You asked for background information on the relationship between the Connecticut Resources Recovery Authority (CRRA) and Enron with regard to CRRA's Mid-Connecticut facility. You wanted to know (1) the options CRRA has in the wake of Enron's bankruptcy, (2) whether CRRA will seek assistance from the state, (3) whether there is any precedent for a quasi-public authority such as CRRA receiving assistance from the state when it runs into financial difficulties, and (4) the potential impact of the bankruptcy on municipalities that dispose of solid waste at the facility.

SUMMARY

The Mid-Connecticut facility is funded by CRRA bonds that are backed by the payments CRRA receives for the energy the facility produces and the tipping fees CRRA charges municipalities for waste disposal. In December 2000, CRRA, an Enron subsidiary, and Connecticut Light & Power (CL&P) entered into a series of contracts regarding the facility and the steam and electricity it produces. Among other things, the Enron subsidiary agreed to pay CRRA $ 2. 2 million per month for the steam the facility produces.

In December 2001, Enron and its subsidiaries sought bankruptcy protection. Although Enron's Mid-Connecticut facility contracts remain in force, the company made its last monthly payment to CRRA in November 2001.

CRRA's options depend on what the bankruptcy court decides and what happens to Enron. If the court disallows the contracts, CRRA could (1) refinance the bonds to reduce their costs and (2) re-market the electricity the facility produces at a higher rate to increase its revenues. CRRA may also be able to reduce its operating costs, particularly in connection with services the Metropolitan District provides CRRA. All of these options would decrease pressure on tipping fees.

If CRRA is unable to increase its revenues or decrease its costs to offset the revenue shortfall caused by Enron's bankruptcy, it may draw down on the Special Capital Reserve Fund (SCRF) established for the bonds that financed the facility. If the SCRF falls below a minimum reserve level specified in the bond offering, the state must appropriate funds to replenish it to the mandatory reserve level.

CRRA has not sought state assistance, via this or other mechanisms, at this time. It does not anticipate making its decisions on how to deal with the shortfall until the bankruptcy court acts.

Several other quasi-public authorities have issued bonds backed by SCRFs. To date, none of these authorities has sought state assistance, but in 1998 the state took action to prevent a draw down of a SCRF for the Connecticut Health and Educational Facilities Authority.

BACKGROUND

The Mid-Connecticut facility disposes of solid waste from approximately 70 municipalities across the state. Recyclable materials are removed from the waste, and the remainder is burned to produce steam and electricity. The facility was funded by CRRA revenue bonds, which are backed by payments CRRA receives for the electricity and steam and the tipping fee it charges participating municipalities.

In late December 2000, CRRA, an Enron subsidiary (Enron Power Marketing, Inc. ), and CL & P entered into a series of contracts regarding the Mid-Connecticut facility and the steam and electricity it produces. The subsidiary agreed to pay CRRA $ 2. 2 million per month until May 2012 for steam produced at the facility. It also agreed to pay CRRA an additional $ 175,000 per month with the goal of jointly developing pollution-free waste disposal technologies. (Please refer to OLR memo 2002-R-0129, which provides additional information on the transactions between CRRA and the subsidiary and CRRA's options. ) Enron Corporation, the parent company, guaranteed the subsidiary's liabilities up to $ 345 million.

In December 2001, Enron and its subsidiaries filed for bankruptcy protection. Although the contracts with CRRA and CL&P remain in force, Enron's subsidiary made its last payment to CRRA in November 2001. As a result, CRRA is not receiving the monthly payments specified in the contracts. If the revenue shortfall created by Enron's actions is not addressed, CRRA may have to raise its tipping fees or face substantial financial consequences.

OPTIONS

The CRRA's options depend in large part on the decisions of the federal bankruptcy court and Enron's subsequent fate. If the court disallows the CRRA-Enron contracts, CRRA could refinance the bonds that financed the Mid-Connecticut facility over a longer period and reduce its annual debt service payments. If the court disallows other contracts involved in the transactions, CRRA could market the electricity the facility produces at a higher rate than it currently receives. Either action would reduce pressure on tipping fees. CRRA could also seek damages in bankruptcy court, although Enron faces a very large number of creditors.

If the court does not disallow the contracts, CRRA could seek a court order compelling Enron to perform. Enron has told CRRA that it intends to keep its subsidiary that was the party to the transactions in business. If Enron and its subsidiary emerge from bankruptcy, CRRA could seek recovery of its damages from them. Independent of the court's actions, CRRA may be able to reduce its operating costs, particularly with regard to services it purchases from the Metropolitan District Commission.

Much of CRRA's bonding, including that for the Mid-Connecticut facility, is backed by SCRFs. If the SCRF for a facility goes below the minimum reserve established for that facility, the state must appropriate funds to replenish the SCRF to the minimum reserve level.

POTENTIAL IMPACT ON MUNICIPALITIES

As noted above, CRRA's bonds are backed by the energy payments it receives and the tipping fees it charges municipalities that use its facilities. If CRRA was completely unable to reduce its costs, for example by refinancing its bonds, its tipping fee (currently $ 51 per ton) could increase by as much as 60% according to some analyses. However, CRRA stated in a December 20, 2001 press release that the increase will be well below this level. In the release, CRRA reported that it had retained counsel to protect its interests in bankruptcy court and is exploring several options to protect participating municipalities from the impact of the bankruptcy. The impact of the bankruptcy on tipping fees will not be known until the court issues its rulings and CRRA acts on them.

Prior to Enron's bankruptcy, CRRA had announced a $ 2 or more per ton increase in its tipping fees to reflect increased insurance and other operating costs. This fee increase will go forward independent of the resolution of the shortfall caused by Enron's actions.

OTHER QUASI-PUBLIC ENTITIES

Connecticut has created several quasi-public entities that perform public functions without being subject to certain rules that apply to state agencies. Several of these entities, like CRRA, are authorized to issue revenue bonds backed by SCRFs. In addition to CRRA, the following authorities have issued such bonds for which the state has limited contingent liability: Connecticut Development Authority, Connecticut Health and Educational Facilities Authority (CHEFA), Connecticut Higher Education Supplemental Loan Authority, and Connecticut Housing Finance Authority.

To date, none of these authorities has sought assistance through this mechanism from the state to cope with financial difficulties. However, the legislature took a number of steps in 1998 to avoid a draw down on CHEFA's SCRF. PA 98-167 allows the state treasurer to advance CHEFA funds for principal and interest payments on SCRF-backed bonds when an insolvent nursing home has been sold. For this to happen, CHEFA's board of directors must determine that there would be a drawn down of the SCRF if the payment is not made. It allows CHEFA to refund existing SCRF-based bonds with bonds that have terms that are more favorable to the state. It also bars CHEFA from issuing additional SCRF-backed bonds for nursing home that has already received such bonding.

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