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Lawsuit Against PEC Settles
Wednesday, March 12, 2008 • Posted March 11, 2008

On Monday afternoon in his Austin courtroom, District Court Judge John Dietz dictated into the record the essential terms of a settlement agreement in the class action law suit filed against the Pedernales Electric Cooperative, its board of directors and top management.

Bill Ikard of Ikard Wynne LLP is co-counsel for the plaintiffs in the law suit. Ikard said Tuesday that he is satisfied with the terms of the settlement. “It’s extraordinary that in July we couldn’t get the time of day, much less a document from the PEC, and now we have a settlement that benefits PEC members and paves the way for responsible corporate governance in the future.”

The settlement requires the PEC to hire Navigant Consulting Inc. of Chicago to perform an independent, comprehensive review of the business, financial and management practices at the PEC for the past 10 years. The review will look at corporate governance, compensation, expenses and investments of the cooperative.

If Navigant determines it needs to look back further than 10 years, it may do so. Navigant’s report will be posted on the PEC website for public review.

As part of the settlement, current co-op members will receive $23 million in rebates of capital credits beginning in 2008 for five years. This rebate of capital credits will be in addition to the $7 million capital credit program the PEC began late last year for members prior to 1976.

The $23 million in capital credits will be allocated based on usage, so larger users will receive a larger rebate. State Senator Troy Fraser said of the refund of capital credits, “I think it's a sad day in the Texas Hill Country when it takes a lawsuit, a couple of state legislators, and a judge for people to get back what's rightfully theirs.”

The PEC carries directors and officers insurance with AIG. The PEC will pay $4 million dollars in attorneys’ fees, costs and expenses to three law firms: Ikard Wynne LLP and Baker & McKenzie the attorneys for the named plaintiffs in the current suit, and Lawrence & Soifer the law firm who filed the original class action suit that was dismissed and replaced by the current suit.

As of press time, the PEC could not comment on whether the AIG insurance will also pay for the PEC’s attorneys’ fees and costs to Clark, Thomas & Winters, and to Stephen E. McConnico of Scott, Douglas & McConnico who entered the suit in February as counsel for the19 individual defendants named in the case.

A “stipend” for the named plaintiffs will be determined at a later date and will also come out of the $4 million set aside for attorneys’ fees and costs.

Two matters yet to be decided in the suit. A “fairness hearing” is tentatively set for April 23 before Judge Dietz to determine if the class should be certified. If the class is certified, then the settlement will be binding on all PEC members, and none could sue the PEC, its board or management on the same issues brought out in the current class action.

PEC members cannot “opt out of the class” as in other types of class action suits since this matter is filed under Rule 42(b)(2) relating to mandatory class actions. At the April hearing, Judge Dietz will have the option to either approve the class and bind all PEC members, or not approve the class and the settlement will not be entered.

The second issue yet to be resolved is the confidentiality of some documents obtained by the plaintiffs from the PEC during the course of the law suit. The PEC sought and the judge granted a protective order early in the suit to keep some PEC records confidential. Under the protective order, any documents deemed confidential will be destroyed or returned to the PEC within 60 days of the settlement of the suit. Judge Dietz has indicated in prior interviews that he will not protect discovery materials and will let everyone evaluate the materials for themselves.

Senator Fraser has been an advocate for transparency and open governance at the PEC and is concerned about what has not been covered by the terms of the settlement. Fraser said the settlement does not cover the salaries of current and past PEC board members and general manager, nor the “perks” they received at co-op expense. The settlement also does not address dismissing the board members who have who have guided the PEC.

Fraser said, “This misguided board continued to block fair elections, paid themselves excessive salaries and benefits, and tried to hide these facts from the public. Unfortunately, the board's secrecy continues to this day, and they stubbornly refuse to lower their excessive salaries and benefits. The settlement did not address this issue, nor has the board taken sufficient action so far. I want to make sure that the court does not seal the records in this case. The secrecy has to end and the practice of board members lining their own pocketbooks has to be corrected.”

Fraser is chair of the Senate Business & Commerce Committee, which will begin public hearings on the unregulated electric cooperative business in Texas on March 27 in the Betty King Room on the second floor of the State Capitol.

Ikard said, “The departure of the former management and the addition of fine new people like Juan Garza and Paul Hilgers at PEC” aided the settlement process. According to the settlement, it will be up to PEC management and board to implement any changes in business practices suggested by the Navigant review.

The PEC will mail notices to members about the terms of the law suit settlement in upcoming bills, and prior to the fairness hearing in late April.

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