it would no longer directly supply their power because their distribution deals with utilities had collapsed.

Instead, the customers' local utilities would supply their power. But Enron would pay any difference between the contract price and what the utilities charged for the electricity. Enron would continue its metering, billing and related services under its existing contract.

``Yes, we are losing money on these contracts,'' Mahoney said.

Enron's other major customers, including San Jose's Cisco Systems Inc., haven't raised an alarm over the switchover.

Risk of added costs

But the universities say the change could expose them to considerable added costs for two reasons:

Getting power from the utilities could lock the universities out of low-cost power deals from other providers for years. The major utilities, Pacific Gas & Electric Co. and Southern California Edison, are nearly bankrupt, and the state is buying power for their customers under emergency legislation. That law bars customers receiving state power from switching to another provider until the state contracts expire. The universities had hoped to renew their Enron contracts next year or seek another non-utility supplier.

Utilities could replace the high-tech Enron meters with their own less sophisticated models, reducing the schools' energy efficiency. That could jeopardize the air pollution agreements governing the universities' use of backup generators and potentially leave classes and medical facilities in the dark during blackouts. It could also raise energy bills. As a result, the universities say, their added costs could reach $297 million. That's 37 times the $8 million Gov. Gray Davis has proposed spending to improve undergraduate education at the University of California next year. The UC budget this year is about $15 billion, and CSU's is about $4.9 billion.

``Our budget isn't so big that that isn't a huge hit,'' said Eric Behrens, an attorney for UC.

Enron blames state crisis

The universities say utilities already have tried to replace at least two Enron electric meters, though one has since been returned. Enron officials insist the schools will be able to keep the company's meters.

Enron said the collapse of the state's energy market forced the company to change the schools' power source. It blamed the utilities and state lawmakers.

Enron is suing to recover payments the utilities owe to companies that supply power to its former customers. And the company said state lawmakers should allow the universities to continue seeking alternative power suppliers.

Enron said it hopes to keep the universities as customers.

``We enjoyed a good relationship with them up `til now,'' Mahoney said. ``We hope to work it out.''

Contact John Woolfolk at jwoolfolk@sjmercury.com or (408) 278-3410.

http://www0.mercurycenter.com/premium/local/docs/enron13mo.htm

-- Martin Thompson (mthom1927@aol.com), March 13, 2001