Nov. 26--Customers of rural electric cooperatives in Indiana will not face immediate rate increases, as some had feared, after a federal judge agreed Tuesday to grant their key power provider a preliminary reprieve in a tangled financial deal with an insurance company.

But the judge had harsh words for nearly everyone involved in the deal, which he called "a sham" and "a case study of some of the worst aspects of modern finance."

The preliminary injunction gives Hoosier Energy Rural Electric Cooperative of Bloomington more time to argue its case and avoid paying $120 million to John Hancock Insurance immediately.

Such a payout might have caused the utility to default on other loans, credit lines and long-term supply contracts, and perhaps force it into bankruptcy, wrote Chief Judge David F. Hamilton of the U.S. District Court in Indianapolis.

It also could have forced the utility and its members to pass along the cost to customers. The 17 cooperatives serve a large swath of Central and Southern Indiana.

The decision lets Hoosier hold on to the money while it pursues a lawsuit against John Hancock, based in Boston.

"It puts everything on hold so we can litigate a fair outcome," said Reed Oslan, a Chicago attorney who represents Hoosier.

The dispute arose over a complex financial arrangement the two sides set up six years ago as a tax shelter for Hancock. The deal went sour during the global credit crisis when a partner in the deal had its credit rating downgraded.

Hoosier makes electricity and brings in $550 million a year selling wholesale power to 17 electric cooperatives in Indiana and one in Illinois. The company operates an electrical generating plant in Merom, Ind., on the Wabash River.

In 2002, Hancock put together a deal under which it bought the generating station and leased it back to Hoosier. The utility received a $20 million fee, and Hancock was able to take a tax deduction from owning an industrial property.

"Despite the reams of paper and the circular flow of hundreds of millions of dollars, the transaction appears to have been a sham, without economic substance," the judge wrote in his ruling.

He said the court "will face some challenging problems" in crafting a remedy. Yet he said allowing Hancock to demand $120 million immediately would produce an unfair result by letting the insurer walk away "with the windfall of fraudulent tax benefits."

"The more prudent, risk-minimizing course at this point is to grant injunctive relief to prevent irreparable harm and to sort out later the difficult terms of final equitable relief," Hamilton wrote.

Hoosier's deal soured this year when the credit crunch set off by the subprime debacle led to a lower credit rating for Ambac Assurance. Ambac had guaranteed a $300 million loan used in the deal.

Hancock demanded payment of $120 million because the contract with Hoosier said the electric utility would owe that much if Ambac's credit rating ever faltered, court documents say.

Hoosier contends it was lining up new loan insurance through Berkshire Hathaway when Hancock demanded the money.

On Oct. 30, Hoosier filed a lawsuit in Monroe Circuit Court against Hancock, contending the deal never required that Hoosier compensate Hancock for the loss of tax benefits.

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