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July - Duke Energy Employee Advocate

Deregulation - Page 20 - 2002

"The shortage was not real, it was contrived by the power pirates." - George Skelton - LAT

Enron Let Certain Employees Cash In

Houston Chronicle by Eric Berger August 18, 2002

(8/16/02) - A top Enron executive wrongfully allowed employees who stayed with the company to cash deferred-compensation claims worth at least $32 million, while denying similar payments to former employees, legal experts say.

And the experts said one-time Enron Chief Operating Officer Greg Whalley may well be personally liable for the payments distributed in October and November.

A lawyer for Whalley recently told the Chronicle that his client had allowed dozens of company executives to cash out their deferred-compensation plans because they were still "providing value" to Enron.

But retirees and other ex-employees who sought to cash out at the same time, or earlier, did not get approval.

When Enron filed for bankruptcy on Dec. 2, about $435 million left in the accounts was frozen.

Whalley's lawyer, Michael Levy, said that as the deferred-compensation plan's administrator, Whalley was simply performing his fiduciary duty to Enron by drawing the line between plan members who remained with the company and those who had left.

But experts say he was wrong to do so if -- as members of the deferred compensation group contend -- the plan policies did not allow him to make such a preference.

"To me, in a vacuum, a plan administrator owes the same duty to all plan participants," said John Neslage, a lawyer who specializes in employee benefits for Baker Botts.

"A plan administrator is only supposed to look out for the benefits of plan participants, not the company."

As administrator, Whalley was effectively the plan's trustee, the experts say, and owed allegiance to the beneficiaries of the trust.

"My gut reaction is that Whalley's lawyer is wrong because he owed a duty to plan members," said Steve Berman, the lead lawyer in a federal class-action lawsuit filed by former Enron employees. "I'd like to see him in court."

Levy did not respond to several requests for further comment.

A group of about 180 former Enron employees seeking to recover their deferred compensation is considering suing Whalley in state court.

Such a lawsuit is not likely to be folded into the class-action lawsuit, Berman said, because Enron's deferred compensation plans were not covered by the federal Employee Retirement Income Security Act, or ERISA, that sets penalties for employers that violate an employee's trust.

That the plans fall outside of ERISA also diminishes the possibility that Whalley, or Enron, could face criminal charges for violations of fiduciary duty.

But there's a theoretical chance, said a former federal prosecutor, that a criminal case could be made against Whalley and Enron if he intentionally favored the company instead of plan members.

"Increasingly, you're seeing both civil and criminal liability for the same acts," said Sandra Guerra-Thompson, a former assistant district attorney in the New York County District Attorney's Office who is now a University of Houston law professor.

If Whalley used the mail or telephones to abrogate his duty to plan members, he could be charged with mail or wire fraud, she said.

Leslie Caldwell, head of the Department of Justice Enron Task Force, said Tuesday she could not comment on the matter.

A U.S. Labor Department investigation of Enron's employment practices does not include plans that were not subject to ERISA, spokeswoman Sharon Morrisey said.

Enron's plan allowed members to defer up to 30 percent of their income and all of their bonuses to save on taxes, much like a 401(k) plan, although the company held the money in a trust.

Enron changed the plan's rules in 1997 to let members of some of the plans cash in early by taking a 10 percent penalty.

But many of the retirees say they were not aware of the change and the former workers who asked to cash out only happened to learn of it from friends still at the company who had been alerted by Enron's human resources department.

Some ex-workers say company documents make it clear the deferral-plan committee must "interpret the plan" and that early withdrawals are "subject to the consent of the committee." There is no further elaboration.

In the last weeks before Enron filed for bankruptcy, group members say, Whalley was a committee of one.

"His actions appear, on the surface, to be in conflict with his role as plan administrator," said Mike Dahlke, treasurer of the deferred compensation group. "We're looking at all our options."

The group faces an uphill battle.

It's unclear how much of their claims Whalley could pay if a lawsuit succeeded, and although Enron held as much as $450 million in liability insurance for officers and directors, most, if not all of that cash is expected to be consumed by two class-action lawsuits.

Any money recovered in the bankruptcy proceeding is likely to be shared among all creditors lined up to receive a pool of cash considerably smaller than their claims.

And the deferred compensation group members are probably toward the end of that line.

Chronicle reporter Mary Flood contributed to this article.

Enron Fatcat Claims Anger Ex-Workers

Houston Chronicle by Bill Murphy August 18, 2002

(8/14/02) - Several ex-Enron employees are outraged that their attempt to obtain $13,500 in severance for all former workers may be derailed by a few ex-executives' demands for as much as $1.6 million.

They were especially infuriated by the refusal of Rebecca Carter, wife of former Enron President Jeff Skilling, to accept the proposed package and demand what she says she is owed, $875,000.

"If you're married to the person who helped ruin the company, it takes some gall to turn around and want more money out of it," said Nick Tubach, a laid-off director of Internet commerce transactions. "It's almost like killing somebody's family and going back to plunder the house."

A committee representing Enron's creditors and Enron have signed off on a plan to pay former workers $13,500 in severance. The plan needs U.S. Bankrupcty Judge Arthur Gonzalez's approval.

Creditors, however, could back out because 54 former workers, out of 4,200, won't agree to the deal and are seeking the full severance package, as outlined in the company handbook. Former executive John Sheriff, for instance, wants $1.6 million.

Wanda Chalk, a former human resources worker who gave birth to a baby boy a month ago, said she had assumed the $13,500 deal was going through. "We're going to pay some bills with these funds," she said. "It's a struggle making the mortgage."

Phillip Randle, a laid-off information technology worker owed $26,000 in severance, said, "We need that money. I need it to pay bills."

A company generally doesn't have to pay severance after it files for bankruptcy, but Enron and its creditors have agreed to provide at least some.

Like Randle, several employees said they couldn't understand why the 54 holdouts won't accept the package, considering that creditors could refuse to agree to pay anything at all.

"The old saying is, `The shade of a toothpick beats the hot boiling sun,' " Randle said. "Whatever I can get, good, and then I'll move on."

Under the company's written policy, most workers who would receive up to $13,500 are actually due far more -- an average somewhere between $20,000 and $30,000, an AFL-CIO lawyer working with laid-off employees has said.

In its employee handbook, Enron said workers were eligible for one week of pay for every year of service plus a week's salary for every $10,000 in annual salary. The total was to be doubled if the employee agreed not to sue the company.

Enron already has paid each laid-off worker about $5,700, and put $5 million into a "hardship fund" for ex-employees facing financial emergencies.

If Gonzalez signs off on the $28.8 million deal, each ex-worker will get what they're due, up to the $13,500 cap. That money, minus taxes, would be paid almost immediately.

Debbie Perrotta, a laid-off senior administrative assistant, was among the former Enron employees who worked with the AFL-CIO and the Rev. Jesse Jackson to lobby for the $13,500 package. She is upset that former executives may block the deal.

"It ticks me off because there are people who desperately need the money," she said. "Some people are working with their mortgage companies, telling them that they have (additional severance) money coming in. It would help them get caught up on their payments."

"Fifty-four people out of 4,200 is not a large percentage," she added. "Judge Gonzalez is pretty fair. I don't believe this is going to prevent the employees from getting their money."

Perrotta said Carter should think of the people who need the extra severance money. "She's living a very good life right now," Perrotta said. "I'd like to see her live like some of these people are living. What she's doing is greed."

Carter couldn't be reached. Her husband's spokeswoman and lawyer didn't return calls.

Tubach is among about 90 former employees who aren't due to receive the package, though his fiancee is.

Subsidiaries that the 90 worked for -- EnronOnline, CommodityLogic and Enron Facility Services -- laid off workers when Enron did, but those arms of the multilayered company didn't declare bankruptcy.

Only workers laid off from company divisions that declared bankruptcy have received severance.

Enron representatives have said the 90 workers will likely end up being included in the proposed deal, but that hasn't happened yet.

"There is some resistance to giving us the $13,500," Tubach said. "What they keep on saying is that they are working on it."

Energy Trading Stalled

Dallas Morning News by Sudeep Reddy August 15, 2002

(8/14/02) - As he spoke to analysts one year ago, Jeffrey K. Skilling tried to deflect concerns that his resignation as Enron Corp.'s chief executive was a sign of trouble.

"This is purely a personal decision, and I can't stress enough that it has nothing whatsoever to do with Enron," he said on Aug. 14, just six months into the job.

But that announcement was one of the first indications that the high-flying energy trader in Houston was on the brink of collapse. A year later, energy trading -- the field that launched corporate America's biggest crisis of confidence in decades -- has yet to recover.

Today, most major energy traders are facing poor credit ratings and federal investigations over sham trades amid a questionable outlook for their field.

While some of the sector's problems were becoming clear last summer, Enron's business practices highlighted the worst of the problems, said Ross Miller, co-author of What Went Wrong at Enron.

"There were incipient problems just because of normal cycles in the energy business," said Mr. Miller, president of Miller Risk Advisors. "The fact that there was the appearance of fraud in one business -- Enron in particular -- then brought the magnifying glass on all of the businesses."

The next few months revealed the off-balance-sheet partnerships and other accounting techniques Enron used to inflate profits and conceal debt. On Oct. 16, the company took a $1.01 billion charge against its third-quarter earnings, and one day later slashed shareholder equity by $1.2 billion to account for transactions with the partnerships. On Dec. 2, Enron filed what had been the largest bankruptcy in history.

As it turns out, the anniversary of Mr. Skilling's resignation coincides with the deadline for executives of the nation's 947 largest corporations to certify their companies' financial statements.

That will be a difficult task for some energy traders facing intense investor scrutiny and investigations by the Securities and Exchange Commission.

Last Wednesday, CMS Energy Corp. chief financial officer Alan Wright told investors that he couldn't certify his company's books until two years of earnings restatements are completed.

"Under these circumstances, we feel it imprudent to certify [the filings] at this time," he said.

Dynegy Inc. and Mirant Corp. have expressed similar doubts.

Dynegy, which was poised to buy cross-town rival Enron last November, is one of several companies undergoing a broad restructuring plan to clean up its balance sheet. Mirant Corp., Duke Energy Corp., Williams Cos., and Reliant Resources Inc. are also trying to make changes as they face scrutiny over trading practices.

Aquila Inc. of Kansas City, Mo., exited the wholesale energy trading business entirely last week -- pulling out of an industry that accounted for more than 90 percent of its $40 billion in sales last year.

"What you're seeing is across the board companies so focused on [restructuring], there's been a diminishing activity level in the trading business," said Ron Lumbra, an energy industry recruiter in Houston. "With so many players right now worrying about strengthening their own balance sheets, it's difficult. Who are you going to trade with?"

Going forward, the biggest problem for these companies will be escaping the self-fulfilling prophecies from concerns about their ability to operate, said Dr. Praveen Kumar, chair of the University of Houston's Department of Finance.

"There is a vicious cycle aspect to some of these companies," Dr. Kumar said. "Perceptions of future problems can affect the willingness of counter parties to trade with them now."

That, in turn, "almost guarantees that bad earnings outcomes are going to be realized in the future."

While bigger companies like Dynegy try to clean up their balance sheets and restructure their debt, smaller companies will team up with stronger financial partners to fulfill their roles, Dr. Kumar said.

"We're going to see much, much more active role being played by financial services and intermediaries, trying to improve the credit performance and risk of energy trading," he said.

But even UBS Warburg, a major bank, is considering cutting much of the trading business that it bought from Enron in January.

"With all credit to them, it's a different business today than the one they bought into when they picked up that business from Enron," said Mr. Lumbra, managing director of Russell Reynolds Associates. "They've got the balance sheets, they've got the creditworthiness to be active participants in the market. But even they have to right-size for the amount of business that's there today."

Even without the accounting revelations at Enron, the company's business model was bound to collapse and expose the industry's problems, Mr. Miller said.

"It's something that should have been expected," Mr. Miller said. "In a way because of Enron moving fast and everyone trying to catch up with them, they were trying to create very complex markets without doing the necessary research and development to get those markets to work properly."

"You can't go and build a Boeing 767 jetliner that works on the first try."

Where Did the $21 Billion Go?

High Point Enterprise August 15, 2002

(8/12/02) - Imagine pulling up to the pump at a service station and having to pay $6,000 to fill the tank. That's the outrageously stark comparison that an electric industry official made during a speech Friday in the Triad on the impact of deregulation on the energy field.

"The theory of retail electric deregulation assumed that removing the rules and regulatory controls would free up the market to provide lower costs and better electric service. The real-world results were just the opposite," said Jesse Tilton, chief executive officer of the ElectriCities municipal power trade group.

For example, during the height of the electric deregulation crisis in California two years ago, prices for electricity spiked to as high as $10,000 per megawatt hour. Typically, the price would be $40 per megawatt hour, Tilton said during the ElectriCities annual meeting at the Grandover Resort & Conference Center. Paying $10,000 per megawatt hour is the equivalent of having to pay $6,000 for a tank of gas, Tilton said during the annual meeting, which concludes today.

The volatility brought about by deregulation, combined with the financial scandal engulfing the bankrupt Enron Corp., has fundamentally shifted the public attitude about throwing open the power industry to the whims of the free market, Tilton said.

Enron was a leading advocate of power industry deregulation in the 1990s, and the corporation is being investigated now for manipulations of the deregulated California energy market that has suffered huge price swings since 2000.

"The total electric bills for California in 1999 were $7.4 billion," Tilton told an audience in a Grandover ballroom. "But in 2000, the bills were $28 billion. In just one year, where did the $21 billion difference go?" Tilton is one of 30 members of the Study Commission on the Future of Electric Service in North Carolina, which has been looking at reforms to the $8-billion-a-year power industry in the state.

The debate has particular significance for High Point, since it's one of the 51 towns and cities that operates its own municipal power system. One of the debates regarding power industry reform in North Carolina is how to deal with the $5.3 billion municipal power debt. High Point has the fourth-largest individual debt among the ElectriCities members at $408 million.

The recent crises circulating around electric deregulation have cooled any move for reforms in North Carolina for the time being, said Sen. Kay Hagan, D-Guilford, a study commission member.

"... North Carolina is in a good position. Currently we have affordable electricity for economic development," Hagan said in a phone interview Friday.

Hagan said she doesn't expect any movement on deregulation in North Carolina for at least the next two years.

Tilton told ElectriCities members that the Raleigh-based municipal power agency makes gradual progress on retiring its debt.

"The talk at the start of the debate on deregulation was that the combined debt of the power agencies was $6 billion," he said. "Today it is $5.3 billion, in 2006 it will be $4.7 billion, and in 2011, it will be paid down to $3.5 billion. By comparison, Enron's debt is in bankruptcy."

The 51 towns and cities that make up the ElectriCities municipal power trade group have combined power debts of $5.3 billion.

High Point has the fourth-largest individual debt at $408.2 million.

Lexington has the sixth-largest individual debt at $278.5 million, ElectriCities reports.

Enron Fatcats Want Even More

Associated Press August 14, 2002

NEW YORK (AP) - Among a group of laid-off Enron workers who are asking a bankruptcy court for extra pay are five insiders who reaped $7 million in the year before the company's collapse. They include the wife of former chief executive Jeffrey Skilling.

The five insiders joined 49 other former colleagues in opting out of a tentative agreement negotiated earlier this summer that would give some 3,550 laid-off workers as much as $13,500 each in severance. Instead, they filed individual claims - with several seeking hundreds of thousands of dollars more from the bankrupt energy company.

On Monday, bankruptcy judge Arthur Gonzalez said he would decide at the end of August whether those who opted out of the tentative agreement should receive anything, and how much.

The ruling is critical because if the total amount granted to those making individual claims exceeds the amount they would have received under the tentative agreement, Enron and its creditors are allowed to back out of the $29 million deal.

If that happened, thousands of former workers would likely seek severance payments exceeding the amount they would have received under the agreement, lawyers for the former workers said.

Among those who opted out of the tentative agreement was Rebecca Carter, a former senior vice president who married Skilling in March and received more than $477,500 in payments and stock in the year leading up to Enron's collapse.

In all, 144 insiders amassed more than $743 million in salary, bonuses, long-term incentives, loan advances, stock options and more between December 2000 and December 2001, when Enron filed for bankruptcy. For his part, Skilling received nearly $35 million over that period.

Now, Carter is asking for $875,000 more, according to bankruptcy court filings.

David Cox, a former executive at Enron's high-speed Internet subsidiary, is seeking $1.1 million from his former employer after receiving $1.1 million in the year before Enron's collapse.

Keith D. Dodson, a former executive in Enron's engineering and construction subsidiary, wants $210,000. Dodson received $319,941 in the 12 months before Enron's collapse.

Charles K. Garland, a former managing director, is asking for $892,000. He received $1.6 million before Enron's demise.

John Sherriff, the former president of Enron's European operations, asked for $1.65 million. He received $4.3 million in pay and stock before the collapse.

The former insiders claimed they're owed ``administrative expenses'' _ which can include wages and commissions _ for services they rendered that helped preserve the value of the company after it filed for bankruptcy. Bankruptcy experts said the burden of proof will be difficult since their employment contracts were terminated when the company made its Chapter 11 filing Dec. 2.

Even if Gonzalez rules in favor of the former employees on the administrative expense claims, he might withhold funds pending an investigation into the pay and stock these employees received in the year before Enron imploded.

Lawyers representing the official creditors committee argued in a court filing that Gonzalez should not provide any severance to these individuals until an ongoing investigation of the earlier payments is complete.

Gonzalez will rule on the administrative expense claims and the severance agreement in the last week of August.

Duke Fell For Hype, But Some Did Not

Baltimore Sun by Dan Thanh Dang August 14, 2002

Go-go energy-trading companies learn that booms aren't forever, a lesson traditional Dominion could have taught Enron long ago

Originally published August 11, 2002

In the summer of 2000, a steady stream of New York investment bankers tramped down to Dominion Resources Inc.'s 12-acre campus on the banks of Virginia's historic James River to tell Thomas A. Capps he was crazy.

Just look at the evidence, they said to the chief executive: Energy trading giant Enron Corp. was trading at an all-time high of $90.65.

Calpine Corp. and Dynegy Inc. were posting triple-digit earnings growth. Reliant Energy Inc. and Duke Energy Corp. were winning Wall Street kudos for their plans to spin off lucrative generating and trading businesses.

It was time, the investment houses said, for the Richmond company to get in line. Sell your power plants, they said. Or split off the production business. The big money was in energy trading, Dominion was told.

With pressure mounting, Capps took a good, hard look at his energy company. Then he simply ignored the advice.

It took just a year to prove Capps right. It took two years to make Capps look like a genius.

The industry's strategy to focus on aggressive trading and power-generation businesses was fatally flawed from the beginning, energy experts now acknowledge.

It was based on the idea that more and more power plants could be built, that the price of power would continue rising, that demand would be limitless, and that higher and higher profits would roll in, the experts said.

But the rise of the energy powerhouses was overshadowed only by the speed of their decline.

"We were wondering what they were seeing that we didn't see," said Capps, who has been chief executive for more than half of his 18 years with Dominion. "We decided, nothing. We've never believed in the herd approach to anything. We had what we thought was a good game plan.

"In fact, it has been the best game plan," Capps said. "The fad du jour at the time was to sell off and be power marketers. We thought that was dumb. We still think it's dumb."

Many of the energy companies that were Wall Street favorites have fallen.

Enron declared bankruptcy. Dynegy's share price is less than $2, a 95 percent plunge from its 52-week high. Duke recently fired two employees for improper energy trades that inflated revenue, and several other companies are facing similar investigations. Most energy stocks have taken a nose dive.

"It's been an extremely painful period of experimentation for everyone in the industry," said William W. Hogan, research director of Harvard University's Electricity Policy Group. "Some years ago, the people who were less adventuresome looked like Neanderthals - they just didn't get it. Now they look like prescient visionaries.

"Particularly when you get new things coming along that look sexy and exciting, it's very hard to stick to your knitting."

But that's what Capps did.

Seductive promises

While others were seduced by the promise of reaping dazzling returns on power production and energy trading, Capps was buying a natural gas pipeline.

While others rushed to buy power plants at two to seven times their value, Capps refused to add too much debt for overpriced assets.

While others were buying or building their marketing operations, Capps allowed Dominion to trade only what its plants and natural gas wells could produce.

These days, Dominion is trading at slightly more than $58 a share, about 10 percent less than its 52-week high of $69.99.

But the stock has held up significantly better than others in the industry. And it recently announced a plan to buy a liquefied natural gas plant in Southern Maryland.

Many of Dominion's counterparts are beating a hasty retreat from strategies that were once considered bold and smart, and guaranteed to make millions.

Like the pop of the dot-com bubble, the energy euphoria has faded, at least for the time being, industry experts say.

"The fall of the dot-com and the energy-trading industries have taken place faster than has happened to other industries in the past," said Severin Borenstein, director of the Energy Institute at the University of California at Berkeley.

"If you think about the time it took other industries to turn from profitable to unprofitable - for instance, the steel and railroad industry - that took years and years.

"This happened at warp speed."

The energy-trading boom began soon after Congress passed the Energy Policy Act in 1992. The act directed states to adopt policies leading to greater competition between power suppliers and transmitters.

Energy companies were suddenly functioning in a new world. No longer bound by regional service territories, they were free to buy, sell and deliver power anywhere they wanted.

Things were shaping up nicely. The telecommunications industry was growing, the economy was robust through the late 1990s, and about half of the states had adopted electric deregulation laws.

In May 1999, Mark P. Mills and Peter W. Huber, co-editors of the Digital Power Report wrote in Forbes magazine: "It's not unreasonable to project that half of the electric grid will be powering the digital-Internet economy within the next decade."

"No one ... had a clue'

Energy analysts predicted 40 percent to 50 percent growth over the next five years, growth not seen in 20 years.

"It was a thesis that people believed was going to be true," said Paul B. Fremont, a utilities analyst at Jefferies & Co. Inc. "There was no pre-existing experience in this country for a free market [in] electricity. ... They had operated in a regulated monopoly market for years. No one inside or outside of the industry had a clue what it was going to look like."

But the rush began.

Utilities began shedding their sleepy, low-yield investment image.

Some, such as Enron, adopted an "asset light" strategy in which the company sold commodities it did not own or produce. Some went on a power plant purchasing frenzy that transformed them into independent power producers.

Some, such as Potomac Electric Power Co., took the less-risky path of selling plants and focusing on the delivery business.

Many integrated companies such as Duke, which owned plants, trading operations and delivery businesses, decided to take advantage of both by spinning off production and marketing businesses.

In Baltimore, Constellation Energy Group Inc. was no different.

On Oct. 23, 2000, chief executive Christian H. Poindexter stood with his top executives in front of a backdrop of the company's bustling trading unit and announced that the 184-year-old utility would split into two billion-dollar companies.

Constellation would pursue an aggressive, unregulated strategy to produce and sell electricity into the wholesale market. The other company, BGE Corp. would become a slow-growing, regional delivery company that would include its regulated utility, Baltimore Gas and Electric Co.

Almost everyone, including Constellation, rushed to announce plans to construct more power plants.

"The growth was based on irrational expectations," said Fremont, who wrote a report in November 2000 warning energy companies that the supply and demand for energy would reach an equilibrium by 2002.

"It was absurd to assume the economy was never going to contract," Fremont said. "Supply was going to outstrip demand. It was only a question of when.

"We put out a piece that said we thought the generators were overvalued. Our predictions were particularly out of favor in the past."

Enthusiasm for energy businesses continued to grow. And with the dot-com meltdown that began in 2000, investors quickly switched their allegiance and money from high-tech to energy.

Then, early last year, the lights went out in California.

Power prices shot up. Pacific Gas and Electric Co. and Southern California Edison, which had sold their power plants without arranging contracts to buy back electricity, began racking up debt. By the time PG&E declared bankruptcy, other companies nationwide had begun experiencing similar difficulties.

The problem, experts say, is that power is a different type of commodity. It can't be stored. As soon as it is produced, it has to be used. So many factors influence prices, such as weather, demand and government regulations. With the resulting volatility, prices can shoot up from $10 a megawatt hour to $10,000 a megawatt hour. It isn't a market for the faint of heart.

It didn't take long to discover that flawed deregulation laws in many states were not prepared to deal with such a fickle market.

In New England, New York, Montana and most of the West, electricity prices rose. Concerns about power shortages grew, and confidence in the electricity industry faltered.

On top of that, the economy slowed further.

That led Constellation to pull back its plan in October, a year after the announcement and just as Enron's stock price began to plummet. Constellation called off the split, paid Goldman Sachs Group Inc. $355 million to end their trading partnership, canceled major power projects and cut 900 employees from its work force.

Poindexter later stepped down as president and chief executive, replaced by former Alex. Brown chief Mayo A. Shattuck III.

And just as California seemed to be recovering from its deregulation fiasco, Enron went bankrupt , sending the energy industry into free fall.

"Enron has dragged everything down," said John Sodergreen, publisher of the Scudder Publishing Group in Annapolis, which puts out five energy newsletters. "Credit and access to capital has absolutely dried up."

Accounting shenanigans

More problematic is evidence that many companies besides Enron were playing fast and loose with the rules.

As the Securities and Exchange Commission looks into accounting shenanigans, many energy companies are stepping away from mark-to-market accounting, which allowed them to count a multiyear contract as current earnings.

In addition, the Federal Energy Commission is investigating allegations of power price manipulation in Texas and California, and sham trading practices used by companies to falsely inflate revenue.

Trading volumes have shrunk, liquidity has dried up, and many companies are backing off from trading businesses.

Many companies, including Allegheny Energy Inc. in Hagerstown and Texas-based Williams Cos., have canceled major power plant construction projects, reduced earnings forecasts and laid off hundreds of workers. Aquila Inc. in Missouri said Tuesday that it was abandoning the wholesale energy and marketing business completely, having cut 550 jobs since May.

Many are returning to what they know best, the unexciting, but reliable business of power delivery.

But energy trading is not dead, experts say.

"There are a lot of similarities to the fall of the dot-coms, but there is a big difference," said M. Ray Perryman, founder and president of the Perryman Group, an economic and financial analysis firm in Texas. "Clearly, there was some speculation that took place. There was also that rush and euphoria to buy that dot-coms had, too. The difference is that dot-coms couldn't generate the profits.

"In energy trading, that is a market that has a future. It is a core business that is going to persist."

Experts point to dot-com survivors such as eBay and

"Some of the dot-coms made money and are still in business," said Borenstein, director of the University of California's Energy Institute. "Some of the power traders are doing fine. So you can't say in either case that everybody screwed up. In both cases, we went from having a whole lot of perceived wisdom that was self-reinforcing. In both cases, it ended up being wrong. That's not unusual in new industries."

In light of Enron's downfall, few remember the bankruptcy of Power Co. of America in 1998. The Greenwich, Conn., company filed for Chapter 11 protection when it defaulted on $236 million in contracts because it was unable to deliver power it had agreed to sell to others.

The culprit? A heat wave that sent power prices soaring as high as $7,000 per megawatt hour in the Midwest. Several other companies defaulted also. The failures led trading firms to tighten credit policies and improve hedging practices.

"After that, the systems got better and the processes got better," Sodergreen said. "This time around, there were some significant risks that people weren't prepared to deal with, and the timing of this downturn has just hit the industry very hard. There is a such a microscope on the market right now.

"The problems in the industry are not systemic," Sodergreen added. "There are some bad eggs, but this is not an industry of crooks. When the smoke clears, this is going to be a force to be reckoned with."

It won't be easy to get there.

"We have a lot of kinks to work out in energy trading," said Jeffrey Gildersleeve, a utilities analyst at Argus Research. "This is such an old and mature industry that's becoming very progressive, very new. I constantly tell clients that we have an 80-year-old grandfather meeting his 15-year-old grandson. It's going to take time."

Playing it safe

Without a crystal ball, Capps says, he is playing it safe.

"We like being in the generating business," Capps said. "You have a chance to make money on electricity and you can make money on gas. We're not a trading house, but we do trade around our assets. We won't sell electricity where we can't crank up a generator and produce it."

Dominion plans to continue trading on assets that it owns. The company also will depend on its traditional utility franchises - which serve nearly 4 million retail customers in five states - to contribute to earnings and cash flow.

Dominion plans to continue to expand its power production capacity by about 18 percent over the next three years.

To minimize the risk of spikes in natural gas prices, it spent $8.9 billion to purchase Pittsburgh-based Consolidated Natural Gas Co. in 1999, and the company jumped at the chance last fall to purchase Louis Dreyfus Natural Gas for $2.3 billion in cash, stock and assumed debt. Last week, the company announced that it would purchase Williams' liquefied natural gas plant in Southern Maryland.

As other utilities deal with huge debt and credit problems, many cash-strapped utilities are selling their power plants at heavily reduced prices. Capps is ready to snap up those assets. Dominion already has several fossil-fuel, hydroelectric and nuclear facilities.

"We don't want to be a one-trick pony," Capps said. "We haven't cornered the market on smarts. We're just pretty conservative. Because the New Economy and dot-coms were predicting 30 percent growth, people started believing you had to have double digit growth, too. But this business is an infrastructure business.

"Many people need electricity and many need gas. The public doesn't use electricity because it's available. They only use it when it's needed. We've been in this business too long and have too much basic common sense to realize that our growth rate will not get those kind of results."

That kind of thinking has led Dominion to 13 straight quarters of meeting consensus earnings estimates.

Two years from now, will Capps still look like a genius? Possibly, experts say, but it's hard to say.

"We don't know what the market will look like," said Borenstein, of the Energy Institute. "We don't know what the model of a successful business will look like in that market. The market rules and environment have to be determined. Until that's settled, we're going to remain in this state of uncertainty. It's very much in the air."

Lawsuit Claims Dismissal for Refusing to Cheat

New York Times by David Barboza August 6, 2002

HOUSTON, Aug. 4 A former senior executive at the Dynegy Corporation says in a lawsuit that Dynegy fired him last year after he refused to go along with a plan to manipulate the company's profits and losses in the summer of 2000.

The executive, Bradley P. Farnsworth, seeks unspecified damages in the suit, filed on Friday in a state court here.

Mr. Farnsworth, who was the controller and chief accounting officer at Dynegy from 1997 to early 2001, says in the suit that he was pressured to alter the company's accounting standards so as to hide energy trading losses and bolster profits.

Steven Stengel, a spokesman for Dynegy, which is based here, said today that the accusations outlined in the lawsuit were baseless. "We are in the process of reviewing the lawsuit and intend to vigorously contest Mr. Farnsworth's claims," he said.

The accounting and trading practices at Dynegy, one of the nation's biggest energy traders, are already under investigation by the Securities and Exchange Commission and the United States attorney's office over suspicions that the company inflated revenue and profit. Shares of the company, like those of other big energy traders, have been battered in recent weeks because of concerns about mounting debt and questionable trading practices.

Shares of Dynegy, which peaked at $47.50 last November, closed at $2.12 on Friday.

The company sought last fall to acquire the Enron Corporation and then backed out of the deal. Its longtime chairman and chief executive, Charles L. Watson, resigned in May after questions arose about the trading operations.

In the suit, Mr. Farnsworth says that top executives at Dynegy asked him to conspire to manipulate the company's results so as to meet profit forecasts and please investors.

In the summer of 2000, when Dynegy's trading portfolio in Europe turned sour, Mr. Farnsworth says in his suit, the president and chief operating officer then, Stephen W. Bergstrom, and the chief financial officer, Robert D. Doty Jr., asked him to "shave" the value of losses in the gas market. He also says in the suit that Mr. Doty had told him that unless such a change was made, the company would most likely not meet its third-quarter profit forecast.

Dynegy said that Mr. Bergstrom was unavailable for comment and that it did not have contact information for Mr. Doty, who resigned in June. Other efforts to reach Mr. Doty have been unsuccessful.

Mr. Farnsworth said he refused to make the changes and, as a result, was excluded from high-level executive meetings. He was later removed as controller and demoted, he said. In October 2001, the complaint says, he was fired, without severance pay.

Mr. Farnsworth did not specify in the suit how much of a gain the proposed changes would have delivered to Dynegy's results. He also did not indicate whether Dynegy adopted the changes without him.

But his lawyer in Houston, Philip H. Hilder, said: "The bottom line is, he refused to manipulate the company's profits and losses, and because of that he was fired."

Dynegy did meet its third-quarter 2000 profit forecast, reporting $176.5 million, or 55 cents a share. The company called it a record quarter but said the results had been hurt by losses in Europe because of volatile power and gas prices.

Mr. Hilder said Mr. Farnsworth, 49, was not aware of any other attempts to manipulate the company's accounting or its profit statements.

In March 2000, the suit says, Mr. Bergstrom became concerned about the company's natural-gas trading portfolio in the Britain. The company had a short position, or a bet that prices would fall. A month later, when gas and power prices rose, Dynegy began suffering "significant" losses that violated the company's risk policy, the suit says.

In August that year, Mr. Farnsworth says in the suit, Mr. Bergstrom asked him to shave, or reduce, the forward curve that is used to calculate mark-to-market, or long-term, trading gains and losses. Altering the curve would have artificially reduced the losses on the books. Mr. Farnsworth says in the complaint that he had told Mr. Doty that making the change would violate the company's standard accounting procedures and would be illegal.

In January 2001, the complaint says, Mr. Doty told Mr. Farnsworth that he needed a controller who was 110 percent supportive so as to "achieve the company's aggressive earnings and growth targets."

In March 2001, Mr. Farnsworth agreed to be reassigned and signed a one-year employment contract, going from supervising a staff of about 350 to overseeing a staff of about 10 working on a financial software program, Mr. Hilder said. (Mr. Hilder also represents Sherron S. Watkins, the Enron vice president who won acclaim for questioning accounting methods at Enron last August.)

A Dynegy announced in March 2001 the appointment of Michael R. Mott as controller but made no mention of Mr. Farnsworth. In October, Mr. Farnsworth was terminated but continued to be paid through last March, his lawyer said. "This is unlawful termination," Mr. Hilder said. "He was asked to do an illegal act, and he refused to do so."

Wash Trades Can be Manipulative

Dow Jones - July 23, 2002

SANTA CLARA, Calif. (Dow Jones)--The Commodity Futures Trading Commission is concerned about the potential for energy companies to use "round-trip" or "wash" trades to create false and manipulative price signals, Commissioner Thomas J. Erickson said Tuesday.

"In certain cases, wash transactions can send price signals that are manipulative," Erickson said at an energy industry conference.

Wash or round-trip trades refer to the simultaneous sale and purchase of energy at the same price by the same counterparties. The CFTC has issued subpoenas to several companies regarding their trading activity, including wash trades.

Companies that have confirmed receiving subpoenas from the commission regarding their trading activities include Duke Energy (DUK), Avista Corp. (AVA), Enron Corp. (ENRNQ) unit Portland General Electric, El Paso Electric (EE) and Dynegy Inc. (DYN). El Paso Electric isn't related to El Paso Corp. (EP), which hasn't said it has been subpoenaed by the CFTC.

Reliant Resources (RRI) and American Electric Power Co. (AEP) have confirmed receiving subpoenas from the commission, but haven't disclosed their focus.

As reported, the probe of energy companies will test a gray area in the enforcement powers of the CFTC, which primarily regulates established commodity futures markets.

The Commodity Futures Modernization Act of 2000 exempted over-the-counter energy derivatives - which account much of the trading in wholesale natural gas and electricity markets - from regulation by the CFTC.

Congress should restore the CFTC's authority, and over-the-counter energy derivative transactions should be subject to a transparency requirement, Erickson said.

"We have a regulatory regime that allows fraud and manipulation to run free of regulation," Erickson said. "We need to ensure these transactions actually occur. The concern is that these transactions are not covered. It is outside our authority to sanction."

Traders have to report their positions in the futures markets to the CFTC each week. U.S. Sen. Dianne Feinstein, D-Calif., has drafted a bill which seeks to give the commission the authority to regulate OTC energy derivatives.

Flawed Market Encouraged Manipulation

Dow Jones - July 23, 2002

NEW YORK -(Dow Jones)- California's poorly designed electricity market enabled individual power suppliers to set prices above what a competitive market would bear and lacked the ability to mitigate such pricing when it occurred, the U.S. General Accounting Office said in a study released Tuesday.

In particular, the study found fault with California's frozen retail rates, which kept demand high even as wholesale prices soared, and with the California Public Utilities Commission's policy of discouraging utilities from signing long-term supply contracts, leaving them at the mercy of traders in the spot markets. "Our analysis and other studies found that during some periods, prices did not follow patterns consistent with prices under competitive conditions," the GAO concluded in the study, which was conducted for Reps. Peter DeFazio, D-Ore., and Jay Inslee, D-Wash.

Power suppliers were able to withhold electricity from the market until the last minute, when buyers were desperate enough to pay high prices, the study concluded.

The study, however, also concluded that weather created a tight balance of supply and demand that would have led to higher than normal prices even during competitive conditions, making it difficult to isolate the effect of market power.

The power crisis ran from May 2000 to May 2001, a period marked by a hot summer and limited hydroelectric supplies.

The Federal Energy Regulatory Commission is in the middle of a broad investigation of possible market manipulation during the crisis. FERC is looking into the activities of about 150 companies, including Enron Corp. (ENRNQ), Williams Cos. (WMB), Duke Energy (DUK), Reliant Resources (RRI), Mirant Corp. (MIR) and Dynegy Inc. (DYN).

Energy traders' activities more generally are under investigation by the U.S. Justice Department, the Securities and Exchange Commission, and the Commodity Futures Trading Commission.

California is asking FERC to order suppliers to pay about $9 billion in refunds to the state as compensation for what it alleges were excessive prices during the crisis.

Power suppliers have repeatedly denied overcharging, manipulating the market or withholding supply during the crisis. To the contrary, suppliers have said their plants ran overtime to meet demand.

The study shows electricity to be a commodity uniquely subject to market manipulation and that deregulation invites market abuse, DeFazio said in a press release.

In a separate release, Inslee said FERC needs to aggressively monitor the industry after price controls on the western power markets expire in September.

California's price caps were ineffective in reducing prices, in part because they didn't extend to the entire West, the GAO study concluded.

Smoking Gun Shoots Down Bush View

L. A. Times by George Skelton July 22, 2002

(7/16/02) - SACRAMENTO -- That deep, mellow voice of Vice President Dick Cheney still resonates in my ear. It's accentuated now by reverberations from the Enron smoking gun.

"Frankly, California is looked on by many folks as a classic example of the kinds of problems that arise when you do use price caps," Cheney told me in April of last year. "Your problem is that your demand for electricity is up and your supplies have actually declined.... "Ultimately, of course, the peak power period this summer will exceed any capacity the state has and you'll end up in those rolling brownouts. There's no magic wand that Washington can wave."

Cheney was reflecting the laissez-faire, hidebound ideology of the new Bush administration. And he could not have been more wrong.

California then did not have wholesale price caps. It had consumer rate caps that had left private utilities short of enough money to pay their gouging suppliers.

The power pirates--many of them pals and political patrons of Cheney and President Bush--were reaping profits of 400% to 600%. The cost of electricity that private utilities (Edison, PG&E, SDG&E) were sending consumers soared from $7.4 billion in 1999 to

$27.6 billion in 2000 and seemed headed for $70 billion in 2001.

Demand had not been up significantly; indeed, it then was falling. Supplies were rising.

There was a magic wand Washington could wave. And it finally did get waved in June after dogged goading by Gov. Gray Davis, other West Coast Democrats and a new Democratic U.S. Senate. The wand was regional price caps, imposed by the Federal Energy Regulatory Commission.

Those caps--so abhorred by the Bushies--worked with new long-term power contracts negotiated by Davis, plus a mild summer, to quash the energy crisis.

Megawatts that had sold for $321--and frequently exceeded $1,000--were capped at $92. They soon slid to $60 and now are back down to $30. That's about where they were when California naively set out on its ill-fated deregulation venture, which shifted control over most electricity from the state Public Utilities Commission to the pro-profiteer FERC.

Despite Cheney's glum prophecy, there were no rolling brownouts last summer, nor have there been any since.

Rather than the feared $70-billion electricity bill, the tab last year again was about $27 billion. Still, if you assume that 1999's $7-billion charge was reasonable, it means the gougers--most of them out-of-staters--sucked $40 billion in excess profits out of California over a two-year period. They broke Edison and PG&E and forced the state into the power-buying business.

Davis is asking FERC to order refunds totaling $9 billion. Atty. Gen. Bill Lockyer also is suing energy companies for billions in penalties, charging they ripped off California.

Now comes the smoking gun, the Enron internal memos disclosed by FERC that show clear evidence of market manipulation. The documents indicate that not only Enron, but other companies were fleecing Californians by driving up prices and triggering blackouts. The Enron sharpies had brazenly dubbed their strategies Death Star, Fat Boy and Get Shorty.

One particularly galling scheme was to buy electricity produced by California plants during blackout threats and sell it for huge profits in Oregon.

The California public--and the governor--had it right after all: The shortage was not real, it was contrived by the power pirates. A Times poll in January 2001 found that most people believed the crisis was created by profiteers.

"This is going to be the most egregious example in history of greedy and unethical corporate interests--with the complicity of the U.S. government--going into a state and raping it economically," says Garry South, Davis' chief political strategist.

Davis' problem is that although a smoking gun was found, he already had been seriously wounded. His job performance rating plummeted a year ago because of the energy crisis and never has recovered. (Approval 42%, disapproval 49% in the latest Field poll.)

Voters are irked because he procrastinated jumping into the fight in 2000 and later signed $43 billion in long-term contracts many consider overpriced. Some pacts have been renegotiated.

How much will Davis benefit from the smoking gun?

The Republican theory is not a lot. Any benefits are counterbalanced by other Davis baggage: a software scandal, obsessive fund-raising and a gaping budget deficit.

However, he's bound to be cut some slack.

Davis' message will be that while the feds stood by, he fended off pirates. Davis slew Goliath.

As for Bush and Cheney, people should listen skeptically to their future messages about what's good for California.

Deregulation - Page 19 - 2002