SDG&E; Took Bath on Oil Deal : Utility to Pay $3 Million to End Costly Episode
San Diego Gas & Electric Co. ended one of its most embarrassing and costly sagas Tuesday when it agreed to pay $3 million to a Texas oil dealer it had sued for allegedly defrauding it out of $31.2 million in oil.
As part of the $3-million out-of-court settlement, SDG&E; ended its lawsuit against bankrupt United Petroleum Distributors (UPD) Inc. of Houston and its president, Edward J. Fourti.
In exchange for the payment, Fourti agreed to drop his countersuit against SDG&E;, in which he sought $75 million for breach of contract, false representation and mental anguish.
SDG&E; already has written off $30.6 million in probable losses from the UPD-Fourti deal--losses that were taken from earnings and absorbed by SDG&E; shareholders.
$4.4-Million Fine
In addition, in 1982 the utility was fined $4.4 million by the state Public Utilities Commission for buying oil in a UPD-related transaction, and it was forced to pay a group of its shareholders $5.8 million to settle a related lawsuit.
So the total loss to SDG&E; from the Fourti deal, including the $3 million agreed to Tuesday, approaches $44 million. But because that is tax-deductible, the net loss to the company is about $22 million.
Much of the $3-million payment to Fourti will be used to settle claims against him by the Internal Revenue Service, attorneys and other creditors, according to Len Viejo, SDG&E;’s director of accounting systems.
SDG&E; would have been successful in the lawsuit, Viejo maintained. But, because Fourti and UPD have been in bankruptcy since 1981, “we would have spent a lot of time and money in legal fees to get nothing.”
SDG&E; also faced “substantial (legal) exposure” from Fourti’s countersuit, Viejo conceded: “A Texas jury (hearing a case involving) a large San Diego firm against a Texas businessman might have found in favor of Fourti.”
SDG&E;’s lawyers both in San Diego and in Houston agreed that prospects were remote for collecting any future judgment against Fourti, SDG&E; officials said.
Settlement Approved
U.S. District Judge Gabrielle K. McDonald, who is overseeing the Fourti bankruptcy, approved the settlement.
The saga began in mid-1978, when SDG&E; had a surplus of fuel oil and diverted a 2.4-million-barrel fuel oil shipment, valued then at $39 million, to UPD for storage.
Fourti was supposed to return the oil in installments beginning in 1979, but he delivered only part of his quota, about $5.1 million worth, and repaid $3.3 million in cash.
Fourti sold the rest of the oil on the open market.
SDG&E; then discovered that the assets UPD and Fourti had pledged as collateral for the oil, including a coal mine, were inadequate and would not cover the value of the oil. As a result the utility decided to write off $30.6 million in losses in 1980 and 1981.
The utility filed two lawsuits against the oil dealer and his firm, while Fourti countered with a suit of his own. In addition, a group of SDG&E; shareholders sued the utility for “reckless management,” but that suit was settled when the utility agreed to pay 35,000 shareholders $5.8 million in August, 1982.
Oil Purchase
Adding insult to injury was SDG&E;’s nearly $4.4 million purchase in 1982 of 107,000 barrels of oil from a company that had originally bought the oil from Fourti.
Although the oil was not the original SDG&E; oil and although it was later used for the benefit of SDG&E; ratepayers, the PUC fined the utility $4.4 million, or the price it paid for the oil.
The oil deal caused SDG&E; much embarrassment, not only because of the loss, but also because it surfaced at a time when public sentiment against the utility for rapidly escalating energy rates was at an all-time high.
The oil swap also was investigated by the U.S. attorney’s office in San Diego, which concluded its investigation without filing any charges.
SDG&E;’s Viejo said Tuesday, “It’s a chapter we’re glad is over.”
