In a six-page order issued Friday evening, the Federal Energy Regulatory Commission determined that Enron was engaging in illegal activity at the time it entered the contracts with the utilities - and that therefore, a hearing should be held to determine whether Enron should be allowed to collect profits it would have received had those contracts been fulfilled.

It was the first time FERC acknowledged that the contracts were signed under fraudulent pretenses. The hearing is expected in May, followed by FERC's final decision late this year.

"Our ratepayers shouldn't be forced to reward criminal activity," said Sen. Maria Cantwell, D-Wash., who has made the issue a top priority. "We will not rest until the wooden stake is punched through the heart of the Enron lawsuit against us."

The utilities and cities - including the Snohomish Public Utility District in Everett, about 30 miles north of Seattle; Nevada Power Company and Sierra Pacific Power Company in Nevada; and the cities of Palo Alto and Santa Clara, Calif. - terminated their contracts with Enron or watched as Enron terminated them when the company's web of fraudulent accounting was revealed in late 2001.

When Enron went bankrupt, it turned around and sued for the money it would have made had the contracts been fulfilled. Enron sought $300 million from the Nevada companies, and $122 million from the Snohomish County PUD, which in January 2001 signed a nine-year contract with Enron for power that was four times as expensive as usual.

To come up with $122 million, the PUD said, it would have to collect $400 per customer.

Instead, Snohomish began digging. It searched through thousands of pages of Enron documents and paid to transcribe hundreds of hours of taped conversations involving Enron traders - a job largely ignored by FERC. The material was explosive: The traders joked about stealing money from California grandmothers and about the possibility of going to jail for their actions.

Early this year, Snohomish's investigators determined that Enron began honing its schemes to manipulate the market in 1997 - well before rolling blackouts hit California.

Armed with the new evidence, the PUD went to FERC and sought a finding that it didn't have to pay the money. Friday's ruling brought the PUD a major step closer to that goal.

"This is a very significant order for us," Snohomish PUD lawyer Eric Christensen said. "We've now put in place all the essential legal groundwork to make sure Enron is not able to collect any further unjust profits from us."

FERC has already demanded that Enron give up $32.5 million in unjust profits, but Snohomish's investigators have estimated that the company gouged Western ratepayers for at least $1.1 billion.

Portland, Ore.-based trader Tim Belden pleaded guilty in October 2002 to wire fraud for participating in trading schemes to game the California market. Two other former Enron traders, Jeffrey Richter and John Forney, later pleaded guilty to similar charges.

Former Enron Chief Executive Jeffrey Skilling and former top Enron accountant Richard Causey have pleaded not guilty to more than 30 counts each of insider trading, fraud, conspiracy and others. They face trial alongside Enron founder and former chairman Kenneth Lay, who has pleaded not guilty to seven counts of conspiracy and fraud.

More than a year ago, former Chief Financial Officer Andrew Fastow pleaded guilty to two counts of conspiracy, admitting to running myriad schemes to manipulate Enron's finances while enriching himself on the side, and is expected to be a key witness in the case against Skilling, Lay and Causey. He has agreed to serve 10 years in prison.