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Sierra Pacific says it was set up

John Seelmeyer

Did Merrill Lynch set up Sierra Pacific Resources to fail when the utility last year sought to recover its costs from the sharp spike in energy prices during 2000 and 2001? And did Allegheny Energy Inc., a trading firm, secretly slip Sierra Pacific communications to a consultant for the state attorney general’s Bureau of Consumer Protection during hearings on the utility’s request? Those allegations are the cornerstone of an $850 million lawsuit filed by Renobased Sierra Pacific Resources against Merrill Lynch and Allegheny at the start of this month.

Both Merrill Lynch and Allegheny strongly deny the allegations in the action filed in U.S.

District Court in Nevada.

An Allegheny spokeswoman said the company believes the lawsuit is without merit.

A Merrill Lynch spokesman said his company believes Sierra Pacific is trying to hold Merrill Lynch responsible for the Public Utilities Commission’s refusal to grant $180 million in rate adjustments last year.

There is “absolutely no basis” for that allegation, the spokesman said.

The PUC’s refusal plunged the utility into a financial crisis and a close brush with bankruptcy.

The company’s stock, which traded at more than $15 a share, these days sells for less than $4.

If the utility company wins the lawsuit, the damages would flow to investors rather than ratepayers.

Here’s the case that Sierra Pacific lays out in its legal filing: In 1999, Merrill Lynch came to Sierra Pacific and offered to advise it through the turbulence of electric deregulation.

Among other things, the investment house said it would be responsible for providing a portion of the electricity needed by Nevada Power Co., the Sierra Pacific Resources unit that serves Las Vegas.

Sierra Pacific decided against the deal.

But even while those discussions were under way, the utility claims, Merrill Lynch was secretly involved in sham trades with Enron and was planning to sell a portion of its energy-trading business to Allegheny.

When the PUC last year rejected Sierra Pacific’s request to recover $180 million spent on power, commissioners said the utility could have protected its ratepayers by signing the deal with Merrill Lynch in 1999.

The utility’s lawyers say Sierra Pacific never would have started talks with Merrill Lynch if it knew the brokerage house was involved in sham trades.

If it hadn’t conducted those talks with Merrill Lynch, then the PUC couldn’t have used the failed negotiations as a reason to reject the $180 million rate recovery.

The utility claims that Merrill Lynch and Allegheny apparently wanted to weaken Sierra Pacific’s position during the PUC hearings and fed confidential material about the negotiations to the attorney general’s office.

“Allegheny voluntarily provided these communications to a consultant for the Nevada Attorney General’s Bureau of Consumer Protection, even though no proper or legal subpoena had been served on Allegheny for the production of such materials,” the utility’s lawsuit claims.

Because Allegheny gave only a portion of the communications to the AG’s office, the utility says, the PUC didn’t get a complete picture of the negotiations.

The suit also claims Merrill Lynch failed to adequately supervise energy trader Daniel Gordon, who was fired by Allegheny in late 2001 after an internal investigation found he had violated policies concerning

conflict-of-interest.