Counter claims of bad faith and misconduct

A return salvo has been filed in the legal battle between America's two wind giants -- and this time Enron Wind Corp is accusing ESI Energy Inc of fraudulent misconduct, hypocrisy and bad faith throughout a two-year co-operative relationship between the companies to develop wind plants worldwide.

In court documents, Enron Wind alleges that ESI never intended to fully co-operate when it entered the agreement but instead just wanted to lock itself into investing equity at a favourable rate of return on certain "cherry-picked" projects in which it had not "paid to play." The implication is that ESI has not shouldered the cost or risk to be entitled to benefit when projects bear fruit. In the case of the projects that did not pan out, ESI unfairly wants its initial investment and its costs back, alleges Enron Wind. ESI is the international development subsidiary of the huge FPL group of energy companies in the US.

"ESI seeks to recast history as if it made a loan [to Enron Wind] to develop projects, and it now is entitled to repayment of the loan," the document alleges. In fact Enron Wind says that ESI owes it more than $5.5 million -- a sum that includes development costs for 1996-97 that have not been reimbursed.

The allegations are in a memorandum filed with the US District Court in San Diego in which Enron Wind asks the court to force ESI into arbitration and also to halt or dismiss ESI's litigation, which seeks $15 million in compensation and damages from Enron Wind (Windpower Monthly, October 1998). The memorandum says that, according to the terms of a 1995 agreement, the disputes must be resolved informally in mediation. If the disputes go to a court appointed arbitrator, Enron will ask the arbitrator for damages as well as punitive damages and for a declaration that ESI cannot participate in projects with Enron Wind -- but that Enron Wind should be entitled to participate in development of the former Kenetech's assets as per their agreement.

The court documents also contain record of disappointment expressed by Ken Karas of Enron Wind to Michael Yackira of FPL that the lawsuit was not voluntarily dismissed, although the parties have apparently agreed to some mediation. Karas mentions disputes in which Enron Wind says it is owed by ESI from work connected with wind farm projects knows as Owenreagh, in Ireland, and Vansycle, in Oregon.

Zond Development Corporation, part of Enron Wind, on September 16 also filed a complaint against an ESI subsidiary, ESI Vansycle Partners, in New York State Court alleging breach of contract and fraud over the proposed Vansycle project, now under construction in eastern Oregon. Zond alleges ESI owes it $695,250, or half of the purchase price agreed upon. Zond is seeking the "unpaid balance," punitive damages and asks the court to put the asset in the hands of a receiver until the dispute is settled.

In the documents, Enron Wind elaborates its point of view on various matters raised by ESI in its lawsuit. Enron Wind says that, in contrast to what ESI alleges, it did not promise certain rates of return on projects. Enron Wind points out that ESI did its own extensive due diligence work on project opportunities and thus should have known the odds.

Bullying tactics

Enron Wind alleges that the terms of the marriage were never fair -- that ESI used its larger size to bully the smaller Enron Wind into a deal disproportionately favouring ESI. ESI was taking advantage of the smaller Enron Wind, then known as Zond Corp, which needed operating capital. Enron Wind says it identified 100-plus potential projects, while ESI only brought one to the table, in the Philippines, and both parties soon judged that as "worthless." The document states: "ESI has failed to deliver on its promise to bring projects to the table and apparently never intended to do so." Enron Wind also alleges that ESI refused to approve budgets so that it could refuse to pay its share of development costs.

In the case of the just completed Lake Benton I project in Minnesota, the largest in the world, Enron Wind charges that while it incurred $3.8 million costs, ESI contributed just $534,000. Instead of contributing half of the equity, as should have been the case under the co-operative agreement, ESI demanded a preferred rate of return on its equity investment, the right to manage the project and "unprecedented turbine warranties." Enron Wind says that it obtained a construction loan and substantially completed the project, but ESI tried to interfere and Enron Wind had to indemnify the construction lender, Mees Pierson, against any claims that ESI might raise.

As recently as late this summer, Enron Wind says it needed permanent financing for the project and offered ESI one last chance to commit. "Rather than respond with a call or a letter, ESI filed a frivolous lawsuit, in which it still doesn't commit to being in or out of Lake Benton I," says the document. Enron Wind says that now ESI should only be allowed to recover its development costs on a "subordinated basis," or after other creditors.

Enron Wind says that it should be permitted to participate in ESI's repowering of Kenetech assets because the project was identified during the co-operative relationship. In the case though of the Mid-American project in Iowa, Enron Winds says that since its bid was selected in January 1997, after the agreement was terminated, ESI does not have the right to participate in it. If, however, ESI retains any right to participate, it should immediately pay its owed development expenses and costs, including $5.5 million incurred through 1997 and 60% of Enron Wind's 1998 development expenses, ESI's share of costs according to the agreement.