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Deregulation - Page 18 - 2002
Punishing Market AbuseDow Jones – by Andrew Dowell – July 1, 2002
(6/25/02) - NEW YORK (Dow Jones) -- The agency that runs California's wholesale power market is looking to beef up its ability to investigate and punish market abuse.
The California Independent System Operator has launched a review aimed at making the most of its current enforcement power and may seek to expand its authority to impose penalties and sanctions.
The ISO, which briefed its governing board on the effort Tuesday, will seek input from market participants and hopes to file its suggested changes with the Federal Energy Regulatory Commission on Aug. 7.
The effort represents a further step to crack down on the free-wheeling electricity markets plied by companies like Reliant Resources Inc. (RRI), Dynegy Inc. (DYN), Mirant Corp. (MIR), Williams Cos. (WMB) and Duke Energy (DUK). Scrutiny of those markets has increased in the wake of California's power crisis, the collapse of Enron Corp. (ENRNQ) and mounting disclosures of questionable trading practices.
In addition to state officials, the Federal Energy Regulatory Commission, the Commodity Futures Trading Commission and the Securities and Exchange Commission are looking into electricity traders' behavior.
Those investigations shifted into high gear in May, after FERC released Enron memos discussing strategies to reap unearned profits by manipulating California's energy markets.
Separately on Tuesday, the ISO approved a $300 million to $350 million upgrade of Path 15, a critical transmission interconnection between northern and southern California.
Constraints along the transmission line have contributed to higher electricity prices and rolling blackouts in the state. Work to clear the bottleneck should begin within the next year and could be completed by late 2004, the ISO said.
The ISO, charged with keeping electricity supply and demand in balance on the state's power grid, was thrust into a central role during the power crisis as it scrambled to buy about a third of the electricity needed each day by customers of California's ailing utilities.
Nominally independent, the ISO is now run by a board appointed by California Gov. Gray Davis and has come under fire from power suppliers in the past year for being biased in favor of the buyer, which in California is now the state.
ISO officials speaking at Tuesday's board meeting said the enforcement review aims to set clear rules for behavior and clear consequences for violators. In particular, the agency is considering a series of escalating warnings and fines.
The ISO also wants to set standard procedures for investigating abuse and make sure it is using its existing authority as effectively as possible, said Eric Leuze, the ISO's director of compliance.
The ISO currently has limited enforcement powers. The agency can make traders' infractions public or refer violations to other agencies for sanctions. It can also impose penalties when participants fail to perform under its ancillary service rules.
Practices targeted by the agency's review include presenting false schedules and manipulating congestion payments.
The agency is in the middle of a thorough redesign of its market, following California's power crisis. The enforcement review is intended to fit in with that overhaul and to fill gaps before it takes effect.
Enron Also Hid ProfitsNew York Times – by David Barboza– July 1, 2002
(6/23/02) - The Enron Corporation used undisclosed reserves to keep as much as $1.5 billion in trading profits off its books during the California energy crisis, according to six former managers and executives who handled or reviewed the accounts.
The enormous reserves, which would have doubled the company's reported profits, were hidden in late 2000 and early 2001, as energy prices soared in California and politicians accused trading companies like Enron of price gouging. The former Enron officials said that the company swelled the reserves in hopes of damping the political firestorm.
Further, some former executives said, Enron manipulated the reserves to help it report steady profit growth to Wall Street and credit rating agencies. Investors generally are not willing to pay as much for the stock of a volatile trading operation as they would for companies -- like Enron before its collapse -- that report steady quarter-by-quarter growth.
The Securities and Exchange Commission and investigators from the Justice Department have interviewed witnesses to determine whether the practices violated securities laws by creating ''cookie jar reserves'' or a kind of corporate slush fund to doctor quarterly earnings reports, according to people who have been interviewed by investigators.
The existence of the huge reserves adds a strange twist to the Enron story. The company filed for bankruptcy protection last December amid reports that executives inflated profits and hid losses with off-balance-sheet partnerships. But interviews with more than a dozen former executives and managers suggest that the company at times also held back trading profits to serve its political and financial ends.
The majority of these gains were ''paper'' profits on long-term contracts, rather than cash that could have helped Enron stave off the liquidity crisis that led to its collapse last fall. In any event, one former executive said, the reserves were depleted in the months before Enron's bankruptcy.
The use of reserves to manage profits is outlawed, but it is not uncommon. This month, the Microsoft Corporation agreed to settle an enforcement action in which the S.E.C. charged it with maintaining huge reserves in the late 1990's that could have been used to enhance profits when the company's earnings growth began to wane.
Former top executives at Enron, including Kenneth L. Lay, the longtime chairman, and Jeffrey K. Skilling, the company's president and later chief executive, said last week through their spokeswomen that they were aware of the reserves but considered them proper.
Judy Leon, Mr. Skilling's spokeswoman, said that money was set aside mainly in credit reserves to insulate Enron from the risk that California's utilities could be bankrupted by the crisis and left unable to pay their debts. ''At no time did Mr. Skilling have any knowledge of inappropriate or illegal activity in the reserve account,'' she said. The S.E.C. questioned Mr. Skilling about the reserves late last year, according to a person who has reviewed his testimony.
Accounting rules allow for credit reserves -- and, indeed, California's biggest investor-owned utility, Pacific Gas and Electric, sought bankruptcy protection in April 2001, owing Enron $500 million. The rules also permit companies to reserve against specific contingencies, like litigation. And trading companies can use so-called prudency reserves to protect against market risks, like the inability to exit a trading position at a good price.
But six former Enron officials who handled or reviewed the accounts said that Enron used prudency reserves to manipulate the reported profits of its energy trading operations.
The economic value of energy trades -- particularly deals providing for the delivery of electricity long in the future -- is highly subjective. As the dominant trader, analysts say, Enron had great leeway to establish market prices. Likewise, when profits seemed bloated during the California crisis, executives said, it became common to give trades a ''haircut,'' shifting a portion of the profits into a reserve that could later be drawn down.
One former executive recounted how Enron traders made close to $500 million on a single day in the summer of 2000, after a natural gas pipeline burst near Carlsbad, N.M., and market prices spiked.
''We made such an incredible amount of money we didn't want to recognize it all into earnings,'' said the executive, who like others interviewed requested anonymity because of concern about being drawn into litigation. ''We were supposed to make $500 million in a quarter and we were doing it in a day.'' Two other former Enron officials confirmed details of the episode.
Accounting experts said that the subjectivity of prudency reserves makes them susceptible to abuse.
''If you're using trading reserves as a mechanism for understating your positions in good times -- and therefore not reporting profits -- and later reporting the old profits in times that aren't as good, that would clearly be an abuse of the accounting rules,'' said Lynn Turner, a professor at Colorado State University and the former chief accountant for the S.E.C.
During the energy crisis, power shortages led to rolling blackouts and price spikes in California. Elected officials railed at power merchants, with Gov. Gray Davis accusing them of profiteering and market manipulation.
At the time, Enron executives denied the charges, blaming a poorly designed energy market for California's problems. And while the company reported profits of $350 million for the last three months of 2000 -- 34 percent more than a year earlier -- executives minimized the impact of the crisis on Enron's bottom line.
''Now for Enron, the situation in California had little impact on fourth-quarter results,'' Mr. Skilling told Wall Street analysts on a Jan. 22, 2001, conference call. ''Let me repeat that. For Enron, the situation in California had little impact on fourth-quarter results.'' He explained that because Enron did not own power plants in California, the company did ''not invite the same accusations the generators have faced regarding excessive profits.''
The disclosure of internal documents last month describing ways that Enron's traders operated in California's market prompted officials to renew their demand for billions in refunds from energy companies. Told about the reserves, Gov. Davis expressed fresh outrage.
''Enron's made such a killing off this state, they were embarrassed to disclose it to their shareholders,'' the governor said on Friday in a statement. ''Unfortunately, Enron will live on as a symbol for everything that has gone wrong with electricity deregulation.''
Several high-ranking Enron executives said that the company began using reserves to ''smooth'' or ''manage'' earnings growth as early as 1998, when energy price spikes in the Midwest brought traders unwanted scrutiny.
Enron's disclosures about its reserves were limited, and, according to former executives, incomplete. In its year-end report for 2000, it listed $452 million in ''credit and other reserves.'' There was nothing disclosed about prudency reserves.
Enron's use of the reserves was approved by Arthur Andersen, the company's longtime auditor, and by Richard A. Causey, the company's chief accounting officer. His lawyer, J. C. Nickens, said that Mr. Causey -- who left the company after its collapse -- told Enron's board that the company was using a combination of credit and prudency reserves.
W. Neil Eggleston, an attorney for the independent directors who have left the board since Enron's collapse, said, ''If the management of Enron was using reserves to manipulate the profits of the company, the board was completely unaware of it.''
Kelly Kimberly, the spokeswoman for Mr. Lay, Enron's former chairman, said that both the growth of the prudency reserves and their subsequent release into the company's profit stream were appropriate.
''It is a common practice and in fact a responsible practice to increase prudency reserves when volatility is high and when prices are rising,'' she said. ''In 2000, volatility was high and natural gas and electricity prices rose at least fivefold over the course of the year. In 2001, when prices and volumes declined, the prudency reserve would also have been adjusted downward.''
Patrick Dorton, a spokesman for Andersen, said the firm did not engage in any wrongdoing. ''Andersen auditors would never, under any circumstances, tolerate an arrangement intended to manage earnings,'' he said. ''Not in this situation, or any other, did that happen.''
Former managers and executives said there were at least three types of reserve funds and that they totaled between $800 million and $2 billion at various times in 2000 and 2001.
During the California energy crisis, the reserves skyrocketed, former managers and executives said. Enron's traders were making more than enough to meet profit targets. And there were concerns that the big gains would not last.
''There were days when we were making $100 million,'' said another former Enron manager with access to the trading records. ''When you're making that kind of money you have to ask yourself, 'Are we the market?' Your earnings are unfathomable, so you say, 'Maybe we're too large. Maybe we ought to reserve something.' ''
Another Energy Executive Hits the TrailAssociated Press – June 23, 2002
HOUSTON (AP) - Less than a month after Dynegy Inc.'s chief executive stepped down as the company's stock price plummeted amid questions surrounding energy trades, the company's chief financial officer has followed his former boss out the door. The company also said it is cutting 340 jobs.
Rob Doty stepped down Wednesday as Houston-based Dynegy Inc. CFO and executive vice president. Hours later the company announced it would cut 340 employees from its work force.
The company said had appointed the president of its energy marketing division, Louis Dorey, to replace Doty…
More Market Manipulation EvidenceAssociated Press – June 23, 2002
SACRAMENTO, June 21 (AP) — Internal e-mail messages among employees at the Perot Systems Corporation show that the company approached Edison International with an offer to advise the energy company on how to manipulate California's market, either to make money or so Edison could be "alert to others trying to pick their pockets."
The messages were among five boxes of documents Perot Systems delivered to the Senate committee investigating the software company's role in advising companies accused of gouging electricity customers. In the May 1997 exchange of e-mail messages, Perot employees discuss partnering with a consultant, George Backus, to advise Edison on how to take advantage of "holes" in California's emerging energy market.
An Edison spokesman, Gil Alexander, said the utility did not hire Mr. Backus or Perot Systems because it had an incentive to keep wholesale prices lower, because it was selling power under a retail rate cap.
H. Ross Perot, a former presidential candidate and chairman of Perot Systems, plans to testify July 11 at the Senate Select Committee to Investigate Price Manipulation of the Wholesale Energy Market.
The California attorney general subpoenaed the documents, which were also delivered to the committee.
Perot Systems said it would also provide the material to the Securities and Exchange Commission and the company posted the documents on its Web site.
Mr. Backus said Thursday that he had not been asked to testify before the California Legislature yet, but was asked by the committee to retain any documents pertaining to Perot Systems and California.
He declined further comment and referred calls to his lawyer, Tim Beyer, who said he had not yet reviewed the documents and could not comment.
An economist hired by Perot Systems blamed lawmakers and regulators for California's troubles. The economist, Steven Stoft, author of a book on designing electricity markets, said the rules for California's market were flawed.
Wising Up To DeregulationEmployee Advocate – DukeEmployees.com – June 23, 2002
It has been a slow process, but people in Montana are wising up to the sham promises of electric deregulation.
The Associated Press reported that five merchant energy companies have been rejected because too little was known about them.
Commissioner Bob Anderson said “It simply didn't pass the smell test. It wasn't fair to the other bidders.”
That is just one of the fallacies of electric deregulation. A fly-by-night energy company can come in and place low-ball bids. If they happen to make money, fine. If they start to lose money, they can just walk away and leave their customers with dumb looks on their faces.
The bottom line is that it costs a certain amount to produce electricity. That is if one obeys the laws, treats employees fairly, and honors commitments. Well capitalized, experienced energy companies can do this. They are not likely to steal away in the middle of the night.
The illusion of cheap power prices is HMO sales pitches rehashed. Nothing is gained by letting a bunch of half-baked companies into the game. The price of power can always be lowered by cheating employees, dumping PCB in the creek, doing shoddy work, and otherwise cutting corners. But this game can not go on indefinitely.
Customers are in for unreliable service and possibly no service at all, only to try to save a few cents. It is just not worth it.
Someone is catching on. These five power companies were not allowed to compete because they were viewed as being a little shaky.
The commissioners accepted the largest suppliers, including Duke Energy. Duke was accepted because of virtues of the past: reliability and trustworthiness. Wallowing with the bottom feeders will continue to erode these virtues.
Somebody Ought To Go To JailAssociated Press – by Mark Sherman – June 23, 2002
(May, 2002) - WASHINGTON - Senate Majority Leader Tom Daschle said Thursday he believes Enron Corp. broke laws while manipulating electricity supply and prices during the California energy crisis.
“I don't think there's any doubt that somebody ought to go to jail and that we ought to find a way through public policy to fix a system that needs to be addressed," said Daschle, D-S.D.
California Republicans sought to blunt any partisan advantage for Democrats on the issue. Reps. Mary Bono and George Radanovich joined Democrats in calling for a Justice Department investigation of Enron's energy trading practices as explained in internal company memos made public this week.
"We now have reason to believe that illegal acts took place," Bono said.
The Enron documents described how the energy trading company sought to cash in on California's energy crisis in 2000 and 2001. During the crisis, wholesale energy prices shot up tenfold.
Democrats continue to fault the Bush administration and Republican leaders in Congress for taking a hands-off approach to the crisis, despite pleas from California to help control wholesale prices.
"The Bush administration and congressional Republicans sided with the energy companies and did nothing to help," said Rep. Henry Waxman, D-Calif.
At a news conference, Democrats from California, Washington state and Oregon also criticized the Federal Energy Regulatory Commission, saying it waited months to impose price caps to address the California crisis.
"We told them Enron and others were gaming the system. So my question to FERC is, 'What took you so long?'" said Sen. Barbara Boxer, D-Calif.
Two panels in the Democrat-controlled Senate announced hearings Wednesday on price manipulation in energy markets. The commission chairman, Pat Wood, is expected to testify before the Senate Energy and Natural Resources Committee.
The Enron lawyers who wrote and received the documents about the company's trading strategies have agreed to appear before a Senate Commerce, Science and Transportation subcommittee, said a spokesman for the committee chairman, Sen. Ernest Hollings, D-S.C.. The committee also voted Thursday to give Hollings authority to issue subpoenas to compel their appearance if necessary, Davis said.
In the Republican-controlled House, the Energy and Commerce Committee is resisting calls from Democrats for an investigation of Enron's and other companies' energy trading strategies.
"The first thing to determine is how pervasive is the problem," said Ken Johnson, spokesman for Rep. Billy Tauzin, R-La., the committee chairman.
Enron's share of the $9 billion California is seeking in overcharges for electricity is just 1 percent, Johnson said.
Johnson said the committee would wait for the results of FERC's investigation. Federal energy regulators, who released the Enron documents this week, have given more than 150 power generators, marketers and utilities until May 22 to disclose whether they used similar practices.
‘Curtains’ for Another Deregulating Energy CEOWall Street Journal – June 20, 2002
(6/19/02) - AES Corp. President and Chief Executive Dennis W. Bakke resigned yesterday, the latest casualty of investor disenchantment with the nation's power companies.
Mr. Bakke, 56 years old, who co-founded the company in 1981 and served as CEO since 1994, steps down as AES grapples with a slew of power investments in developing countries, particularly in Latin America. The Arlington, Va., company has for the past decade aggressively sought to take advantage of energy deregulation and has units in 40 countries, ranging from Brazil to Sri Lanka.
AES's board chose Paul T. Hanrahan, 44, an executive vice president, to succeed Mr. Bakke. Mr. Bakke will remain on the company's board and has been given the title of co-founder and emeritus CEO.
In a prepared statement, Mr. Bakke acknowledged that "the entire power sector has undergone a crisis of confidence" and that "investors are demanding change."
Roger W. Sant, AES's chairman and co-founder, added that the board selected Mr. Hanrahan -- a 15-year veteran of the company -- "because of his demonstrated effectiveness as a problem solver, his management experience around the globe and his financial acumen."
He has served AES on four continents and as CEO or chairman of three of AES's publicly traded subsidiaries.
Mr. Hanrahan acknowledged that his company suffers from the same problems as others in the power sector, including tighter capital markets, weakened electricity prices "and difficulties in emerging markets."
In an interview, Mr. Hanrahan said his immediate priorities include "fixing our problems in South America" through major corporate restructuring, sales of assets, joint ventures or spinoffs as independent businesses. In addition, he wants to focus on strengthening the company's balance sheet to "regain financial stability in the short term" and to bring AES's credit rating higher in three to four years.
He said his plans for the next 18 months include the sale of $750 million of assets, the reduction of $200 million in costs and a $500 million cut in new capital investment. In addition, he wants to boost AES's liquidity by an additional $1 billion, through either the sale of additional assets or the sale of equity.
At the same time, the company does have some significant advantages compared with many of its peers. It isn't engaged in the high-stakes energy-trading business and it suffers from relatively little exposure to the industry's well-publicized problems in the California market.
Troubles in the merchant energy sector have already taken a serious toll among executives. The entire leadership of Enron Corp. has left following the company's bankruptcy filing last December, while more recently CMS Energy Corp. Chairman William T. McCormick and Dynegy Inc. Chairman Chuck Watson have stepped down as their companies faced scrutiny over their trading practices.
While AES hasn't come under fire for its trading, its stock has still dropped precipitously of late. From an all-time high of more than $70 in October 2000, AES shares plummeted to $44.50 about a year ago -- on June 28, 2001 -- and were down six cents at $5.02 in 4 p.m. composite trading on the New York Stock Exchange.
Time to End Energy Trading SecrecyHouston Chronicle – by Janet Elliott – June 20, 2002
(6/19/02) - AUSTIN, Texas -- Electric companies should be required to publicly disclose details of all wholesale energy transactions, a key state lawmaker proposed Tuesday.
State Rep. Steve Wolens, co-author of the 1999 electric deregulation law, called for monthly reporting of all wholesale electricity contracts.
"Each day's headlines strengthen my belief that the public can only be served by open, transparent energy markets," said Wolens, D-Dallas. "Secrecy breeds corporate behavior that would never withstand the light of public scrutiny."
Wolens, co-chairman of the Electric Utility Restructuring Legislative Oversight Committee, called on the Public Utility Commission and the Electric Reliability Council to adopt rules requiring monthly reporting of all wholesale electricity contracts.
Wolens also proposed making ERCOT's board of directors more independent. Private power companies hold 12 of the 25 seats on the board, which manages the state's transmission grid and oversees the market.
Wolens said the board is too slow to act on problems, such as delays in switching customers from one power provider to another. Under Wolens' proposal, ERCOT board members could not be employed by or have a significant financial interest in a company that provides electricity in the Texas market.
Wolens was angered that Jack Hawks, who resigned earlier this month as chairman, did not appear as requested to testify. Hawks is a vice president at PG&E National Energy group and lives in Maryland.
Hawks was replaced by Mike Greene, president of Oncor, TXU's energy delivery business.
Wolens said that despite the problems in switching customers, he still believes Texas has the nation's best deregulated market.
But Wolens said events in California highlight the need for vigilance here.
"Californians are several billion dollars in the red because a bad market design, bad weather and bad corporate behavior all came together at once," he said.
Wolens said round-trip trades such as those disclosed by Reliant Resources are an example of information that needs further examination. The trades involve buying and selling the same amount of energy at the same time. Reliant Resources, a unit of Reliant Energy, has said it used such trades to inflate its trading volumes and revenues for the past three years.
Wolens asked representatives of Reliant about 4 million megawatt hours of trades it made in the first quarter of 2002 with a small, unregistered Houston power marketer, Cokinos Power Trading.
John Stout, a Reliant Resources senior vice president, said the trades were tied to the demise of Enron and to a change in congestion management zones on the Texas electricity grid. Stout said the transactions were not round-trip trades because they had legitimate business purposes.
Stout said that when Reliant recognized that Enron was about to file for bankruptcy, it needed to aggregate its transactions with Enron into one trading portfolio in order to manage the risk. Cokinos earned $4,000 for the transactions, Reliant official said.
Lawmakers were skeptical about Reliant's explanations.
"It sounds like an insider deal," said Rep. Debra Danburg, D-Houston.
Wolens said he is concerned such transactions could affect prices on the electric futures market.
Under Wolens' proposal, companies would report to the PUC wholesale electricity transactions 60 days after they occur. The PUC would make that information public 30 days later.
"Three-month-old data will not completely reveal a company's strategic position in the market, but it will enable investors and regulators to reasonably ascertain the validity of corporate statements of financial health," Wolens said.
The requirements are similar to what Texas companies must file with the Federal Energy Regulatory Commission for transactions outside of the state.
Reliant and other power companies expressed support for Wolens' proposal.
Chris Schein, a TXU spokesman, said the disclosures are needed to help restore public confidence in the state's deregulated market.
"There has been an erosion in confidence in the market, particularly as it relates to trading," Schein said.
On another matter, the company that designed the computer systems to manage the state's electricity market promised lawmakers it would never sell that information to market participants. That assurance came from a representative of Accenture, a New York-based consulting firm.
California lawmakers are examining whether Perot Systems Corp. may have shown traders how to exploit defects in the systems it designed for two California markets. Chairman Ross Perot has denied the allegations.
Perot Systems said it was working Tuesday to forestall a subpoena from the California Legislature over its role advising companies accused of manipulating California's electricity market.
Enron Paid Senior Execs MillionsL. A. Times – by T. Mulligan, N. Brooks – June 19, 2002
(6/18/02) - NEW YORK -- Before collapsing last year, Enron Corp. paid out $744 million in salary, bonus and stock grants to the company's 140 senior officers--an average of $5.3 million each.
The company disclosed the payments Monday in a court filing that provided the most detailed accounting yet of the company's payments to executives and other employees--including $100 million in retention bonuses to about 300 workers.
The filing also details $3.6 billion in payments to creditors and others in the three months before Enron filed for bankruptcy protection Dec. 2. The sums collected by top Enron insiders provide a stark contrast with the modest severance payments to the 4,200 Enron employees who lost their jobs around the time of the bankruptcy filing.
So far, the most any of the fired workers has collected is well under $10,000, Lowell Peterson, a lawyer for a number of those workers, said Monday. In a recent settlement still awaiting court approval, the group won several additional payments up to a maximum of $13,500 per person, he said.
By comparison, former Enron Chairman Kenneth L. Lay collected $103.6 million in total payments last year, including salary of $1.07 million, a bonus of $7 million, long-term incentives of $3.6 million and $81.5 million in loan advances, according to the filing. Lay also was awarded stock options and restricted stock worth $49.1 million, the documents show.
"It sort of shocks the conscience," Peterson said. "It's just not right for a company to be run as a private piggy bank for its officers, who then proceed to run it into the ground, costing 4,200 people their jobs."
Employees and investors who lost money in Enron's collapse could seek to have the bonuses rescinded and used toward a potential damage settlement.
The Senate Finance Committee said Monday it was investigating whether the bonuses were paid into special accounts, possibly offshore, without the knowledge of tax authorities.
The salary data are part of a required 1,600-page "statement of financial affairs."
The salary and bonus figures are for all officers at the level of managing director and above. The data go beyond what already has been disclosed in Enron's regular proxy statements, which deal with a few top executives and directors, including Lay, former President and Chief Executive Jeffrey K. Skilling and former Chief Financial Officer Andrew S. Fastow.
The bulk of the information disclosed Monday concerns the nearly $3.6 billion in payments made by Enron to its creditors before its bankruptcy filing.
Those creditors include Enron's former accounting firm, Arthur Andersen, which collected $12.3 million over the three months, the filing shows. A federal jury in Houston on Saturday convicted Andersen of obstruction of justice for its role in the Enron scandal.
Other large creditors include big commercial and investment banks such as J.P. Morgan Chase, Lehman Bros., Credit Suisse First Boston, Citibank, Bank of New York and UBS Warburg. Most of the bank transactions involved foreign-currency exchanges connected with Enron's overseas operations, Enron spokesman Mark Palmer said.
The documents give a flavor--much of it ironic in light of Enron's collapse--of the minutiae of daily corporate life. Payments went for such expenses as soft drinks, burritos, limousines, party tents and silk flowers. But there also was $37,933.70 to Accountemps, $100,000 each to the Republican and Democratic senatorial committees and $90,000 to the lobbying group Americans for Tax Reform.
Monday's filing concerns just Enron Corp., the parent corporation, Palmer noted. Filings by more than 50 other Enron entities are still to come, he said.
According to the documents, here is what some key Enron executives collected last year:
* Skilling received $8.7 million in salary, bonus and other compensation last year, plus stock and options grants of $26 million. A spokeswoman for Skilling could not be reached for comment.
* Fastow in 2001 collected $2.4 million in salary, bonus and other pay, plus $1.8 million in stock-related compensation. The figures do not include the reported $40 million more that he received through his interest in controversial limited partnerships that Enron used to boost profits and conceal corporate debt.
"We know the papers were filed; we don't have a comment on any aspect of it," said Gordon Andrew, a spokesman for Fastow.
* Richard B. Buy, former chief risk officer, received $2.4 million in salary and bonus and $3.4 million in stock compensation.
* Richard A. Causey, former chief accounting officer, was paid $1.9 million in salary and bonus plus $2.5 million in stock awards.
Buy and Causey were criticized in a board report Feb. 1 that said they were not effectively policing off-the-books partnerships run by Fastow and others. Both were subsequently fired.
J.C. Nickens, a Houston lawyer who represents Buy, Causey and several other former Enron executives, said Monday that Buy and Causey put far less money into their pockets than the numbers show because they had to pay taxes on stock-related compensation that became worthless after the bankruptcy filing.
Causey, for example, lost all but $400,000 of his stock-related payments but had to pay taxes totaling $1.6 million last year, the lawyer said.
"They're not out there looking for sympathy, just a fair hearing," Nickens said.
Kelly Kimberly, a spokesman for Lay, said the figures "appear to grossly overstate the amount of compensation which Mr. Lay realized in the 12 months prior to the bankruptcy filing."
Much of his pay was in stock, stock options and other long-term compensation that, because of the bankruptcy, was never realized, she said.
Mulligan reported from New York and Rivera from Los Angeles. Reuters was used in compiling this report.
Duke Ran at 50% Capacity During Energy CrisisL. A. Times – by P. King, N. Vogel, N. Brooks – June 18, 2002
One fall day in 2000, in the midst of the California energy crisis, S. David Freeman found himself debating by telephone with Enron's Kenneth Lay, chief executive of the then highflying Texas energy firm.
Freeman, head of the Los Angeles Department of Water and Power at the time, had joined other California officials in pushing the federal government for price controls as a means to rein in a runaway wholesale market.
Government intervention, Lay warned Freeman by telephone, would not work. Extended price caps would keep the market from correcting itself, and frighten away future investment in power plants. Lay, as Freeman recalls it, ended the conversation with this parting shot: "Well, Dave, in the final analysis, it doesn't matter what you crazy people in California do, because I got smart guys out there who can always figure out how to make money."
Looking back on it now, amid revelations about "Death Star" and "Get Shorty" and other colorfully named tactics concocted by Enron traders, Freeman figures he should have paid more attention: "What he was telling me, in a sophisticated way, was that they were going to game the system."
Over the last few weeks, internal memos, notes and other energy industry materials have kept popping into public view, suggesting in sometimes vivid detail just how the "smart guys," as Lay called them, worked to manipulate the California energy market in 2000 and 2001.
The paper flow, which began in early May with the release of a set of so-called "smoking gun" memos from Enron, has prompted regulators, politicians and other industry figures to begin reexamining the root causes of the crisis and even to consider anew that most fundamental of questions: Was there, in fact, a shortage at all?
Federal regulators, who long maintained that the mess was one of the state's own making--and who, in turn, were maligned by California leaders as cops asleep on the beat--seem to have executed an about-face.
Patrick H. Wood III, the former Texas regulator who late last year was appointed chairman of the Federal Energy Regulatory Commission by President Bush, said that initially he considered the California debacle the result of a flawed deregulation plan. Now he's not so sure.
"I didn't walk in here thinking we needed to do a names, numbers, times and dates and 'Who's your alibi?' investigation of the California market, and now I do," Wood said in an interview. "That kind of analysis is something that we really do need to do ... to get the definitive understanding of what happened in the California market."
While Wood and others say the evidence on manipulation is not yet conclusive, California officials who contended all along that the crisis was artificial are no longer being dismissed as conspiracy theorists. There is more at work now than sorting out the spin and revising history.
Although the crisis faded away a year ago, the Enron memos and subsequent disclosures have given a push to state efforts to retrieve some of the fortune spent to keep the lights on.
Seeking to Revise Long-Term Contracts
California officials have demanded nearly $9 billion in refunds from power companies on the grounds that wholesale electricity rates violated a federal requirement of "just and reasonable" prices. They have also sought a restructuring of long-term contracts negotiated with generators--often at steep prices--to keep electricity flowing.
At a minimum, the disclosures have poked a hole or two in the vapor of mythology that enveloped the crisis almost from the start. Bottlenecks on the north-south transmission lines, air quality rules, drought in the Pacific Northwest, overworked plants, the demands of the burgeoning California computer culture--all these and more were blamed at various times for driving California's electrical system to the edge of collapse. Even Christmas tree lights had a moment in the defendant's dock.
In testimony before a U.S. Senate committee, state Sen. Joseph Dunn (D-Santa Ana) described what he called the "evolution of excuses" this way: "Prices skyrocket and consumers are told they are suffering the short-term 'pain' of deregulation. Prices remain high, and generators falsely explain that California is a victim of its own demand--despite ranking 48th among the 50 states in per capita energy usage and a demand growth of just 4%, year after year.
"Then we are told there is an outright shortage--a myth that persists today. Next they tell us that the crisis is the result of bad rules, the generators' and traders' way of justifying manipulative behavior. The Enron memoranda and the recent admissions by other market participants reveal the truth about the cause of the energy crisis:
"Certain market participants gamed the system to reap excess profits on the backs of Californians."
Robert McCullough, an Oregon-based energy consultant and early advocate of the view that market manipulation, not scarcity, was propelling the runaway prices, cited several other myths he would like to dispel, including:
* A Pacific Northwest drought depleted hydroelectric supplies, an important source of California energy in summertime peak hours. Hydro supplies were just slightly below average in the summer of 2000, when wholesale prices started to soar, he said. Oddly enough, when the prices declined in mid-2001, hydro supplies were much worse than they had been the previous summer.
* Plants were so overworked that they kept going down for repairs just as they were needed most. On the contrary, McCullough said, citing Environmental Protection Agency data, power plants operated in California by AES Corp., Duke Energy, Dynegy, Mirant and Reliant ran at only 50% of capacity from May 2000 to June 2001. Plants of similar construction and vintage outside of California, he said, were working much harder.
* Congested power lines caused six days of blackouts, and dozens of near misses, in early 2001. McCullough, citing Bonneville Power Administration reports, said that transmission lines from the Pacific Northwest to California were never fully loaded at those times.
"A lot of what was going on," McCullough said, " ... just didn't pencil out."
Energy Generators Insist No Gouging Occurred
Experts still disagree over just how big a role manipulation played in the crisis. Private energy generators still insist that California dug a hole for itself by not building enough power plants and by bungling its deregulation effort. And what Californians call "gouging," they tend to describe as playing by the rules as the state wrote them.
Indeed, many of the so-called industry "myths," as McCullough and others describe them, do have some basis in truth. There was a drought in the Northwest. Plant construction did slow down for a time in California, as it had across the West. There were clogs in the transmission system and flaws in the electricity market design.
"Every charlatan starts with a kernel of truth," state Sen. Steve Peace (D-El Cajon) said in an interview. "Everything that they pointed to had some kernel of truth to it, some credibility to it. That was the trouble with arguing your way through this thing. Everybody wanted a simple, philosophical, cut-and-dry answer. As opposed to the reality, which is that all these things they point to combine to create an environment that allows unethical, crooked people to take advantage of the circumstances."
In recent weeks, however, new kernels of truth kept emerging.
Last week, a state Senate committee produced a "blueprint" for gaming the California market, a document that it said had been developed by Perot Systems. Perot Systems denied any wrongdoing.
Another industry document, produced by FERC's expanded investigation into market manipulation, caught the attention of Wall Street analysts last week. It contained telephone transcripts in which traders appeared to be discussing assorted ways to manipulate the California market and maybe even share profits.
"We are deeply concerned," noted the analyst, Christopher Ellinghaus of the Williams Capital Group, "that the unveiling of additional documentation related to the California issue will continue to be bombshells for this industry."
So far, though, the most provocative discovery to come to light has been a Dec. 6, 2000, memo from outside attorneys for Enron. It was written after they debriefed traders in the fall of 2000 about their conduct in the California market. In the memo, made public in early May, the lawyers laid out a catalog of trading "strategies." These included laundering megawatts in and out of state and the creation of false congestion on the transmission grid.
The language can be wonderfully accessible. For example, in describing a congestion gambit known as "Death Star," the attorneys wrote: "The net effect of these transactions is that Enron gets paid for moving energy to relieve congestion without actually moving any energy or relieving any congestion."
And a tactic by which electricity was bought by Enron and then exported from California to markets willing to pay even higher prices was defended this way: "This strategy appears not to present any problems, other than a public relations risk arising from the fact that such exports may have contributed to California's declaration of a Stage 2 Emergency yesterday."
As for the colorful names attached to the tactics, it was explained: "Enron's traders have used these nicknames with traders from other companies to identify these strategies." In another document, a set of a lawyer's handwritten notes from the debriefing, a public posture for the firm is proposed should the tactics become the subject of investigations: Answer questions, say nothing ... finger others.
Only the Price of Power Changed
Some state officials and energy experts contend that the main value of these documents has been to popularize a point they had attempted to make all along--that the steep increases in wholesale prices went beyond what could be expected in the normal fluctuations of a working market. They regret not coming up with catchy names like "Fat Boy" and "Ricochet" themselves.
Said Freeman, who left the DWP during the crisis to become a key energy advisor to the governor: "For a lot of people, all of the sudden, it just clicks. The light bulb turns on."
However compelling the internal documents may be, many California officials insist the best evidence that the crisis was, as Freeman put it, "ginned up" has been there all along, simple and empirical. Demand for electricity was not significantly higher during the crisis period than it had been in previous years. Supply was not drastically lower. All that changed, and changed dramatically, was the price being paid for the electricity.
What happened, according to their scenario, is that in the late spring of 2000, for a variety of reasons, the market began to tighten up. There was still enough juice--by and large the lights did stay on--but the cushion of excess supply shrank. This gave generators and traders what is called "market power," the ability to demand and receive excessive prices over an extended period of time.
Market power traditionally occurs when two or three suppliers control vast portions of a given market.
In California's electricity market, however, such dominance wasn't necessary. With supply and demand curves running more closely together, a small amount of generation offered at just the right time also would do the trick.
Frank Wolak, a Stanford University economist and chairman of the market surveillance committee for the California Independent System Operator, which runs the grid, explained: "Say 10 firms each own 1 megawatt and demand is 9.5 megawatts. There's no shortage, but you're going to have prices at the price cap. Why? Because each firm knows that you need half a megawatt from me no matter what my competitors do to meet demand."
Peace said federal regulators failed to recognize this nuance: "You don't have to have 40% of the overall market to exercise market power. You only need to control the right electrons at the right time. And that's what these guys did."
Anjali Sheffrin, director of market analysis for the independent system operator, has churned out chart after chart tracking demand and price for California electricity since 1998, when the state began its transition away from a regulated energy model. The lines stay relatively flat month after month, until May 2000.
At that point, like the wild scratching of a polygraph machine when the suspect begins to tell fibs, the wholesale price curve starts to shoot upward. It peaks in December 2000, a month when wholesale prices were running 10 times higher than they had the year before--even though demand was virtually unchanged. The price line finally flattens out again at what had been normal levels in June 2001--after FERC essentially rewrote the market rule book for California and the entire Western grid, imposing price limits and closing loopholes.
Sheffrin has reworked her numbers many times to incorporate all the supposed forces behind the rising prices. Each time, in examining the price spike, she has found the same thing: "A significant portion of it--even after you accounted for cost of production, emission, everything--occurred because suppliers were demanding high prices."
And getting them: "In all my reports," she said, "what I show is that whenever supply and demand get real close, even though you're not in a shortage situation, then suppliers can name their price. That's what market power is."
In this context, questions of whether plants were shut down needlessly for "unscheduled maintenance" or traders shipped California electricity out of state take on added importance.
Ongoing federal and state investigations are exploring whether generators withheld supply--either by idling plants, or through manipulations of the bidding process--to preserve their market power and strike only when prices were at their highest.
As the crisis unfolded, other oddities were noticed. Prices for wholesale electricity during off-peak hours--early Sunday morning, say--began to climb nearly as fast as those of the busiest afternoon hours. There was a wintertime spike in natural gas prices, the fuel needed to run many California plants; gas prices were high everywhere in that period, but the increases in California exceeded those registered in other states many times over.
Of the half-dozen rolling blackouts that finally did materialize, most occurred not in the summer, when demand for electricity tends to be at its peak in California, but in the cooler months.
Wolak, for one, finds this remarkable: "That says to me, these guys figured out [they're] the only game in town. Declare enough forced outages, and you will be able to jack the price up through the roof."
Traders and suppliers, of course, spun a different story throughout. In October 2000, about the time Lay was debating price caps with Freeman on the telephone, and energy companies were posting huge boosts in third-quarter earnings, and Enron traders were telling the lawyers about Death Star and Get Shorty and the rest of their tricks, a leading Enron trader, Tim Belden, addressed his colleagues at a conference on volatile energy prices.
He said he was baffled by it all.
"We sit here, we listen to everybody talk," Belden said. "Each side is compelling. You scratch your head. You maybe say, 'I have no idea.' Is there scarcity? Is there a smoking gun? We still don't know. How did we get here? Well, first these complex markets were designed by economists and engineers. If you want to trade power in California for Enron, the minimum requirements are, you need to have a law degree and a PhD in engineering. You need to have done significant research in market theory and game theory."
At this point, the audience laughed.
A Bleak Time for Energy Industry
Of course, laughter in the energy industry has been in short supply of late--and not an artificial shortage either. The fortunes of outside energy companies dealing in California tended to follow the lines on Sheffrin's price chart. And now, seven months after the collapse of Enron, the merchant-energy industry is suffering one of the bleakest periods in memory.
Of the 123 industry groupings in the Standard & Poor's 500 blue-chip stock index, the Multi-Utility category--made up of Duke Energy, Williams Cos., Dynegy, Mirant, Calpine and AES, California players all--finished dead last for the month of May, with an aggregate decline of nearly 23%.
Every day, it seems, brings another damaging revelation, another investigation launched, another executive resigned. In California, there's talk among industry leaders about establishing voluntary codes of conduct for traders. And even some of the best allies of the energy generators express disappointment in the mind-set revealed by the Enron memos.
"It's personally offensive to me," said Jan Smutny-Jones, executive director of the Sacramento-based Independent Energy Producers, which represents power plant owners, "as someone who's spent a lot of time working on markets in California ... to have someone creating congestion in order to get paid for fixing it."
He pointed to a window in his Sacramento office.
"This window doesn't have a sign on it that says do not throw a rock through it, but most people have a common sense that you don't throw rocks through windows. If we need to put a sign on every window that says don't throw rocks through it, that's fine."
Meanwhile, the investigations proceed.
Dunn, whose committee has smoked out some of the most damaging documents, sat in his office the other day surrounded by 33 yet-to-be explored boxes of internal Enron paperwork.
"The tip of the iceberg" is how he described what has transpired so far. He recalled the long stretches early on when the investigation into possible market manipulation often was dismissed as something of an Oliver Stone production: long on conspiratorial theory, short on the goods.
"At some level," he said, "there's relief that what we suspected for a long time has proven to be true. But economists said that you can't have this sort of wealth transfer going on without something having gone wrong in the market. They were right. When you saw the transfer of wealth we had in so short a time, something's wrong."
Times staff writers Ricardo Alonso-Zaldivar, Richard Simon, Thomas Mulligan and researcher Maloy Moore contributed to this report.
Deregulation is Bad for Your HealthWall Street Journal – June 18, 2002
(6/14/02) - As the Bush administration pushes a plan that critics say would loosen controls over power-plant emissions, a new report by an international trade commission shows those emissions have increased far more than the government's worst-case projection, issued as deregulation began.
Emissions of carbon dioxide jumped 20% to 2,611 million tons in 2000 from 2,175 million tons in 1995, or double the increase forecast by the Federal Energy Regulatory Commission in 1996, according to the report by the Commission for Environmental Cooperation of North America. The commission is composed of representatives from the governments of the U.S., Mexico and Canada, and was set up under a side agreement to the North American Free Trade Agreement to monitor crossborder environmental issues such as pollution from power plants. FERC had forecast an increase of 10% to 2,404 million tons.
The commission attributed the unexpectedly high increase to a cutback in energy-conservation measures by power companies following deregulation. The industry expenditures for such measures fell to $1.4 billion in 1999 from $2.4 billion in 1995. Utilities chose to limit the investments that would have required the costs be passed through to consumers, a thing they didn't want to do in the newly competitive market.
"It's my hope that we can restore these investments and expand them, but this report shows the consequences of not doing it," said Ralph Cavanagh, energy program director for the Natural Resources Defense Council environmental group, and a member of the commission's advisory board. Officials of the Federal Energy Regulatory Commission weren't available for comment on the report, which was reviewed by The Wall Street Journal in advance of its scheduled release Monday.
This much-increased pollution isn't the way deregulation was supposed to play out, but then little has gone according to plan. Proponents of deregulation believed that breaking the monopoly grip of utilities would lower electricity prices and reduce air pollution. This would happen, they reasoned, because competing companies would build new plants fired by natural gas and would be able to sell juice more cheaply than older, dirtier plants. Over time, the better technology was expected to result in older plants being retired.
So far, that hasn't happened to any significant extent. Though dozens of new gas-fired plants have been built, it hasn't driven older plants out of business. They continue running because they are needed for voltage stability, on the electric grid, and because many places, such as the West, remain energy deficient at times. Wholesale prices in places with abundant energy supplies, such as the South and Midwest, remain so low that coal often has the edge over gas-fired plants.
Despite the commission's call for increased investment on conservation, the pollution problem isn't expected to ease anytime soon. After Enron Corp.'s collapse and energy-industry retrenchment, for example, less money is available for the construction of new, cleaner plants. A report from Standard & Poor's this week acknowledged that trend, noting that "deregulation and restructuring . . . should be improving efficiency . . . as well as building investor confidence to support new investment, yet chaos seems to be the order of the day."