DukeEmployees.com - Duke Energy Employee Advocate
Deregulation - Page 19 - 2002
Deregulation Set Stage for Corporate ScandalsPublic Citizen – Press Release - July 19, 2002
Public Citizen President Joan Claybrook Tells Lawmakers
WASHINGTON, D.C. - The recent wave of corporate scandals results directly from a decades-long campaign waged by Corporate America to diminish or eliminate executive accountability and dismantle vital safeguards for consumers, workers and pensioners, Public Citizen President Joan Claybrook told lawmakers today.
The Bush administration and Congress are talking tough about cleaning up corporate crime, but unless the deregulatory drive is stopped, meaningful reforms are made and members of the administration - most notably Army Secretary Thomas White - are held accountable for their actions in the corporate world, those words will ring hollow, Claybrook said.
"To put an end to the crime wave, Congress and the White House must stand up to the corporate lobbyists and start legislating and governing on behalf of the American people," Claybrook said. "We need strong regulation of corporations - standards that will prevent wrongdoing and punish executives who violate the public trust."
The cascade of corporate criminal accounting scandals and its negative impact on Wall Street are forcing members of Congress for the first time in decades to pass strong financial accounting legislation long blocked by the industry, Claybrook said.
During testimony before the subcommittee on Consumer Affairs, Foreign Commerce and Tourism of the Senate Committee on Commerce, Science and Transportation, Claybrook renewed her call for the resignation of White, whom she called a "poster boy for corporate abuse." White headed an Enron Corp. subsidiary that manipulated energy markets and prices during the California energy crisis and used questionable accounting methods to inflate profits. He also has been late in reporting stock sales to the Securities and Exchange Commission (SEC), as required by law, was slow to divest his Enron holdings, and flew on an Army jet at taxpayer expense to sign papers on the sale of his Colorado estate.
Claybrook praised the Sarbanes accounting reform bill, passed by the Senate on July 15 but said it should be stronger. While Public Citizen supports the bill and many of its reforms, it still allows many consulting services to be performed by companies in charge of audits, at the very least creating conflicts of interest for accountants.
Claybrook released a new Public Citizen analysis of consulting fees paid by the top 20 companies in the United States and another 29 companies that are embroiled in accounting scandals. The analysis found that there was a close parallel between these two groups in terms of the percentage of total accounting fees that went to non-audit consulting. In 2001, the top 20 group paid a total of $880 million to accounting firms, and of that, $636 million, or 72 percent, went for consulting services rather than auditing. The 29 companies in trouble paid a total of $378 million in fees - 75 percent of which went for non-audit services. Arthur Levitt, former head of the SEC, sought to end this conflict in the 1990s, but amid the deregulatory climate and a hailstorm of lobbying and campaign contributions by accounting firms, his proposal was quashed.
"The weak financial regulatory system has failed the American people," Claybrook said. "But we have seen politicians of both parties rush to assuage their campaign contributors by whittling away vital protections at the behest of the powerful corporate entities that fill their campaign coffers."
Many of the scandals now coming to light would not have occurred without the poor enforcement of some existing regulations, the sharp curtailment of others and the stymieing of new regulations by well-funded corporate lobbying campaigns. Not nearly enough is being done to slow the deregulatory drive, Claybrook said. For example:
Claybrook made specific recommendations to improve investor recovery for fraud, limit corporate executives' abuses of stock options and increase their accountability, increase auditor responsibility, prevent pension abuses so that employees will not lose their life savings because of executive corruption, and increase the staffing and funding of the SEC, while ensuring the transparency of the agency's actions.
Duke’s Secret Price Code CrackedThe Charlotte Observer – by Stella M. Hopkins – July 14, 2002
(7/12/02) - As California reeled toward blackouts early last year, Duke Energy Corp. raised its wholesale power prices, some nearly sixfold in just weeks.
On the first day of blackouts, Duke sought to sell the state power for $1,170 per megawatt hour, according to documents The Observer analyzed. Six weeks earlier, Duke offered the state power from the same plant at $200. Duke also raised prices from its other California plants.
The average Carolinas home uses one megawatt hour per month at a retail cost of $73.
With the price increases, Duke became one of the state's most expensive bidders, according to state documents, which used codes to keep bidders' identities secret. The Observer identified Duke's bids by deciphering those codes.
Critics say the price run-ups support earlier claims that California power producers, including Duke, manipulated the state's electricity market for excessive gain. Generators deny the accusations.
"The bids are a very good indication of what generators believed the state was willing to pay," said Christian Schreiber, an investigator for the California Senate committee probing the role generators played in last year's power crisis. "In addition, it indicates the generators' priority here was never to serve California in a time of need but to exploit California at its darkest hour."
Charlotte-based Duke, one of California's largest generators, denies it raised prices to take advantage of the state's crisis.
Duke says it marked up its prices as much as 80 percent because the agency buying power for the state wasn't paying its bills. Because of that credit risk, Duke says, it tried to sell all its California power to its other customers in the state. But, like other generators, Duke had to sell any available power to the agency when it was needed -- usually when the state's supply was very low.
Duke says it is still owed $266 million for power sold to the agency, the California Independent System Operator, or ISO.
"The fact that our prices went up was related to the (ISO's) credit crisis, not the shortage of power," said Duke spokeswoman Cathy Roche. "These (ISO) bids were a last resort after we tried desperately to sell the power to anyone that would pay us for it."
The Observer also found bids that match sales that another generator has acknowledged making. That data show that Houston-based Reliant Energy Inc. may have offered the state power at an even higher price than Duke did.
The state reports do not show whether California actually bought power at the higher rates, only the prices at which Duke and other energy traders offered to sell it. But federal reports show the state did buy Duke's highest-priced power. And the bids -- some soaring far above Duke's -- provide the closest look yet inside the financial strain California faced as it sought power.
Critics, including lawmakers and lawyers, have decried the secrecy surrounding generators' pricing. The Observer analysis is the first to match a generator with its full bid history. A new federal reporting system starting this month will provide more details on generators' sales.
"The idea that people will be able to hide the truth indefinitely ... is a gamble that will be lost," said Michael Aguirre, a former federal prosecutor who has filed one of several lawsuits against generators. "They won't be able to hide anymore."
California's crisis eased last summer as the state signed long-term power contracts and federal regulators capped prices. Plant fuel costs also dropped, new power plants increased supply, and conservation and unusually cool weather reduced demand.
This week, record temperatures pushed the state's power reserve to the lowest level since last year, prompting calls for conservation. State officials say supplies are adequate. Even Wednesday's breakdown of a large plant didn't tip the state into crisis.
"It's a sea change from last year," said Steve Maviglio, a spokesman for Gov. Gray Davis.
But the industry remains haunted by the disaster that plunged a state into darkness, cost California tens of millions of dollars in higher power prices and derailed electric deregulation in many states, including the Carolinas.
The Federal Energy Regulatory Commission has intensified a broad probe of pricing and sales practices in the Western energy market. The commission also plans an August hearing on California's request for nearly $9 billion in refunds from generators and traders.
The Observer analyzed public bid data from the ISO. The ISO operates transmission lines carrying about 75 percent of the state's power. The agency's job includes buying power to balance supply with demand. The ISO buys power in the volatile, last-minute spot market.
Nationwide, this spot market has seen price spikes, usually caused by weather extremes that drive up demand. The spikes are generally short-lived, but they weren't in California. Prices shot up and remained high for months.
"Some of the increases in price could be explained through legitimate cost increases, but much of it couldn't be," said ISO spokesman Gregg Fishman. "That's why we're asking federal regulators to order refunds of $8.9 billion."
The agency reports how much power its suppliers offer and at what prices. But ISO reports identify suppliers only by code.
The Observer deciphered the code for Duke by comparing ISO bid reports posted on its Web site with power-plant data, federal reports, a known sales price and company information. Citing its confidentiality rules, the ISO would not confirm or deny The Observer's analysis. Duke did not dispute the finding.
Several bidders offered power at prices far higher than Duke's -- as much as $9,999 per megawatt hour. The Observer could not decipher those bidders' codes. The Observer also could not identify bids from Enron Corp., the failed Houston energy giant that has since been exposed as an architect of tactics to manipulate power markets.
On Jan. 17, 2001, the first day of blackouts, Duke sold the state power for $3,880. The Observer has previously identified that as California's highest reported sales price.
The bid data shows that six days earlier, Duke offered power from the same plant at $1,512 per megawatt hour.
Duke says the increase does not constitute price gouging, one of critics' chief allegations.
Duke and other generators say high prices for natural gas -- the dominant fuel for California's non-nuclear power plants -- helped drive up power prices early in 2001. Duke also says its highest price reflected the cost of running one of its least-efficient units. And Duke feared the ISO wouldn't pay.
The ISO buys power from generators such as Duke on behalf of the state's three big utilities. California's deregulation plan froze consumer rates, so utilities couldn't recoup their higher wholesale power costs. That meant they couldn't pay the ISO, and the ISO then couldn't pay companies such as Duke.
"Our prices went up as it became increasingly clear we weren't going to get paid," Duke's Roche said. "Our prices only went up to the ISO."
In California, Duke sells most of its power to customers such as municipal utilities, and other generators and traders. About 90 percent of that power is sold on long-term contracts that typically carry the lowest prices. The company has said its average California price in 2000 was $76 per megawatt hour. Last year, Duke says, its first-quarter average was $136; $145 in the second quarter.
"We've heard about it as a catch-all excuse for ripping off California consumers," Davis spokesman Maviglio said of the credit surcharges. He also said that on the first day of blackouts, the state stepped in to buy power and back the ISO's bills.
"When a state is on its knees, charging that kind of surcharge is pretty outrageous."
The state didn't actually start paying the ISO bills until December -- nearly a year later -- according to the agency making the payments. Duke's prices began dropping sharply in March, long before the payments began. Roche said that by then, the likelihood of getting paid was higher.
Frank Wolak, a Stanford University economics professor and chairman of the ISO's market surveillance committee, also doesn't accept the credit-risk argument.
"I'm not going to say it's completely bogus, but it's difficult to rationalize," said Wolak, who blames federal regulators for not reining in generators as California's crisis worsened. He likens the market conditions at the time to a riot.
"They all knew the television set was going to get stolen," Wolak said. "The only question was who would steal it. That's where you need the cop on the beat."
In the Carolinas, Duke Energy's Duke Power subsidiary is a traditional utility, owning and operating power plants and selling directly to residential and business customers. Duke Energy also owns power plants nationwide, but outside the Carolinas, the company is mostly a wholesaler.
Duke Energy entered the California market in 1998. The company spent $1.1 billion buying three plants, leasing a fourth and modernizing what is now the state's largest power plant. The company plans to invest another $1.1 billion in California.
"We went in there to provide reliable power and earn a fair profit, and that's what we've done," Duke's Roche said.
Reliant paid about $280 million for five California plants in 1998. Last year, Gov. Davis vilified the company after revealing it charged the state as much as $1,900 for power in May.
On the May date when Reliant acknowledges it sold power at $1,900, the ISO lists only one generator bidding that amount. The Observer tracked the ID code for that bidder through other transactions.
In January, under that code, the documents show bids of as much as $5,000 as well as much lower prices.
In response to Observer questions, Reliant repeated previous admissions but would not confirm or deny the latest findings.
"Reliant operated within the rules established by California and ... attempted to make all available power readily available," said Reliant spokesman Richard Wheatley.
Reliant's average California sales price was $117.30 per megawatt hour last year and $88.70 in 2000, he said.
Wheatley said the $1,900 price and previously disclosed bids of $1,500 included a premium for operating plants with severe environmental restrictions. He said Reliant's unpaid ISO bills total $225 million.
"We're proud of our record in California," he said.
Duke Energy Subpoenaed for Trading ActivitiesReuters – July 13, 2002
NEW YORK (Reuters) - Duke Energy Corp. on Friday became the latest U.S. utility to face a probe from federal regulators into alleged sham trading in the power industry.
Shares in the Charlotte, North Carolina-based company fell as much as 14 percent after it said it had received subpoenas from federal agencies requesting documents relating to its trading activities.
Several U.S. power companies, including Dynegy Inc. and Reliant Resources Inc., are being investigated for the use of ``round trip'' trades -- trades in which counter parties agree to sell and buy back a given commodity at the same price and in the same amount in order to boost volume and revenues.
Also on Friday, natural gas and power giant El Paso Corp. said it had received a similar subpoena that requests information on trading activities including round trip trades. The Houston firm has already told federal regulators that it engaged in no such activities. El Paso will cooperate with the subpoena.
Various government agencies have opened investigations into strategies employed by power traders, especially after state officials in California blamed them for widespread aggressive behavior to increase profits while the state fought to keep the lights on during its power crisis two years ago.
Shares of Duke reached a session low of $24.05 in the morning and finished down $3.20, or 11.45 percent, at $24.75 on the New York Stock Exchange. That marked a new 52-week low for the company's stock.
``I think the market has continued concerns over the uncertainty regarding the regulatory investigations of energy trading, and the recent announcement only adds to that uncertainty,'' said Jeff Gildersleeve, an analyst at Argus Research.
Duke said the subpoenas were from the Commodity Futures Trading Commission (CFTC), which has served similar notices to other energy companies for information on their trading activities.
It also received a subpoena from the Houston office of the U.S. attorney general regarding a grand jury investigation.
Duke said both subpoenas request information and documents relating to trading activities, including round-trip trades.
COOPERATING WITH AGENCIES
The company, which has said it did a small number of transactions that might appear to be ``round trip'' trades but were actually used to hedge natural gas prices, said it was cooperating with both agencies.
The exact implications of the subpoenas are unclear, but Paul Fremont, an analyst at Jefferies & Co., said, ``If you look at some of the competitor organizations which have come under a high level of scrutiny by the government, they have announced they're basically getting out of the business.''
``What investors are grappling with right now is, should we be concerned about the immediate findings of the government and whatever fine or penalty they choose to impose and will this put pressure on Duke to exit this business?''
Already, Aquila Inc. and El Paso Corp. have said they will limit their exposure to the trading business and Dynegy Inc. has decided to suspend trading in its online system.
It's also unclear how much does Duke's trading operation contribute to the company's overall business because those numbers aren't broken out, Fremont said.
``I think the problem is that everyone's guessing,'' he said. ``The absence of disclosure is hurting the company.''
However, Greg Phelps, who manages five funds within John Hancock's Patriot Group, believes that Duke's ``incredible amount of credibility and veracity'' will vindicate it when the government inquiries are completed.
He noted too that Duke -- which does not have as much debt as some of its competitors -- still deserves its high investment-grade credit ratings, even though many of its rivals have seen their ratings slashed to ``junk'' or close to it.
Duke is rated ``A plus'' by Standard & Poor's and ``A1'' by Moody's Investors Service.
Cheryl Richer, director at Standard & Poor's, added that Duke is also different from its competitors because the majority of its revenues come from its stable regulated utility and gas transmission businesses.
``There are certainly negative things, like falling energy prices and the loss of investor confidence, going on and we are going to have to monitor them and they certainly could at some point have an effect on Duke,'' she said.
``But it's not as if energy trading were their sole activity.''
The energy trading sector was roiled by the bankruptcy of Enron Corp. last December, which brought to light many trading activities like round-trip trades.
The Heat is on Energy ManipulationUSA Today – by Edward Iwata – July 12, 2002
(7/11/02) - Government regulators are stepping up investigations nationwide into sudden energy price spikes and suspected market manipulation by Enron and other energy companies.
Recently, they have focused mainly on alleged market manipulation in California by Enron, but the investigations are broadening. The Federal Energy Regulatory Commission (FERC) and state officials are talking to traders and utility executives at several firms in Pennsylvania, Nevada, the Midwest and elsewhere, say government and industry sources.
''We're seeing a lot of Enron-style behavior nationwide,'' says Robert McCullough of consulting firm McCullough Research, which advises energy firms and government officials. ''These abuses are very common.''
Some energy flare-ups:
* The Pennsylvania attorney general has opened an antitrust investigation into price spikes in early 2001, when wholesale electricity rose to $300 a megawatt hour from $5, says James Donahue, chief deputy attorney general. The Justice Department also is reviewing the spikes, says another person close to the case.
Last month, the Pennsylvania Public Utility Commission and independent power operator PJM Interconnection found that PPL, a utility in Allentown, Pa., engaged in anti-competitive behavior. PPL denies the charges.
* In Nevada, FERC and the state attorney general's office are examining several ''wash'' trades involving Nevada Power, Enron and other firms from November 2000 to June 2001, say people close to the cases. In wash transactions, two parties trade energy to artificially inflate sales volumes.
Nevada Power has denied engaging in such trading.
Federal and Nevada state officials declined to comment.
* FERC might launch an investigation into price spikes during a Midwest heat wave in June 1998, when wholesale electricity prices exploded to $2,600 a megawatt hour from $25, energy insiders say.
A FERC report in 1998 found no suspicious market behavior. But FERC and Congress last month received a letter from Stand Energy, a wholesale gas-and-electricity company in Cincinnati, saying price manipulation drove it out of the electricity-marketing business.
The Real Manipulation Mastermind?The Dallas Morning News – by Crayton Harrison – July 11, 2002
(7/10/02) - Paul Gribik is a smart man, even brilliant, with a mind that can reduce a teeming, shape-shifting mass of energy market transactions into simple equations. But California officials think the former Perot Systems Corp. employee knew too much in 1997.
California Senate investigators looking into energy price gouging first became suspicious of Perot Systems in June, when they found a document that later turned out to be written by Mr. Gribik.
Now Mr. Gribik, who is scheduled to testify Thursday in Sacramento along with Perot Systems chairman Ross Perot, is crucial to investigators' case against the Plano company. They believe he was one of only a few people who could dream up ways to manipulate prices in California's market.
Plano-based Perot Systems, denying that it helped energy firms learn how to inflate prices, says plenty of people were just as capable as Mr. Gribik, who has declined to comment.
Interviews with people who knew Mr. Gribik and recently released documents depict him as a man who loved exploring the mathematical possibilities of an unregulated energy market but had mixed feelings about telling energy companies how to influence prices.
State officials say that energy firms played pricing games that gouged consumers and sent California's market teetering toward disaster, culminating in rolling blackouts in 2001. The investigation has led a jittery Wall Street to wipe out 40 percent of the stock price of Ross Perot's company.
"Everybody we talk to continually points the finger back to Paul" and his Perot Systems colleague, Dariush Shirmohammadi, said California state Sen. Joseph Dunn, chair of the committee investigating price gouging. Mr. Shirmohammadi is scheduled to testify Thursday.
Mr. Dunn's focus on Mr. Gribik, of Danville, Calif., has yielded results already. Mr. Gribik told investigators Monday that he was the author of the 44-page document that led Mr. Dunn to launch the Perot Systems investigation.
Mr. Dunn obtained the document, a printout of a computerized sales presentation, last month through a subpoena of Reliant Energy Inc. He had been trying ever since to determine who wrote it.
Investigators are still trying to figure out how Reliant got the document, which contained information about how the California energy market system worked. Mr. Gribik told investigators Monday that he didn't know the answer.
Mr. Gribik, who has a doctorate in industrial administration and worked 10 years for Pacific Gas & Electric Co., joined Perot Systems in 1995, according to a resume released by the Plano company.
At Perot Systems, Mr. Gribik would work on a huge project, helping to create a statewide power trading system. It would be a remarkable job for any energy expert.
The two pieces of that energy trading system, the California Independent System Operator and the California Public Exchange (PX), hired Perot Systems in early 1997 to write the software that made the markets function.
Mr. Gribik began attending meetings of the ISO's technical advisory committee, which was discussing the design of the markets.
The committee was arguing heatedly about exactly how free the market would be. Some members of the committee wanted a central authority to have some control of prices and supply.
Others endorsed a more open system, allowing the market itself to always dictate prices. That might give market participants more opportunity to manipulate prices, but those kinks would eventually be worked out, said supporters of the open system.
Mr. Gribik, not an official member of the committee, seemed to be against leaving the system open to gaming, said Eric Woychik, onetime consumer representative for the California markets.
"He and I agreed so much on what the market problems were," said Mr. Woychik, now a private consultant. "He was in discussions with me at the ISO and the PX literally arguing to try to close these loopholes."
In the end, the technical advisory committees opted for decentralized markets that would allow for gaming. That's when Perot Systems launched a new strategy.
George Backus, an independent consultant, e-mailed Mr. Gribik in May 1997, saying he was building software that would emulate the market for a potential client, Southern California Edison. The software would help Edison try gaming strategies, he said.
"I would like to find a way to make it worth [Perot Systems'] while to have you help on this project," Mr. Backus said.
"I hope we can get together on this," Mr. Gribik wrote. "It should be fun and profitable."
Over the next year, Perot Systems and Mr. Backus made sales pitches to energy companies, touting the firm's experience with the California exchanges.
"I have assembled the only team capable of providing you with a valid system," Mr. Backus wrote to William Heller, senior vice president of Edison's parent company, Edison International, in a letter later in May 1997."Perot Systems Consulting is more knowledgeable than anyone about ISO/PX protocols and operation as it relates to your needs."
Another Perot Systems document, which appears to be written by Mr. Backus but has no signature or date, goes even further. "I need to make valid assertions about gaming potential to [Edison International] management plus provide `loss-protected' strategies in the real-time model," the document said. "It is unclear that this can be done without Perot Systems help, especially Paul Gribik's and Dariush Shirmohammadi's expertise."
They are "very clever, and their minds are devious enough to readily search for and find gaming opportunities," the memo said.
ISO employees became concerned about Mr. Gribik's knowledge. In a November 1997 e-mail, ISO technology executive Carol Malugani told her boss, then-chief operating officer Terry Winter, that Mr. Gribik and a consultant for Enron, Carl Imparato, might have other interests in mind.
Both men knew and championed "protocols that are the basis of the congestion management and settlement process," the e-mail said. "Such knowledge could be used to leverage advantages and influence policy changes that might result in advantages for some interests."
The e-mail also said consultants to the ISO might know mathematical algorithms of the system that could give their other clients a competitive advantage.
Perot Systems has provided documents that indicate it resolved any conflict of interest issues with the ISO. But investigators say the company didn't live up to its obligations.
Mr. Woychik, the consumer advocate, said he isn't sure why Mr. Gribik would talk about loopholes with energy firms after being so vocal about patching them. He had lost touch with Mr. Gribik in late 1997.
In some of the Perot Systems documents, Mr. Gribik and others express frustration with the ISO and the PX, saying they aren't quick enough to fix loopholes and will have to learn the hard way that they'll be exploited.
"I think that several of the protocols have large potential for gaming," Mr. Gribik said in one e-mail to Mr. Backus. "I don't know if we want to try to get the [California Public Utility Commission, Federal Energy Regulatory Commission], ISO and PX to try to plug the holes. I am afraid it may be too late."
Mr. Woychik said he's positive that energy companies would have been interested in talking to Mr. Gribik about gaming the markets.
"No way in hey could anybody know how these games actually worked," Mr. Woychik said. "Nobody had the insight of a Gribik about how you actually do it."
But energy companies did not hire Mr. Gribik or Perot Systems when they started making sales pitches in 1997, Perot Systems spokesman Eddie Reeves said.
"If he was the only person in the world with this knowledge, why didn't anybody hire us?" Mr. Reeves said. "It just doesn't pass the logic test."
Mr. Gribik, who now works for London-based PA Consulting, declined to comment through his attorney, Joseph J. Aronica. Mr. Aronica said Mr. Gribik was giving energy companies information they could find by themselves.
"Most of this stuff was public. If you take a look at the public protocols, you'll see that," he said.
The information may have been public, but it was hard to understand, Mr. Woychik said. Mr. Gribik's command of the information could have given hints about where to look, Mr. Woychik said.
That's what concerns Mr. Dunn, the California senator, the most. He noted that the 44-page presentation Mr. Gribik wrote contains references to a power line intersection in Nevada called Silver Peak. The intersection could be congested to manipulate prices, the document said.
In 2000, Enron paid a $25,000 settlement to the Federal Energy Regulatory Commission, which had accused the Houston company of congesting Silver Peak. The settlement did not imply an admission of guilt, Enron said at the time.
If Enron did congest Silver Peak, there's no clear indication that it learned about the technique from Perot Systems. But it's possible, Mr. Dunn said.
"That's one of the key bits of information we're looking for," he said.
Once again, Mr. Gribik could have knowledge that everyone else wants.
Deregulation Problems in OhioEmployee Advocate – DukeEmployees.com – July 9, 2002
Knight-Ridder reports that electric deregulation is not going as promised in Ohio. Welcome to the real world of deregulation.
The customers were baited with minuscule rate reductions a year and a half ago. Thousands moved from reliable suppliers to “independent marketers.” This resulted in thousands of other customers being lost in the shuffle. Some were switched against their will. Others are suffering uncertainty and frustration in trying to decipher how the market actually works.
Electric deregulation has been more trouble that it is worth, according to the July issue of Consumer Reports magazine.
The Industrial Energy Users of Ohio and the Ohio Consumers' Counsel have filed a complaint with the Public Utilities Commission of Ohio against at least one company.
Grid use problems have added to the confusion.
States will likely find that deregulation was easier to get into that to get out of.
Senate Report: Enron Board Ignored EvidenceAssociated Press - by Pete Yost– July 7, 2002
WASHINGTON (AP) - Enron's board closed its eyes to evidence the company was heading for financial disaster, and claims by former directors that they were kept in the dark are untrue, a Senate report concludes.
"Much that was wrong with Enron was known to the board," the Senate Permanent Subcommittee on Investigations said in a scathing 60-page critique.
Directors of the Houston-based energy-trading company failed to heed "more than a dozen red flags that should have caused the Enron board to ask hard questions, examine Enron policies and consider changing course," the report says.
Lawyers for the company and the former directors disputed the findings.
Senate investigators said the board failed to protect company shareholders and contributed to the collapse of Enron, which in December became the biggest company bankruptcy in U.S. history.
The report estimated that at its peak, the company "apparently had between $15 billion and $20 billion involved in hundreds" of complex transactions that entailed "convoluted financing and accounting structures."
The subcommittee chairman, Sen. Carl Levin, D-Mich., said the report shows how important it is for swift Senate passage of legislation to strengthen accounting oversight and toughen laws that punish corporate misconduct.
But Washington attorney Robert Bennett, who is representing Enron, said the report is setting the responsibility of boards of directors far beyond what is commonly understood to be the case.
"I only wish the Congress would apply the same standards to their own conduct," Bennett said. He said the report was "grossly unfair" and that it "leaps to unfounded conclusions."
"We would expect nothing less in this frenzy that is taking place on Capitol Hill," he said.
W. Neil Eggleston, a Washington attorney representing Enron's former directors, says the board was "misled by Enron management and outside auditors about now-suspect transactions."
The Senate report focused on a three-year period leading up to the bankruptcy, an event that marked the first in a wave of huge corporate scandals rocking the U.S. economy. The latest is WorldCom, which inflated its financial results by improperly accounting for nearly $4 billion in expenses.
Enron directors were aware of high-risk accounting practices, inappropriate conflict-of-interest transactions and extensive undisclosed off-the-books activity, the report says.
The report also says Enron's executives compromised the independence of some board members with consulting payments.
Enron paid board member John Urquhart $493,914 for consulting in 2000. Starting in 1996, John Wakeham got a monthly retainer of $6,000 for consulting. The money was in addition to the regular compensation for board members at Enron, which amounted to $350,000 per year, much of it in the form of stock options, says the report.
The $350,000 figure is more than twice the national average for board compensation at the top 200 U.S. publicly traded corporations.
The report says former Enron auditor David Duncan of Arthur Andersen warned directors on the audit committee that the company engaged in high-risk accounting practices. Duncan told the directors that some of what was being done was "pushing the limits" and was "at the edge" of acceptable practice.
Duncan's notes of the discussion were backed up by other documents and by the testimony of a second Andersen accountant who was present. But the Enron audit committee chairman, Robert Jaedicke, said he did not recall being told that the company's accounting practices pushed the limits.
"When we would ask them, even in executive session, about, OK, how do you feel about these" accounting practices "the usual expression was one of comfort," Jaedicke, dean emeritus of the Stanford Business School, told the subcommittee.
"It was not, these are the highest risk transactions on our scale of one to ten," Jaedicke added.
Duncan, who pleaded guilty to obstruction in the Enron probe, was the chief prosecution witness in last month's criminal trial of the Andersen accounting firm, which was convicted of obstruction of justice.
The Senate report said that the board:
_Cleared the way for Enron executives to improve the appearance of the company's financial statements by waiving conflict-of-interest rules for chief financial officer Andrew Fastow.
_Did not raise any questions when told that in six short months, one of Fastow's outside partnerships had produced a phenomenal $2 billion in funds flow for Enron.
_Did not bother until late last year to press for information about the outside compensation of Fastow, who took tens of millions of dollars from Enron in exchange for keeping hundreds of millions of dollars in Enron debt off the company's books.
The Senate report says the board's compensation committee engaged in a "lavish compensation philosophy."
Enron's former chief executive officer, Kenneth Lay, "used his credit line to withdraw $77 million in cash from the company in one year, replaced the cash with company stock, and never mentioned his borrowings or stock sales to the board or the public," the report says. Still, board members were reluctant to criticize Lay at a Senate hearing.
The committee "exercised little, if any, restraint over Enron's compensation plans," the report says.
Board members indicated that they had been unaware the company paid cash bonuses of $750 million to Enron executives in a year when the company's entire net income was $975 million.
Asked why Enron executives misled the board and cheated the company, one board member told Senate investigators he assumed "they did it for the money."
Deregulation Doubles PricesBloomberg News – July 7, 2002
SACRAMENTO, July 5 (Bloomberg News) — Electricity prices in the western United States more than doubled today as new forecasts called for hotter weather, which will increase demand for power to run air-conditioners.
Silicon Valley Power, the municipal utility in San Jose, Calif., expects demand in its service area "to spike with the heat," said Saul Lopez, a trader for the utility who was buying extra power in anticipation of increased demand on Monday.
Utilities in the West were buying power in the volatile day-ahead market to add to electricity they generate themselves or buy under longer-term contracts. Many utilities did not supplement their supplies earlier this week, as mild weather pushed prices to a five-year low before the July 4 holiday.
Wholesale electricity for delivery on Monday at the California-Oregon border surged to $27 a megawatt-hour today from $10.50 on Wednesday, according to Bloomberg data. It was the biggest one-day gain in almost 21 months.
The border price on Wednesday was the lowest since June 1997.
Electricity demand in California will climb to 39,000 megawatts on Monday from a peak of 31,418 megawatts today, said Lorie O'Donley, a spokeswoman for the operator of the state's power-transmission network. The California Independent System Operator may ask power-plant owners to defer maintenance work on Monday to ensure sufficient supplies, Ms. O'Donley said.
Forecasters are expecting temperatures in Sacramento to reach 98 degrees on Monday, up from 89 degrees today. That would push air-conditioner use to 30 percent higher than normal for this time of year, according to Weather Derivatives of Belton, Mo.
"It's going to get hot and humid for a sustained period," said Dave Salmon, a forecaster for Weather Derivatives, "and that makes air-conditioners work harder and harder to keep buildings cool."
California "is going to be hotter than normal during the hottest time of the year," Mr. Salmon said.
Shareholders Ask Energy CEO to ResignReuters - by Andrew Kelly – July 6, 2002
HOUSTON (Reuters) - Angry shareholders urged Reliant Energy Inc.'s chairman and chief executive to resign on Wednesday, saying the power generation and energy trading company had deteriorated rapidly under his leadership.
"This company has gone downhill ever since you took it over," investor Scott Wiggins told Steve Letbetter at Reliant's annual meeting. "I request your resignation," said Wiggins, who identified himself as a Reliant shareholder for 15 years.
Letbetter said he regretted Reliant's participation in sham "round-trip" energy trades and had taken measures to ensure they did not occur again, but he did not respond directly to calls for his resignation which were not submitted to a formal vote.
Reliant Energy and its 83 percent-owned subsidiary Reliant Resources Inc. have seen their stock prices plummet in recent months amid a loss of investor confidence in energy traders since last year's collapse of Enron Corp.
Reliant Resources is being investigated by the Securities and Exchange Commission after admitting to bogus "round-trip" energy trades that boosted its revenues by 10 percent.
Earlier this year the company said it had uncovered an accounting error that delayed its fourth-quarter earnings report and led it to restate results for previous quarters.
DYNEGY, CMS RESIGNATIONS
Chief executives at two other U.S. energy marketing and trading companies, Dynegy Inc. and CMS Energy Corp., resigned recently after the SEC launched investigations into some of their deals. Two less senior executives also resigned at Reliant Resources.
Letbetter was appointed president and chief executive of Reliant Energy in June 1999 and became chairman in January 2000.
Reliant Energy shares traded as high as $30.17 in June 1999 and hit an all-time high of $50.42 in May 2001. They closed at $17.11 on Wednesday, down 10 cents for the day.
Letbetter is also chairman and chief executive of Reliant Resources, which was set up by Reliant to compete in deregulated U.S. energy markets. Reliant Resources shares were sold at $30 each in an initial public offering in May 2001. On Wednesday the shares closed at $8.73, down 13 cents for the day, but off from a record low of $7.28 set last month.
Shareholder Dick Bautch said confidence in the company had been shaken by the revelation of bogus energy trades, in which natural gas and electricity was bought and sold at the same price with the sole purpose of inflating trading volumes and revenues.
"I suggest you all take an ethics course. You've lost credibility. You've lost integrity. The market has no confidence in you anymore," he said.
Investor Roy Kelley described Reliant as a "baby Enron" and also called for Letbetter's resignation.
BACK TO SQUARE ONE
Bautch said he bought Reliant Energy shares eight years ago at around $17, roughly where they are trading today.
"My enhanced shareholder value is zero," he said. "The only enhancements that I see, sir, are the enrichment of the executives."
Letbetter replied that he was committed to honesty and integrity. "If we focus on the long haul, we will deliver shareholder value," he said.
In particular, completion of the Reliant Resources spin-off would deliver shareholder value, he said. Reliant hopes to win regulatory approval for the spin-off this summer.
Several stockholders criticized the remuneration that Letbetter and other Reliant executives have received, contrasting executive pay with shareholders' recent losses.
"You seem to be taking a lesson from Gordon Gekko: Greed is Good," said Paul Levy, referring to the fictional character played by Michael Douglas in the movie "Wall Street."
A Reliant Energy filing showed that Letbetter received a salary of $983,750 last year and a bonus of $1.74 million.
He also received restricted Reliant Resources stock worth $1.69 million and options to buy 850,000 Reliant Resources shares at $30 per share.
Duke Energy Fined by California ISOL. A. Times – by - Nancy Vogel - July 4, 2002
SACRAMENTO -- State grid operators fined a dozen companies and utilities a total of $122 million for failing to deliver electricity from December 2000 to June 2001, according to information released Wednesday by the California Independent System Operator.
Those penalized include major power plant owners, such as Duke Energy and Reliant Energy, and the operators of publicly owned systems, such as the city of Pasadena and the State Water Project.
The companies and agencies were punished for not generating electricity when called on to do so by Cal-ISO, which is responsible for maintaining an even flow of power on the transmission grid serving three-quarters of the state. Cal-ISO disclosed the fines, which were imposed at the height of the state's electricity crisis, in response to requests by the news media. Officials with the agency said the fines were not necessarily evidence that energy companies had shut down power plants to drive up prices.
"Our rules are very clear," said Cal-ISO's executive director, Terry Winter. "We called you; you didn't perform. We're making no judgment on why you didn't perform."
Federal regulators gave Cal-ISO the ability to impose such fines in December 2000 as many power generators avoided selling to the state's utilities for fear that they would not be paid. The utilities were on the verge of bankruptcy after several months of paying exorbitant prices for wholesale electricity in the market that California had created under a 1996 deregulation plan.
Cal-ISO's penalty authority was revoked by the Federal Energy Regulatory Commission after June 2001.
The trading arm of Houston-based Dynegy got the steepest fine--$44.8 million--followed by Tulsa-based Williams Cos., which sells energy from three major Southern California power plants and was penalized $25.5 million.
Reliant Energy paid $25 million in penalties, Duke Energy paid $4.5 million and the city of Pasadena was fined $359,000. The power-trading branch of the State Water Project was charged $1.4 million.
A Williams spokeswoman, Paula Hall-Collins, said the company had contested the fines for months.
"We never refused to dispatch," she said. "We on occasion, because of some kind of physical plant limitation, may not have been able to fulfill the entire offer originally made."
Such penalties will be considered by FERC later this summer when it holds hearings on California's request for nearly $9 billion in refunds from companies that earned handsome profits in the state's electricity market.
If FERC retroactively reduces market prices to give California refunds, the penalties also will be reduced. For each megawatt-hour that the companies failed to deliver to Cal-ISO, they were charged twice the market price at the time.
"All of this is very much tied up in the FERC refund resolution process," said Richard Wheatley, spokesman for Reliant Energy of Houston.