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July - Duke Energy Employee Advocate

Deregulation - Page 13 - 2002

“(Cal. Att. General Bill Lockyer) said …Duke Energy, engaged in similar actions but was not sued
because the firm has indicated a willingness to negotiate a settlement…” – S. J. Mercury News

The Enron Racket Never Ends

Bloomberg News – March 31, 2002

HOUSTON, March 29 (Bloomberg News) — The Enron Corporation asked a bankruptcy court in New York today for permission to spend as much as $130 million to keep crucial employees working for the company as it reorganizes its business.

A spokesman for Enron, Eric Thode, said the company asked the court to approve a plan that would grant retention bonuses and severance payments to approximately 1,700 workers at its broadband businesses and other units that are in the process of being closed.

Enron said the incentive program would provide some reassurance to employees while also offering creditors the assurance that the company would sell viable cash-producing assets.

The company is selling more than $3 billion in assets to pay its creditors after filing for bankruptcy protection in December.

The retention and severance payments would ensure that employees stay while Enron reorganizes, Mr. Thode said. Enron employs about 23,000 workers, most of whom would not be affected by the reorganization, he said.

A committee of Enron creditors has already approved the severance and retention bonus plan, which would cost $47.4 million to $130 million, depending on the amount of money raised through asset sales, the company said in a statement.

Reuters reported that the severance pay would be based on years of service, with a maximum eight weeks' base pay and a minimum of $4,500.

In a statement, Stephen F. Cooper, Enron's interim chief executive, said, "For Enron to successfully reorganize the viable power and pipeline business and to liquidate certain noncore assets to maximize our value for our creditors, we need to ensure that our critical employees are committed to the completion of these tasks."

Enron Cover-up Inquiries

Washington Post – by Carrie Johnson – March 29, 2002

(3/15/02) - One lawmaker compared the work of Vinson & Elkins, Enron Corp.'s outside law firm, to that of Inspector Clouseau, the bumbling detective character in the "Pink Panther" movies. Another bluntly asked "in what way would a coverup look different" than the report the firm made of allegations about accounting irregularities at Enron?

Two top Vinson attorneys defended their firm's work for Enron during pointed questioning yesterday at a hearing of the House Energy and Commerce oversight and investigations subcommittee, which is probing Enron's collapse into bankruptcy last year.

Managing Partner Joseph C. Dilg said the firm, which handled $150 million of Enron's business over the past five years, had nothing to hide. He said Vinson had never seen Enron do anything it perceived as illegal.

Members of the subcommittee criticized the law firm and James Derrick Jr., Enron's former general counsel, who commissioned Vinson to investigate the charges of accounting tricks by Enron with off-the-books partnerships.

Vinson determined, in charging $60,000 for the inquiry, that no intense, independent probe was required, though it said the "bad cosmetics" of the partnerships might cause negative publicity or even lawsuits. A report by a special committee of Enron's board of directors concluded the Vinson effort wasn't skeptical enough and the outcome was "largely predetermined."

When they took the assignment, Vinson lawyers agreed they would not second-guess the accounting advice offered by Arthur Andersen LLP and would not analyze every questionable financial transaction flagged by Enron Vice President Sherron Watkins.

Subcommittee members wondered why the Vinson inquiry didn't look at accounting issues. Rep. Edward J. Markey (D-Mass.), who made the Clouseau reference, asked Derrick if Kenneth L. Lay, Enron's longtime chairman, had suggested the probe be limited in scope.

"We discussed it," Derrick replied. "I don't recall that Mr. Lay proposed that."

Derrick, who retired earlier this month, said, "My integrity is not for sale." He added: "I would never participate in a coverup."

When Rep. James C. Greenwood (R-Pa.), chairman of the subcommittee, asked the Vinson lawyers if their investigation was a coverup, Dilg and Ronald Astin, another Vinson lawyer on the Enron account, defended the inquiry. They said many of the issues Watkins raised had been resolved by the time they completed the report.

Rep. Peter Deutsch (D-Fla.) asked why Vinson and in-house Enron lawyers approved deals used to move debt off the company's balance sheet. Analysis last year revealed that some of the partnerships could not be considered independent under Securities and Exchange Commission rules.

"Why did you miss it?" he asked. They replied they didn't know the partnership didn't meet the independence requirements.

Derrick and other members of Enron's 250-person internal legal team also fielded sharp questions about why they did not dig deeper after then-chief executive Jeffrey K. Skilling failed to sign papers approving the outside deals.

"Didn't that raise some red flags?" asked Rep. Cliff Stearns (R-Fla.).

"Yes, it did," said Scott Sefton, former general counsel in Enron's Global Finance unit. Sefton said he reported the issue to chief financial officer Andrew S. Fastow, who ran the partnerships, before leaving the firm in 2000.

Enron’s Law Firm

Washington Post – by James V. Grimaldi - March 27, 2002

(3/25/02) - For more than a month, Vinson & Elkins, Enron Corp.'s outside law firm, has quietly gone on the offensive as scrutiny of the failed energy giant has brought the law firm's role into question.

Behind the scenes is Harry Reasoner, the Houston firm's managing partner until January. Reasoner has worked hard to minimize Vinson & Elkins' work on allegedly misleading financial statements, blaming Enron's in-house lawyers and Arthur Andersen accountants.

"Enron was also regularly represented by a number of other major law firms," Reasoner wrote in a letter to clients last month.

He told us over the weekend, "They had their in-house lawyers, they had their financial reporting department. We were involved on specific occasions. For many of the major projects . . . other major law firms were representing Enron, instead of us."

Yet Reasoner himself is close enough to Enron that he was part of a select group invited to join Enron's then-chief executive Kenneth Lay and his wife, Linda Lay, on an elaborate cruise to the Caribbean to ring in the year 2000. "This was the 'Great Gatsby,' " said a person who attended the cruise.

Reasoner said that, yes, he was on board, with his wife, his children -- even his mother. "Ken Lay has been a close personal friend of mine for a quarter of a century," Reasoner said. "I'm a trial lawyer, but we did not do a lot of their litigation. I did not give Ken legal advice."

Work Scrutinized

At a recent hearing before the House Energy and Commerce Committee, Vinson & Elkins carried on that same theme set out by Reasoner -- that its lawyers did a lot of work, $150 million over five years, but not enough to have a full picture of Enron's finances.

The law firm reviewed financial statements, worked on documents regarding partnerships allegedly used to hide debts and then investigated allegations that those documents were essentially fraudulent. When Enron officials have been questioned about the questionable dealings, they have said they relied on Arthur Andersen and Vinson & Elkins.

Prime among the panel's questions was Vinson & Elkins' role in conducting a review of the allegations of whistle-blower Sherron Watkins, whose warnings of a "wave of accounting scandals" proved prescient.

It isn't often Congress holds a hearing to scrutinize the behavior of lawyers, but the hearing got scant coverage. Here is the highlight reel:

Rep. Edward J. Markey (D-Mass.) compared Vinson & Elkins investigators, who looked into Watkins' charges, to "Inspector Clouseau, stumbling over obvious evidence, not interviewing obvious suspects or witnesses, and, in fact, coming to conclusions that delayed the point at which a real reckoning was possible." He told the attorneys that the fall of Enron could have been avoided "if you had not conducted this phony investigation."

V&E attorneys countered that they were not asked to review the accounting.

At the same time the investigation was underway, Enron asked Vinson & Elkins for advice on whether Watkins could be fired or reassigned. The firm advised that if Watkins were dismissed, she could sue Enron, saying she had refused to participate in an illegal act, and that Enron's accounting practices and books would be fair game for her lawyers.

Rep. W.J. "Billy" Tauzin (R-La.), chairman of the committee, said disciplining a whistle-blower was contrary to Enron's ethics code. "Why would you even want to ask Vinson & Elkins to give you a list of all the horribles that would occur if you knew you had no right under your own code of ethics to discharge this employee?" Tauzin asked.

Enron general counsel James Derrick, himself a former V&E partner, said that Tauzin had gotten the wrong impression. Why, he wasn't looking for a way to fire Watkins. He wanted to make sure he protected Watkins from harassment or intimidation.

What a swell place to work, that Enron.

Rep. Bart Stupak (D-Mich.) summarized the panel's frustration. He simply could not understand how, in retrospect, non-experts can understand so much of the troublesome financial deals while the V&E lawyers did not find the problems.

"It just seems like such a cozy relationship that even when you get a memo that says even though the common layperson on the street can figure it out, none of you guys can figure it out," Stupak said.

Another Enron Lawsuit

Wall Street Journal – by Rebecca Smith - March 27, 2002

(3/25/02) - Shortly after the opening bell rang at the New York Stock Exchange on Oct. 6, 2000, shares of an initial public offering called New Power Holdings Inc. began to climb strongly.

By the end of this first day of trading, the stock was up a robust 29% at $27. New Power, it seemed, was on its way to becoming the first nationally recognized brand of electricity and natural gas -- the Nike of the energy industry. It even had a plan to market itself to households through America Online under the slogan: "New Power. The power to run your life."

But within weeks, New Power's stock ran out of juice, and before the year was over, it was clear that the company's bold plan to prosper from energy deregulation wasn't working. In February, the company announced it had struck a deal to be purchased by Centrica PLC, a British energy concern, for $1.05 a share.

New Power's story would be just another tale of a failed startup, but for this fact: It was launched and, in many ways, controlled, by Enron Corp. And now, as federal investigators, creditors and angry shareholders scramble to piece together what happened at the failed energy giant, the odd tale of New Power raises serious questions of whether this IPO was used by Enron executives to falsely bolster the company's earnings.

In February, a special committee of Enron's board outlined a series of complicated moves that allowed Enron to book a $370 million profit by selling New Power warrants to partnerships connected to Chief Financial Officer Andrew Fastow. Enron later reversed that profit when the off-balance-sheet machinations fell apart.

Last week, New Power shareholders filed a lawsuit seeking class-action status charging that Enron used the financial maneuvers to protect itself against a decline in New Power's fortunes while failing to put in place policies to protect New Power against fluctuating energy prices.

Enron executives declined to comment on any aspect of New Power, related lawsuits or the off-balance-sheet partnerships. "The structures and transactions are under review and investigation, and we will not comment until those are completed," said spokeswoman Karen Denne.

Enron's collapse into bankruptcy was precipitated in part by arcane maneuvers designed to conceal the true extent of the company's debt burden. The case of New Power offers a different vista: How Enron tried to use the IPO boom to inflate its earnings. In setting up the fledgling company, critics charge, Enron did plenty to help itself and little to nurture the success of New Power -- or the emerging market about which it professed to care so deeply. Interviews and documents portray a series of transactions that allowed Enron to tout New Power as a "first mover" beneficiary of deregulation, milk the capital markets and, ultimately, engage in secret deals to lock in a big profit from the startup.

New Power was the creation of Enron's energy-services unit, which itself was started in 1997 to take advantage of the imminent opening to competition of retail electricity markets around the country. Enron believed the retail market would provide a new source of demand for the company's vast wholesale energy-trading operations.

In the spring of 1998, Enron plunged into California, hoping to snatch retail customers away from Pacific Gas & Electric Co. and the other old-line utilities. Under the deregulation plan, California's retail electricity market was opened up to competition. Any creditworthy seller could market the juice, and its customers paid local utilities a fee to deliver it over existing wires.

But just 20 days after the market formally opened, Enron bailed out, disclosing that it had lost about $40 million in a mere three months. The problem was that few California consumers had ever heard of the Houston-based company, despite a $10 million advertising campaign. What's more, power prices at the time were so low that there was little incentive to shop around.

For Lou Pai, the introspective head of Enron Energy Services, the unit in charge of the retail-sales effort, it was a stunning setback in a career that had been marked by consistent success. The one-time Conoco Inc. economist had risen swiftly through Enron at the side of President Jeffrey Skilling, winning respect from his colleagues for an ability to solve problems quickly.

Rather than concede defeat, Mr. Pai continued to endorse the concept of cultivating small retail customers. The idea "simply hasn't coalesced," Mr. Pai said at the time.

Over the next year, Enron tweaked its formula to reflect what it had learned in California. Instead of trying to crack the market alone, Enron launched talks with potential partners in 1999. Eventually, it signed a pact with America Online to solicit customers online. And it signed a 10-year deal with International Business Machines Corp. to handle New Power's payment and billing needs.

In the months ahead, Enron Chairman Kenneth Lay would also personally woo a marketing ace to assist the cause, former AT&T Corp. executive Eugene Lockhart, who had headed a consumer-services unit boasting $20 billion in annual revenues. Mr. Lockhart received a $780,000 signing bonus as part of his first-year compensation of more than $2 million, according to SEC filings. "Just as we've seen in other deregulated industries such as banking and telecommunications," Mr. Lockhart said upon joining the effort, "energy deregulation will lead to more competition, lower prices, and better service for consumers."

But Enron didn't just focus on building the business. Also in its sights were potential investors, chief among them the California Public Employees' Retirement System, or Calpers, the biggest pension fund in America.

The story Enron sold to Calpers in November 1999 was certainly compelling -- at least on its face. At that point, Enron officials told pension-fund managers, 28 million households were potential customers, and that number would nearly triple by 2002 as more states deregulated their electricity sectors. In confidential presentation material given to Calpers, Enron trumpeted that its enterprise was poised to claim a 10% share of the market within five years, giving it revenues of $10 billion to $15 billion.

Enron's sales job had a sense of urgency. By getting in on this "opportunistic investment" now, Calpers was told, it would be in an excellent position when Enron took the venture public in coming months. It was, Enron noted, according to the presentation material, "an appealing IPO story."

Calpers ponied up $15 million in late 1999. In July 2000 -- with New Power by now incorporated as a separate entity -- Calpers put in $25 million more. And Enron continued to tout New Power's prospects. The retail energy business "has extraordinary growth potential," Mr. Lay said in an interview at the time. Others also invested, including the Ontario Teachers' Pension Plan Board. In all, New Power raised $204 million through two private placements.

Three months after the second private offering, Enron took New Power public, raising an additional $544 million with the help of lead underwriter Donaldson, Lufkin & Jenrette Securities Corp. Enron still held the biggest stake, at 44%, followed by GE Capital Equity Investments Inc. at 7%, Ontario Teachers' at 6.5% and Calpers at 5.7%.

Although New Power was now a stand-alone company with Mr. Lockhart as chief executive, Enron maintained extremely close ties. Mr. Pai, while continuing to run Enron Energy Services, served as New Power's chairman. Other senior Enron executives on New Power's board included Mr. Lay, Chief Accounting Officer Richard Causey and General Counsel James Derrick. The companies used the same legal and accounting firms.

For those who had put their own money into New Power, Enron's deep involvement inspired comfort. "Sponsorship from Enron was a big plus," says Jim Leech, head of merchant banking at the Ontario Teachers' pension board. "We expected that the senior Enron executives would see opportunities to help New Power going forward."

But early results weren't pretty. The deal with AOL, which had been negotiated by Enron 11 months before New Power went public, sounded good. But the fine print showed that Enron committed New Power to pay $49 million over six years for marketing assistance -- a considerable sum for a startup. In addition, for every 100,000 customers who subscribed to New Power via AOL, New Power had to fork over 258,060 shares of its stock to AOL, according to the offering circular. Mr. Lockhart terminated the AOL arrangement shortly after taking control, saying it was ineffective.

New Power had other troubles, as well. In Pennsylvania, the company won a contract a month after the IPO to serve nearly 300,000 customers who were being shed by PECO, the old Philadelphia Electric Co., as it merged with Chicago-based Commonwealth Edison. PECO sent out letters notifying customers that they were being switched to New Power unless they objected. Yet even though New Power guaranteed a 2% break on all energy bills, "thousands and thousands of letters came back," recalls Irwin "Sonny" Popowsky, who oversees Pennsylvania's Office of Consumer Advocate. "They didn't want to be served by somebody they'd never heard of."

New Power lost a third of its Pennsylvania customers that first year. Equally taxing was the disaster unfolding in California, where wholesale energy prices climbed to 32 cents a kilowatt-hour in December 2000 from an average of three cents in 1999. By April 2001, California's largest utility had sought bankruptcy-court protection, the government in Sacramento had stepped in to assume power-buying duties, and states everywhere were having second thoughts about opening their markets to companies such as New Power or Enron.

The psychological damage wrought by California's meltdown "made everybody jaundiced," says Mr. Lockhart. Some states slowed their deregulation efforts and others, like Nevada, reversed course altogether. Soon, New Power was courting customers with heavy discounting and perks such as free frequent-flier miles and $25 Home Depot gift certificates. In 2001, New Power had a loss of $327.3 million, nearly double its deficit of the prior year.

Still, even as New Power struggled, Enron found ways to cash in. It embarked on a tangled series of transactions characteristic of the labyrinthine way it managed many of its other financial affairs.

The best example was with a partnership called Hawaii 125-0, incorporated on Oct. 17, 2000, or 11 days after the IPO, according to documents filed in Delaware. Ownership of the partnership is a closely guarded secret, but the Enron internal board report identified Hawaii 125-0 as part of a group of off-balance-sheet arrangements known collectively as Raptor III. The report says Raptor III entities were established with the knowledge and, at times, investing participation, of the former CFO, Mr. Fastow. A spokesman for Mr. Fastow declined to comment.

The name Hawaii 125-0 was a pun on the 1960s cops show, Hawaii Five-0, and the accounting rule, SFAS 125, that allows off-balance-sheet entities to be created and to do deals regarded as legally separate from their sponsors, according to a person familiar with the matter. (Some of the related partnerships were named McGarret, a reference to Steve McGarrett, the central character of the series.)

Millions of New Power warrants wound up in the Hawaii 125-0 partnership, according to the internal investigation. The partnership also received a $500 million loan from a 16-bank consortium led by Canadian Imperial Bank of Commerce in Toronto, according to a person familiar with the partnership.

The loan was secured by the New Power warrants owned by Hawaii 125-0. Ordinarily, banks wouldn't be eager to make such a big loan to a company whose main asset was a stake in a startup. But Enron offered what's called a "total return swap" to protect the banks against loss, according to the person familiar with the matter. The swap, in essence, guaranteed that if the partnership didn't have enough money to repay lenders when liquidated in a few years, Enron would step in and make them whole. But Enron didn't like its exposure.

Under accounting rules, if New Power's share price dropped, Enron would have been forced to reverse a corresponding portion of its prior $370 million gain. So, according to the board report, Enron decided to create another vehicle, known as Porcupine LLC, to assume the risk. It would eat the loss in the event that New Power shares fell.

Normally, a hedging vehicle like Porcupine is an independent third party that receives a fee for its role. But Porcupine was different. It was the creation of Enron and Mr. Fastow.

A week before New Power's IPO, Enron sold 24 million New Power warrants to Porcupine at the bargain price of $10.75 a share. When New Power hit the public market at $21 a share, Porcupine's New Power holdings gave it enough instant equity or "credit capacity" -- at least on paper -- to hedge $245 million worth of Enron's potential losses. In other words, it basically was sold warrants at a price that guaranteed a profit -- profit that could be used as the basis for creating hedges for Enron. Yet there was a problem: Porcupine didn't have much behind it.

The only real money in the partnership consisted of $30 million contributed by LJM2 Co-Investment LP, the now-notorious partnership set up by Mr. Fastow, when he was still chief financial officer, to purchase various Enron assets. And that $30 million wasn't there for long. One week after putting that sum into Porcupine, Mr. Fastow's LJM2 received back an amount equivalent to its original investment of $30 million, plus a hefty $9.5 million profit.

That left Porcupine, practically speaking, with no financial resources other than its New Power warrants, putting the venture in a curious position: It was supposed to protect Enron against a drop in New Power shares, but its fortunes were helplessly tied to the very same stock. It was like trying to protect a bolt of silk from the rain by making an umbrella out of the silk itself.

It didn't take long for the shoddy architecture to become apparent. New Power's stock rose only briefly and by early 2001 was sinking fast. As its price dropped, the assets available in Porcupine that were supposed to protect Enron against the loss in value for Hawaii 125-0 fell at parallel speed.

Internal Enron documents, obtained by a congressional subcommittee, show that Enron was well aware of this defect and, in fact, modeled it in spreadsheets. At $6 a share, New Power represented a potential loss to Enron of $236 million, for example.

Fearful of having to take a hit to earnings, Enron managers scrambled to "recapitalize" the structure. They shored it up by shifting the supposed excess credit capacity of other vehicles to the Raptor III structure. For its cooperation, Mr. Fastow's LJM2 was paid a $50,000 fee even though, the internal Enron report found, LJM2 no longer had any money at risk.

The fix was only temporary. By the third quarter, the structure was again falling apart because the asset now being used to prop up the mess -- Enron's own stock -- also was tumbling in value. Inside the company, senior Enron executives debated what to do. During one angry meeting that he later recounted for the internal report, Vince Kaminski, a Ph.D. economist who headed Enron's research department, called the whole series of transactions involving Raptor III and similar vehicles "terminally stupid" and "improper." Finally, the decision was made to reverse the entire $370 million profit.

Meantime, the banks that lent $500 million to Hawaii 125-0 were left exposed. In December, they exercised their right to seize the 18 million warrants used as collateral for their loan. They are worth about $19 million today. And though Enron promised to make the banks whole, it now has little ability to make good on that promise.

Canadian Imperial Bank, the lead lender in the consortium, declines to comment other than to say that its piece of the potential Hawaii 125-0 loss already is included in a $215 million reserve taken against its Enron exposure.

There are other losers, too. In Pennsylvania, roughly 180,000 New Power customers are now being notified that Centrica doesn't want them. If its acquisition of New Power is approved, as expected, in April, Centrica intends to dump them back on PECO, the local utility. That will leave consumers paying higher electricity bills and will deal a new blow to Pennsylvania's already-battered deregulated market.

As for Calpers, it lost $36.8 million on New Power, its board has said. The Ontario Teachers' pension plan lost about $45 million. The fund's Mr. Leech says he and his colleagues aren't happy about that, though he points out that Ontario Teachers' still made $250 million on its Enron investments overall.

"We're reserving our right to go back through the file and see if the representations that were made to us regarding New Power were accurate," he says. "It's not exactly regarded as the Good Housekeeping Seal of Approval to be an Enron spin-off these days."

Regulation Follies

Washington Times – by Peter Ferrara – March 22, 2002

(3/13/02) - While Enron is dead, the grip of its cold, dead hand on the nation's economy is not. The Federal Energy Regulatory Commission (FERC) is busily implementing a new scheme of increased regulatory intervention that was long sought by the now defunct company because it would benefit the company's business operations.

However, that poorly thought out plan, so typical of Enron's scheming, would seriously undermine the nation's electricity transmission system over time. Indeed, it has the potential of spreading the energy crisis suffered by California last summer across the country.

The regulation involves the interstate transmission lines that now transmit newly produced electrical energy across the country. That transmission grid enables producers to sell electricity in a national market.

In fact, about half of the nation's electrical output is sold on the wholesale market today, before it is ultimately sold to individual residential or business consumers. Power marketers that specialize only in buying and selling electricity in this market trade about 23 percent of the nation's power production.

The grid also enables nonutility producers to arise that can provide additional power for the national network. These sources now account for 20 percent of the nation's electrical power.

This national transmission grid increases the supply of electricity, which reduces prices. It also creates a very flexible energy supply system, where excess electricity in one part of the country can be transmitted quickly to cover a shortage elsewhere.

But FERC is now intervening in this market with the idea of forcing all the current owners of these transmission lines to transfer them to four, nonprofit, regional transmission organizations (RTOs). The only business of these RTOs would be to operate the transmission lines in their respective regions.

FERC is seeking to completely separate the transmission lines from control by any electricity producer, so that the lines would be open to all producers on equal terms. FERC also wants to consolidate the grid into just four large regional organizations to avoid difficulties of getting many smaller transmission line owners to cooperate in a national network.

But this government created, centrally planned market has a fatal flaw. The RTOs do not have the proper market incentives to provide high-quality, efficient services.

First, the RTOs would each be a monopoly in their own geographic area. If they do not provide the best, most efficient services, there is no where else to turn, at least in the short run.

Moreover, since the RTOs would be nonprofits, why would they be concerned to provide the best and most efficient services? They would not gain higher profits and higher stock prices from doing so.

Most concretely, there would be no incentive for anyone to invest in transmission lines controlled by nonprofit RTOs. The RTOs themselves would not have equity capital and would not have incentives to take the risks of additional investment by borrowing.

Investment in transmission lines has already been declining. Just maintaining the current transmission will require a fourfold increase in investment this decade. This is just not going to happen under FERC's new regulatory initiative.

If the nation's utility grid deteriorates for lack of investment, the supply of power will decrease and prices will rise. Shortages and bottlenecks will appear around the country. In short, last summer's California energy crisis will begin to reappear nationally.

A thorough and insightful new study by Thomas Lenard of the Progress and Freedom Foundation proposes a better policy. Power producers that also owned transmission lines would be required to sell use of their lines to all producers at a uniform price. Companies that owned transmission lines but did not produce power would be free of these requirements, since they would have no incentive to favor one producer over another.

Under these rules, market participants would cooperate to maintain a workable grid for all, as everyone would have an incentive to do so. Companies focusing on the transmission grid exclusively would prosper in particular and provide the needed investment

Enron is gone. It's half-baked, self-serving regulatory scheme should be dumped as well.

N. C. Not Rushing to Deregulate

Associated Press - March 17, 2002

RALEIGH, N.C. (AP) - It may not be dead, but deregulation of the power industry in North Carolina won't be moving forward any time soon.

Last week, a legislative panel made that clear when it indicated it would likely drop a recommendation made in May 2000 that the power market in North Carolina be deregulated by Jan. 1, 2006.

That happened before California consumers saw their power bills skyrocket following deregulation. It was before one of the nation's largest wholesale traders in power, Enron, went belly-up. It was before a recession sapped tax collections and focused lawmakers' attention on two straight years of budget shortfalls and budget cutting.

``I would say the recommendation in this report is obsolete,'' legislative lawyer Steve Rose told the legislative panel.

The panel - the Study Commission on the Future of Electric Services in North Carolina - will meet again before it formally drops the recommendation. At the behest of legislative leaders, the group isn't likely to be disbanded after years of studying the issue.

Sen. David Hoyle, D-Gaston, co-chair of the commission, says it is clear the earlier timetable won't be met. But he also believes it is ``not in the state's best interest to say deregulation is a dead issue.''

``Deregulation is certainly an issue that is not dead around the country,'' he said.

Maybe not, but it is far from healthy.

The push to deregulate and create competition among electricity providers began in earnest in 1996, when the Federal Energy Regulatory Commission ordered that utilities begin to open their transmission lines to competing power merchants.

That decision led several states to end monopolies in retail power markets and triggered a move toward competition in the wholesale market.

But the commission's decision is now being appealed by utility regulators in nine states, including North Carolina. The lawsuit, now before the U.S. Supreme Court, argues that the FERC order usurps powers reserved to the states, specifically regulating retail sales.

Enron had also been suing the agency, arguing that its order did not go far enough to open up competition.

Even before the lawsuit was heard last fall before the Supreme Court, legislators in North Carolina had begun to grow queasy about the issue. In California, they saw what happens when deregulation goes wrong, utility bills double and triple, and voters begin holding legislators responsible.

As if that weren't enough, it's not likely that North Carolina lawmakers are going to tackle anything so controversial while they also address the financial and political realities of a recession.

The anemic economy and slowing tax collections led to a tax increase last year. And lawmakers may have to cut some popular government services this year to avoid yet another tax increase.

It all adds up to a politically caustic environment, one that will likely continue not just through this fall's election but into the 2004 election year.

Still, the driving force behind power deregulation - large industrial electricity users that are looking for reduced rates - isn't going away.

Hoyle says he believes the federal government, whether in the form of FERC or Congress, will eventually renew its push for competition in the industry.

In addition, there is a side issue in North Carolina - $5.3 billion in debt hanging over 51 cities that run their own power systems.

The debt is the result of investments the cities made in nuclear power plants built in the 1970s, and cost overruns in plant construction. Residents of those cities typically pay 20 to 30 percent more for electricity than customers of Duke Power and Progress Energy, the state's largest private power providers.

In order to deregulate, pay off the debt and keep the cities solvent, some type of a buyout of the systems or state-brokered deal may be necessary.

Some lawmakers say the legislative panel needs to address that issue regardless of the outcome of the deregulation debate.

Electricities, a lobbying group formed by the cities, says the delay in the deregulation debate will help them. The debt has been reduced by roughly $200 million over the past year and a half.

Time is taking care of the problem, says Electricities chief executive Jesse Tilton.

It also seems to be taking care of one of the touchier political debates in the state.

California Energy Lawsuits Filed

San Jose Mercury News – by Brandon Bailey – March 16, 2002

(3/12/02) - SACRAMENTO, Calif. -- After more than a year of investigation, California authorities filed lawsuits for the first time accusing power generators of reaping millions in illegal profits by taking advantage of the state's deregulated energy market.

Attorney General Bill Lockyer filed lawsuits Monday charging that four companies "double-sold" some of their electricity by accepting a payment to keep some of their output in reserve for emergencies and then selling that power on the lucrative spot market.

Lockyer said more legal actions will be brought against energy wholesalers as early as next week. The four companies named in the first round of lawsuits -- Dynegy, Mirant, Reliant and Williams -- denied wrongdoing and insisted they have always followed state regulations.

A spokesman for Reliant, which is based in Houston, blamed the suits on election-year politicking.

State officials said the companies exploited weaknesses in a complicated system of contracts and energy auctions that have been used to keep the state's electrical grid working since 1998.

They acknowledged that the suits, which seek an estimated $160 million in restitution and penalties, don't really address last year's sky-rocketing energy prices or the billions of dollars in excessive profits that state officials say the industry siphoned out of California.

"This conduct did not cause the energy crisis," conceded Pamela Merchant, a special deputy attorney general who helped prepare the suits. She said the actions outlined in court papers may have driven up prices by causing short supplies at certain times.

"It's not the ultimate smoking gun," consumer advocate Michael Florio said, referring to evidence that Lockyer's staff assembled after reviewing more than 20,000 wholesale energy transactions.

But referring to the suits' claims for damages, he added, "This is a substantial amount of money. I'm not disappointed."

At a Sacramento news conference, Lockyer said his office is continuing to investigate the energy industry and will bring further actions as evidence is assembled. He filed a separate suit last month against PG&E Corp., alleging that the company drove its utility subsidiary into bankruptcy by illegally diverting billions of dollars.

Despite early threats that he might escort energy executives to jail, Lockyer said recently that his office hasn't found evidence to warrant criminal prosecutions. But his spokeswoman said Lockyer hasn't ruled out that possibility if more evidence emerges.

In the suits filed Monday, he is alleging that four power wholesalers committed civil violations of the state's unfair business practices law.

Lockyer suggested Monday that the alleged "double-selling" was a fairly widespread practice. He said at least one other company, Duke Energy, engaged in similar actions but was not sued because the firm has indicated a willingness to negotiate a settlement with the state.

A Duke spokesman said his company is "in discussions" with authorities over "issues raised in the state's investigations."

The lawsuits focus on contracts between the four energy producers and the California Independent System Operator, a quasi-state agency that runs the transmission grid. The ISO paid those firms to reserve some of their power-plant capacity so that a certain amount of electricity would be available in emergencies.

The attorney general is charging that the power companies sometimes used the reserve capacity to produce electricity that was then sold on the spot market.

"What they did was basically sell the same electrons twice," Lockyer said, adding that the companies did this several thousand times.

As it turned out, he said, there were times when the ISO never needed the emergency reserve. But sometimes the ISO found that needed reserves were unavailable and had to replace them by buying more power on the open market.

The ISO passed its costs on to the state's utilities, which means consumers ultimately footed at least part of the bill, he said.

Grid operators first detected the practice in 1998, but they had few ways of preventing it until September 2000, when the ISO installed sophisticated tracking software and gained authority to impose penalties for violations. Yet, Lockyer said, the four companies have continued to violate the rules.

Spokesmen for the defendants declined to comment in detail on the allegations. But some industry representatives suggested there has been a gray area in the rules governing whether power companies could sell electricity from their plants when the reserves weren't needed.

"My understanding is that's not something generators were precluded from doing, as long as that unit is available if it's needed," said Pat Mullen, a spokesman for Duke.

Attorneys on Lockyer's staff disagreed. An ISO spokesman said that contracts have always prohibited generators from reselling the output that is committed for reserves.

Enron Trading Fraud Investigation

Associated Press – by Marcy Gordon – March 13, 2002

The government is investigating whether Enron Corp. committed fraud or manipulated markets through improper trading, the chairman of the Commodity Futures Trading Commission said Monday.

Disclosure of the investigation comes as Enron's longtime auditor, the Arthur Andersen accounting firm, is negotiating with federal prosecutors over whether it can avoid criminal charges in the Enron case.

Andersen has acknowledged massive shredding by its employees of Enron-related documents. A Justice Department official indicated Friday that government lawyers were negotiating with representatives of Andersen.

CFTC Chairman James Newsome said in a telephone interview: "We do have a full investigation under way." He said the agency was using its anti-fraud and anti-manipulation authority to investigate Enron's trading on commodity exchanges, notably the New York Mercantile Exchange, as well as its own big online trading system.

The system, called EnronOnline, was the world's first commodity trading platform based on the Web.

Enron was the world's largest buyer and seller of natural gas and grew into the nation's seventh-largest company and a favorite of Wall Street by becoming the country's leading electricity trader. The Houston-based company later started new trading markets in telecommunications bandwidth, pulp, paper, plastics and the influence of the weather.

Enron spiraled downward into the biggest corporate bankruptcy in U.S. history on Dec. 2, 2001.

Newsome, who was confirming a report in Monday's Wall Street Journal, said the CFTC began an inquiry into Enron's trading last fall that later became a formal investigation.

The Justice Department and the Securities and Exchange Commission are investigating Enron, its accounting practices and Andersen's role. In addition, the Federal Energy Regulatory Commission is examining possible energy price manipulation by Enron and other traders in Western wholesale power markets.

And the Labor Department is investigating Enron's actions in banning employees -- who lost their retirement savings -- from selling company stock in their 401(k) plans for about three weeks.

Newsome said his agency has been cooperating with the Justice Department, the SEC and the FERC in their inquiries.

Enron spokesmen had no immediate comment on the CFTC investigation.

Enron became one of the largest traders of energy derivatives -- financial contracts used to hedge or speculate on a commodity. Businesses buy them to guard against losses from unexpected market movements while speculators buy them as high-risk bets, hoping for huge returns.

Government officials, including Federal Reserve Chairman Alan Greenspan, have maintained that the multitrillion-dollar global market in over-the-counter derivatives -- which are traded outside commodity exchanges -- should continue to be exempt from regulation.

Enron, which was among President Bush's biggest campaign contributors, lobbied throughout the government and Congress against regulation of electricity markets and the trading of derivatives tied to energy commodities.

Wendy Gramm, an Enron director and member of the board's audit committee, was chairwoman of the CFTC before she joined the Enron board in 1993. As head of the agency, she shepherded an exemption from government oversight for the trading of energy products, which benefited Enron and other energy-trading companies. Gramm, an economist, is married to Sen. Phil Gramm, R-Texas, former chairman of the Senate Banking Committee.

Under current law, the CFTC doesn't have the authority to regulate over-the-counter or electronic derivatives trading but is empowered to investigate if it suspects fraud or market manipulation.

Sen. Dianne Feinstein, D-Calif., recently proposed legislation that would restore full oversight authority to the CFTC.

Previous Enron Fraud Convictions

New York Times – by Corey Kilgannon – March 6, 2002

Enron executives made millions on fraudulent trades, and this was followed by Securities and Exchange Commission investigations. And top Enron officials said they knew nothing.

It all happened 15 years ago in an inconspicuous office park in Westchester County, N.Y.

An Enron subsidiary, the Enron Oil Corporation, set up its office in Valhalla, N.Y., in 1985. By October 1987, the S.E.C. had begun investigating the two top executives there, and the office was shut. Though a far cry from the dimensions of the current scandal, the financial finagling does have eerily similar elements. In October 1987, the S.E.C. accused Louis J. Borget, then the unit's president, and Thomas N. Mastroeni, its secretary-treasurer, of executing sham oil trades over those years.

The two men, court documents show, set up fake offshore companies to disguise the trades and falsified records to conceal them from company officials in Houston.

The two executives pleaded guilty in federal court in White Plains to fraud-related charges and tax evasion. Mr. Borget served a year in jail, and Mr. Mastroeni was put on two years' probation and ordered to do 400 hours of community service. This previous Enron scandal was the subject of a recent article in The Financial Times.

The fake oil trades cost Enron more than $136 million in losses. At the time, Kenneth L. Lay, the chairman, called the loss an "expensive embarrassment."

Other employees were given several weeks to close up shop, recalled David Ralph Hogin, who worked at the Enron office as chief market analyst from December 1985 until the office closed.

Enron rented the whole first floor of the Mount Pleasant Corporate Center, at 117 Stevens Avenue. It was 25,000 square feet of prime office space, and Enron, before moving in, insisted the space be furnished with "the finest of everything," recalled Louis R. Cappelli, the Westchester developer who owned the park.

"They were wonderful tenants," Mr. Cappelli recalled this week. "They paid their rent ahead of time."

There were about a dozen employees, half of whom were traders, recalled Mr. Hogin, now 78 and retired in Wilmington, Del. In 1986, he earned $250,000 working for Enron Oil, he said.

"The office made a lot of money on stock deals," he recalled. "There were high salaries and big bonuses. We were the golden-haired boys in the Enron fold."

But in 1987 the operation began losing money, lots of it. Enron officials in Houston began asking questions and planned an audit of the office. Then, one day in October, S.E.C. investigators arrived at the office.

"One day we showed up, and Lou and Tom were gone, and there were S.E.C. investigators interviewing me," recalled Mr. Hogin, who said that was the first he had heard of the sham deals.

Mr. Hogin said he was issued some Enron stock as part of his severance package, but "I sold it long ago."

Mr. Borget, now 64, lives in Croton- on-Hudson, N.Y. A woman who answered the phone at his home hung up on a reporter. Mr. Mastroeni, 57, also could not be reached. He has a White Plains post office box but no listed address or phone number.

An Enron spokesman had no comment.

Mr. Hogin said he never spoke to either of the executives again. After the men were arrested, he recalled, several members of the Enron board traveled from Houston to the Valhalla office.

"The board members were shocked at what was going on in Valhalla," he recalled. "They said, `What a terrible thing to do.' So when I left Enron company, I thought they'd never trade anything again. Little did I know they'd become the biggest wheeler-dealers around."

Deregulation - Page 12 - 2002