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July - Duke Energy Employee Advocate

Deregulation - Page 21 - 2002

Deregulation Ploys Rejected in the South

Associated Press - September 2, 2002

NEW ORLEANS (AP) - Southern governors voted to oppose a plan by federal regulators to make all customers pay for upgrades to electricity transmission systems to send power to distant markets.

In a resolution approved by the Southern Governors Conference Monday, the chief executives said the plan proposed by the Federal Energy Regulatory Commission could raise power costs in the South while giving residents few, if any, benefits.

FERC's proposal calls for all ratepayers on a transmission system to pay for the upgrades, regardless of how much power they use.

The governors pointed to the recent buildup of merchant power plants in the South, which are not regulated and sell electricity on wholesale markets at a price governed by supply and demand. Much of that power is sold outside the region.

The proposal to make all customers on a transmission system pay for the upgrades would be ``an atrocious assault on ratepayers, particularly in the South,'' said Arkansas Gov. Mike Huckabee.

``Even our cost for electricity is generally lower in the South, the cost of transmission would have to be borne by all, even though our customers would never see a kilowatt of the energy, even though our customers would get no benefit whatsoever,'' Huckabee said.

Gov. Paul Patton of Kentucky compared FERC's proposal to a farmer wanting distant customers to pay for a road so vegetables could be taken to market.

FERC made its proposal on July 31 following a study into a single set of rules governing the wholesale power industry. The agency is attempting to make the wholesale market more competitive and overcome a major problem that wholesalers now have: getting their power to far-off markets.

The resolution by the governors calls for upgrades of transmission systems to be paid by customers whose power needs resulted in the upgrades.

The South also would be adversely affected by FERC's proposal because the region is attractive to wholesale generating plants and the region generally has stayed with power monopolies that are regulated.

``Increases in electricity prices in Southern states could harm economic development at the same time as the possible increase in generating plants could negatively impact the environment,'' Huckabee said. ``This is truly unacceptable.''

Enron Escapades

Wall Street Journal – by A. Raghavan, K. Kranhold, A. Barrionuevo - September 2, 2002

(8/26/02) - When Enron Corp. was riding high, Chief Financial Officer Andrew Fastow had a Lucite cube on his desk supposedly laying out the company's values. One of these was communication, and the cube's inscription explained what that meant: When Enron says it's going to "rip your face off," it said, it will "rip your face off."

It was a characteristic gesture inside Enron, where the prevailing corporate culture was to push everything to the limits: business practices, laws and personal behavior. At Enron's London office, lavishly paid executives submitted blind e-mail bids for the 18 parking places. One of them paid $6,250 to use a well-placed spot for a single year.

This culture drove Enron to dizzying growth, as the company remade itself from a stodgy energy business to a futuristic trader and financier. Eventually it led Enron to collapse under the weight of mindbogglingly complex financial dodges.

Last week brought the first criminal consequences, as former financial executive Michael Kopper pleaded guilty to charges that he helped build a web of partnerships that disguised Enron's waning fortunes and funneled millions to himself, Mr. Fastow and others. The plea made it clear the federal government is now preparing a case against Mr. Fastow.

Finance and accounting remain the core of the Enron story, but the company's cowboy culture -- and the way top bosses such as Mr. Fastow and former Chief Executive Jeffrey Skilling inspired it -- are also key to understanding what happened in this historic business debacle. Only now is the full scope becoming apparent, amid government probes and a growing willingness by some former and current employees to speak about it.

Enron executives lived large, beginning with fast cars. Porsches were one favorite. Former Enron Broadband Services Chief Kenneth Rice drove in Ferrari Challenge races, an exclusive series for the rich. "They were guys who could afford not only to buy Ferraris, but to wreck them," says Todd Renaud, a former information technology director at the company.

Sometimes, employees celebrated their deals or trading wins by heading off to a local strip club. Brittany L. Lucas, a dancer at a club called Treasures, recalls a group of about eight Enron men striding in last summer and announcing they had $10,000 to celebrate with. "Enron guys were known for spending big money and letting you know they worked there," says Ms. Lucas, who says she made $1,200 for herself that weekday afternoon, her best day ever. In late 1999, Enron advised employees they shouldn't use their company cards at the clubs, citing the clubs in a memo under their discreet billing names.

Despite its growing size, Enron operated a little like a family business at times. In 1997, it acquired a company co-owned by a son of Chairman Kenneth Lay, which planned to go into the business of trading pulp and paper. Employees say they were urged to use a travel agency operated by a sister of the chairman. "It was beyond encouraged," says James Alexander, financial chief of Enron Global Power & Pipelines in 1994 and 1995. The sister of Mr. Lay said last year the Enron business was won through competitive bidding.

Mr. Alexander, speaking generally of the company, says, "Enron was always playing it close to the edge." A spokesman for the company, Mark Palmer, says that's not the culture today. "The 12,000 remaining employees at Enron and former colleagues that were laid off feel like they are being unjustly painted by a brush that appears to be deserved for only a few," he says.

Indeed, most at Enron never had a chance to cash in like top managers, whose perks were being protected to the end. Worried last fall that bankruptcy lawyers might try to seize a final $100 million-plus in bonuses for executives and top traders, then-President Greg Whalley told managers to make sure they could defend the checks as retention payments, says one manager involved in the process.

Enron executives would challenge employees, and not just in the office. During a company picnic at Houston's AstroWorld in the late 1990s, Mr. Skilling dared Lou Pai, head of Enron Energy Services, to join him in "barnstorming," a blend of hang gliding and sky diving. Mr. Pai refused, but others felt compelled to take up the challenge.

In this environment, Mr. Fastow managed to stand out. Often telling investment bankers that Enron had "the biggest wallet on Wall Street," he would describe to each one where his firm stood in the pecking order, based on the roughly $100 million in fees Enron paid out yearly. He told a Goldman, Sachs & Co. team he wasn't going to do anything with a presentation they had prepared until they agreed to lend Enron some money, adding that lots of other banks were waiting in line, say people familiar with the incident. Another time, he told a J.P. Morgan banker his firm was "small potatoes," says a person familiar with the matter. A spokesman for Mr. Fastow said he would have no comment.

Mr. Fastow made no secret of his low regard for bureaucracy and rules. In a move to cut the fees it paid to investment banks, Enron sought in the late 1990s to sell securities, a move that would have required some of its employees to pass the "Series 7" brokers' exam. Though several members of Mr. Fastow's finance team got their Series 7, former associates say Mr. Fastow liked to boast, "I am the boss, and I don't have my Series 7." It's unclear whether Mr. Fastow actually needed it.

Ray Bowen, a Citigroup banker at the time and now Enron's chief financial officer, once asked Mr. Fastow about a batch of complex equations that filled a whiteboard in the conference room next to the Mr. Fastow's office. "You can't tell me you understand those equations," Mr. Bowen commented to Mr. Fastow. Mr. Fastow replied: "I pulled them out of a book to intimidate people."

By some accounts, Mr. Fastow, who is 40 years old, began developing such skills early in life. At New Providence High School in New Jersey, where he made his way through honors courses effortlessly, one of his former English teachers says Mr. Fastow tried to negotiate for his grades when a paper got less than the top mark. "He was not satisfied to just accept a grade," says the teacher, Dwight Boud, who remembers Mr. Fastow as a "budding wheeler-dealer."

Mr. Fastow became student-council president but drew mixed reviews. The high-school newspaper, in an editorial titled "Student Council: Promises, Promises," claimed Mr. Fastow hadn't followed through on his campaign pledges. He defended himself, saying that although he had failed to deliver a promised concert, he hoped to book a replacement event, a "Gong Show" or "Class Feud."

Later, studying economics and Chinese at Tufts University in Medford, Mass., Mr. Fastow met his future wife, Lea Weingarten, a member of a wealthy Houston family. After college the two entered a training program at what was then Continental Bank in Chicago. Timothy Davitt, who knew them there, says that while people would often help each other on cases, Mr. Fastow was reluctant to share his answers. "He struck me as pretty aggressive," Mr. Davitt says. "For the most part, all of us had fond memories of each other. Andy was outside of our social group."

The Fastows headed to Mrs. Fastow's native Houston in 1990, both taking jobs at a young company called Enron. Just five years old, Enron was starting to evolve from a natural-gas and pipeline company into a trading firm. Mr. Fastow was one of the first managers hired by Mr. Skilling, who himself had only recently arrived, from management consultants McKinsey & Co. Brought into Mr. Skilling's inner circle, Mr. Fastow returned the loyalty, telling colleagues he had named a child after his mentor. When Mr. Skilling became Enron's president and chief operating officer in early 1997, he and Mr. Lay promoted Mr. Fastow to lead a new finance department. A year later, Mr. Fastow became chief financial officer. Like many power companies, Enron sometimes used outside partnerships to handle capital-intensive projects such as pipelines, thus keeping the debt off its balance sheet. It was a legitimate practice. But Enron grew frustrated with the time it took to set up such partnerships -- months of negotiating with partners and banks so the entity would have the required minimum of 3% in outside equity. Instead, it began to set up partnerships that were supposedly separate, though staffed, housed and significantly funded by Enron itself. It could turn to them if it wanted money quickly to do deals or needed a place to stow assets off the balance sheet until a permanent buyer could be found.

In June 1999, Messrs. Skilling and Fastow outlined to the board plans for a partnership called LJM Cayman LP, its name taken from the initials of Mr. Fastow's wife and children. Mr. Fastow, who would be LJM's general partner, got a ruling from Enron's board that his role there wouldn't violate conflict-of-interest rules on outside business interests.

But conflicts were hard to avoid. When Mr. Fastow laid plans for a second LJM partnership, he spoke openly of the edge that his inside knowledge of Enron assets would give him if the partnership was bidding against other investors for such assets. "Let me simply say I can price [assets] better than anyone else because I will have better information than anyone else," he said in a videotaped presentation to Merrill Lynch & Co. private-equity salesmen in September 1999. The reason: "I know everything about them. And I've been involved in their approval."

He also said that "it is very hard for me not to see the competing bids."

The salesmen were perplexed. Wouldn't Mr. Fastow's privileged information deter other bidders for Enron assets, and ultimately not be in Enron's best interest, one asked. Another wanted to know how aware other bidders would be of his privileged position. Mr. Fastow began his reply but was interrupted. "It's like an auction. It's . . ." A Merrill salesman finished the thought: " . . . where there is a `house bid' on the inside, and you don't know what that `house bid' is?"

Mr. Fastow responded, "That's right."

He then reassured the Merrill salesmen where his loyalties would lie in Enron-LJM dealings: He would "always be on the LJM side of the transaction."

But it sometimes put him or his team in very awkward situations. In a deal to offload Enron's pulp and paper business to LJM, the negotiator for the Enron side was supervised by Barry Schnapper -- whose own boss was Mr. Fastow, the general partner of LJM.

LJM employees used Enron office space and were on its phone system. When a call came from LJM, Enron employees would have no reason to know the person on the line was representing LJM unless he or she said so. In mid-2000, as Enron Broadband Services was negotiating to sell some fiber-optic cable to LJM2, an LJM2 employee named Anne C. Yaeger called the Enron unit and grilled it about Enron's valuation of the cable, without identifying herself as an LJM staffer, according to a former employee familiar with the matter.

An attorney for Ms. Yaeger says people she dealt with at Enron knew she was working for LJM. An attorney for Mr. Fastow has previously pointed to Enron statements that all the LJM transactions were proper and approved by the board and top management.

By the late 1990s, Enron had become a freewheeling trading firm. But it wasn't eager to let Wall Street know just how much of its profit came from trading, because trading companies tend to command lower price-to-earnings multiples than energy producers.

That posed a problem when executives at Enron Americas, the company's wholesale trading operation, expecting a drop in natural-gas prices around the start of 2001, wanted to make a big bearish bet by selling gas futures. The gas trading group was already bumping against its $65 million limit for the amount it could have at risk in trading. If Enron Americas asked Enron's board for a higher trading limit, the move would eventually have to be disclosed. Among other things, Wall Street could be tipped off to the extent of Enron's dependence on trading for its profits.

Enron Americas Chief Executive John Lavorato called a meeting of top gas traders to figure out how to make the bearish bet, says Jim Schwieger, a trader who attended. The plan devised, according to Mr. Schwieger: Enron would portray its gas-futures sales not as trading but simply as an effort to hedge gas that it owned -- or needed to own to operate power plants. Such contracts wouldn't have to be accounted for as so-called mark-to-market earnings, under which traders estimate future profits from trades and record them as current earnings. If the company accounted for the trades under a different method, they wouldn't count toward the gas group's "at-risk" trading limit.

Mr. Lavorato's predictions were right: Gas prices plunged, and the bet paid off for Enron. "At Enron, you never got punished for breaking the rules and being successful," Mr. Schwieger says. "At every level, Enron people were arrogant and smart enough to think they knew better than the level above them." Mr. Lavorato declined, through a spokesman, to comment.

Last October, the extended financial latticework that had propped up Enron began to come unglued. Enron said it would take a $1.01 billion pretax charge against earnings. More than $700 million of this, it would later emerge, was due to termination of deals related to one of the LJM partnerships. At an employee meeting held by Mr. Lay, Mr. Schwieger piped up with a barrage of questions about the partnerships.

A half-hour later, as Mr. Schwieger stood at a fax machine, he says he looked up to see Mr. Fastow extending his hand. Mr. Fastow "said the questions that I was asking about the partnerships were the questions that needed to be asked, but he said he didn't think it was time to be asking them," Mr. Schwieger recalls. He says the CFO invited him to meet the following day to discuss the partnerships. The meeting never happened. The next day, Enron suspended Mr. Fastow.

Some six months later, Mr. Schwieger says, he ran into the former CFO at the Houston airport. While Mr. Fastow's parents were undergoing a random search, he stopped to chat with Mr. Schwieger. "I never got an opportunity to explain the partnerships to you," he said, according to Mr. Schwieger. Mr. Schwieger replied, "With everything that has come to light, I probably wouldn't like the answer I would have gotten."

Arizona Rescinds Electric Deregulation

The Tribune, Mesa, Arizona – by Dave Woodfill – September 1, 2002

Aug. 29--The Arizona Corporation Commission's repeal of the state's electric deregulation plan will not impact Valley pocketbooks, experts say.

Tuesday's decision by the three-member regulatory board -- which regulates rates for most state utilities -- means the state will discard its six-year plan to open the retail energy market to competition and allow companies to spar for customers.

The move has already provoked a challenge by Arizona Public Service, which, along with Tucson Electric Power, was required to divest itself of all its electricity-generating plants. The divestitures were an essential step in the deregulation process and would have shifted oversight of the plants from Arizona to federal government. The companies were given the choice of selling their plants to wholesale companies -- which would produce energy for use on the open market -- or place them under the control of an affiliate. Part of the commission's concern centered on potential negative impacts of the federal wholesale selling plan on consumers.

APS, the main subsidiary of Pinnacle West Capital Corp., said it wants to recover the costs of construction for several plants built between 1999 and 2003 amid a nationwide energy shortage. Company officials say since the plants are being shifted back under oversight of the state, and since they were built to serve the needs of Arizona customers, APS is entitled to recover construction costs via a rate hike. Under deregulation, the company would have been able to set its own rates to whatever it felt was necessary. Now, that must be approved by the commission's three members. APS president Jack Davis said it is unclear if the company will be able to appeal for increases because the commission neglected to address how the issue would be handled in Tuesday's order. He said the company will appeal for reconsideration within 20 days after the decree is formalized.

"We're disappointed in the action they took at hopefully, upon request for reconsideration, we can get some of it squared away," Davis said. "The way the order came out (Tuesday) is that those new generating plants that were built to serve APS' load wouldn't have the opportunity to be recovered."

Under the state constitution, utility providers are guaranteed a "reasonable rate of return" from their in-state customers for products investments.

Commissioner Bob Mundell criticized the company for not raising its concerns during Tuesday's seven-hour hearing.

"If there was a concern, they should have been more forceful in making it," he said. But Mundell added that the commission will review language in its action once APS files its appeal. Mundell and Davis, along with a state consumer advocacy group, doubted the commission's decision will have any affect on electricity prices before the 2004 deadline when the current rate caps expire.

"We don't anticipate any short-term price spikes," said Lindy Funkhouser, director of the Residential Utility Consumer Office. Funkhouser said despite APS' concerns, the company may not win the commission's approval for rate increase if it's found they are making profit on their new plants by selling energy outside of the state.

"Just the incurring of costs doesn't necessarily mean an increase in rates," he said. The commission's decision to ax retail energy deregulation arose from its concerns that future energy shortages would rock Arizona consumers with soaring wholesale prices and possible brownouts similar to those California experienced in 2001. Mundell worried the federal government's oversight after deregulation would be inadequate in protecting Arizona citizens.

Frozen Accounts for Enron High-Rollers

New York Times – by Kurt Eichenwald – August 25, 2002

(8/24/02) - A Houston magistrate has signed orders freezing a number of brokerage and bank accounts controlled by Andrew S. Fastow, the former chief financial officer of Enron, and members of his family, people involved in the case said yesterday.

The orders were signed by United States Magistrate Calvin Botley late Thursday after some family members tried to move millions from one account to another, these people said. Peter Fastow, the brother of Andrew Fastow, was said to be among the family members involved. In a filing Wednesday, federal prosecutors sought to seize $500,000 in an account of Peter Fastow.

Gordon Andrew, a spokesman for both Andrew and Peter Fastow, declined to comment yesterday. The signing of the orders was reported yesterday in The Houston Chronicle.

The orders to freeze the accounts restrict the Fastows and others from moving or withdrawing money, but it does not grant the government its request that those assets be forfeited. Rather, the orders ensure that the money remains in place while a federal judge considers the forfeiture request.

The government sought to seize about $23 million in accounts controlled by members of the family and associates of Andrew Fastow. The move came as Michael Kopper, a former associate of Mr. Fastow, pleaded guilty to two felonies and agreed to cooperate with the continuing criminal investigation. Mr. Kopper surrendered $12 million that he obtained illegally through schemes involving a group of off-the-books partnerships that did business with Enron.

In entering his guilty plea, Mr. Kopper implicated Andrew Fastow in criminal wrongdoing, saying that his former colleague had taken kickbacks out of partnership management fees and had joined in a scheme to cheat Enron out of millions of dollars through use of another partnership.

Prosecutors said that they were trying to seize all assets that could be traced to criminal activity at Enron. In their filings in the case against Mr. Kopper, they identified the $23 million in assets belonging to the associates and family members of Mr. Fastow.

In particular, the papers indicate that the government is seeking forfeiture of two Fastow family bank accounts totaling $9.1 million, as well as another account with $4.6 million that is held in the name of a family foundation.

According to tax forms filed with the Internal Revenue Service, the foundation was established in March 2000, as Mr. Fastow was engaged in a transaction involving a partnership known as Southampton. Mr. Kopper admitted in his guilty plea that the Southampton partnership was used by a group of Enron insiders, including Mr. Fastow, to divert $19 million that rightfully belonged to the company into their own pockets.

The records show that the partnership was opened with a cash contribution from Andrew Fastow of $50,000 on March 16 of that year. Some of that money, according to court records and a report compiled for the Enron board, was used to invest in Southampton. Within weeks, that investment was transformed into a profit of just under $4.5 million, an amount that is disclosed in the tax records.

In that year, the family foundation distributed $62,850 in charitable contributions to charities in the Houston area, the tax records show. According to the criminal information against Mr. Kopper, the foundation still holds $4.6 million in an account at J. P. Morgan Chase, which the government is now seeking to seize.

Enron Wheels Not Off the Hook

L. A. Times – by N. Brooks, W. Hamilton – August 25, 2002

The government must decide whether to charge ex-Enron CFO or cut a deal with him to get evidence against higher-ups, experts say.

(8/23/02) - Once a fast climber up the corporate ladder, former Enron Chief Financial Officer Andrew S. Fastow is headed for a long stretch in federal prison unless he can provide significant new evidence against his ex-bosses, Jeffrey K. Skilling and Kenneth L. Lay, legal experts said Thursday.

Fastow, 40, has not been charged, but he was portrayed as the mastermind of three allegedly fraudulent off-the-books partnerships in court papers filed Wednesday with the felony guilty pleas of Fastow subordinate Michael J. Kopper.

That means prosecutors probably have enough evidence to charge Fastow, attorneys say, and the fact that they haven't suggests that they still are sorting out what Fastow may be able to give them at the negotiating table.

"It's clear at this point that Mr. Fastow is in the cross hairs of the government based on the information provided by Mr. Kopper," said Robert A. Mintz, a former U.S. prosecutor who now is a partner in New Jersey law firm McCarter & English.

The choice for prosecutors is whether to negotiate a deal with the former CFO of Enron Corp. to get to Skilling and Lay or to play tough with Fastow, who may represent their best chance for scoring a big prison sentence.

Even if Fastow is able to negotiate a plea bargain with prosecutors, as Kopper did, the exchange of cooperation for leniency probably would include some jail time, several experts said.

Kopper, 37, pleaded guilty to charges of money laundering and conspiracy to commit wire fraud and agreed to cooperate in the Enron investigation and to hand over $12 million in profits from the three partnerships, called RADR, Chewco and Southampton.

Though Fastow has not been charged, federal prosecutors said they are moving to seize property and $23.6 million in cash from him and others, including his wife and brother and several Enron employees who invested in the questionable partnerships.

It is unclear how much, if any, incriminating data prosecutors have collected on Skilling, 48, Enron's former chief executive, and Lay, 60, its former chairman and chief executive. Neither has been implicated in the partnership schemes, and they were not mentioned in any of the publicly available documents filed in connection with Kopper's plea agreement.

However, Skilling and Lay face possible charges of illegal insider trading if it can be proved that they sold huge chunks of Enron stock when they knew the partnerships were contributing to the deterioration of Enron's financial condition. Skilling also could face perjury charges if his vehement and extensive denials of wrongdoing in testimony before Congress prove false.

The investigation appears to be following the trail blazed by the Powers Report, the probe conducted by independent Enron board members that explored some of the allegedly fraudulent partnerships, including Chewco and Southampton, said Dennis H. Taylor, a former Securities and Exchange Commission lawyer now with Shepherd, Smith & Bebel in Houston.

The report, issued in February, sternly criticized Lay as an absentee manager but also absolved him of wrongdoing with the partnerships, Taylor said. Skilling also failed to adequately oversee the partnerships, the report said, and was warned by former Treasurer Jeffrey McMahon about conflicts of interest in the suspect partnerships but took no action.

Some experts doubt that government prosecutors would cut a deal with Fastow given the evidence they appear to have amassed against him. Throughout their court filings, investigators portray Fastow as the puppet master of the off-the-books partnerships, listing in extensive detail the kickbacks that he allegedly received and the measures that he allegedly put in place to disguise his actions.

"He's been vilified [in court filings] and it would be highly unlikely, both because of the position he held and what he's alleged to have done, that they'd be interested in aggressively pursuing a deal with him," said Walt Brown, a former prosecutor in Los Angeles who is now a partner at Gray Cary in San Francisco.

Prosecutors probably would consent to a plea bargain if Fastow agreed to a harsh penalty, experts said. But if prosecutors pressed for too long a prison term, Fastow might conclude that he has little to lose by fighting any charges in court.

Prosecutors also would have to worry about a potential public relations nightmare if it appeared that they were going lightly on someone perceived to have been a main culprit in Enron's downfall.

"Cutting any deal is going to subject them to a fair amount of criticism," said Dan Hedges, a former U.S. attorney in Houston now in private practice. "As a prosecutor, it would be a bad idea, and politically it would be suicide."

Any decision allowing Fastow to plead to lesser charges could rest on whether he could provide substantial evidence implicating his former superiors, Skilling and Lay. Some experts say it would be much tougher to convict Skilling and Lay, in part because they were not involved in the day-to-day activities of the partnerships and could disclaim any knowledge of Fastow's financing.

Cutting a deal with Fastow therefore poses a risk for prosecutors: They may not get what they need to convict Skilling or Lay, while giving up the chance to throw the book at Fastow.

Investigators are probably looking at other mid-level executives, like Kopper, who were involved or knew about the schemes and could testify, Mintz said. That way, prosecutors are not relying on a single star witness, as they did with David B. Duncan, the former Arthur Andersen auditor who played that role in Andersen's obstruction-of-justice trial.

"We saw how well that worked," Mintz quipped. Though the government won a conviction against Andersen, the victory did not come as easily as many had predicted, and jurors said Duncan's testimony was not central to their decision.

Enron: Hang ‘em High – Lisa Sanders – August 22, 2002

(8/21/02) - HOUSTON (CBS.MW) -- Michael Kopper on Wednesday became the first former Enron executive to be prosecuted in connection with the company's collapse, agreeing to help U.S. authorities go after others responsible for the scandal.

Kopper pleaded guilty to criminal conspiracy charges to commit wire fraud and money laundering, and was released on a $5 million bond after appearing in federal court in Houston.

Additionally, Kopper agreed to pay a fine of $12 million, some of which the Securities and Exchange Commission intends to distribute to Enron shareholders. He also accepted an SEC charge that would permanently bar him from working as an officer or director of a public company.

"This is the first in what we anticipate to be a series of actions brought as the result of the close cooperation between the SEC and Justice Department's Enron task force," said Stephen Cutler, chief of the SEC's enforcement division. Watch video of Cutler's remarks.

The Justice Department said it is looking to seize $23 million from other people and entities associated with Enron. According to the agency's criminal filing Wednesday, bank accounts and property under the name of Chief Financial Officer Andrew Fastow are listed.

Kopper, who had served as managing director of Enron's global finance department, helped Fastow manage off-balance-sheet partnerships that benefited both of them monetarily even as the company's fortunes were tumbling.

The SEC listed three off-balance-sheet transactions that Kopper and others created to make it appear as if the entities were independent of Enron (ENRNQ: news, chart, profile) -- RADR, Chewco and Southampton. Enron artificially inflated its financial results by hiding information about those partnerships from its public statements. See related story.

Kopper and others used the partnerships to "misappropriate millions of dollars representing undisclosed fees," the SEC said.

In a statement, Kopper's lawyer said that his client offered an apology to victims of the Enron debacle and hoped that his plea and agreement to cooperate expresses his regret.

Kopper faces up to 15 years in prison, but a federal judge will determine his sentence, likely taking his cooperation into consideration, a Justice Department official said.

Kopper's cooperation may help prosecutors obtain what many in the public have been seeking since Enron's collapse -- indictments of senior management.

In the government's case against Enron auditor Andersen, the prosecution heavily relied on David Duncan, the lead auditor who pleaded guilty to obstruction of justice and agreed to provide evidence that implicated other Andersen partners. A federal jury convicted the accounting firm in June of obstruction of justice.

"This is significant for two major reasons," said Thomas Ajamie, a Houston lawyer who specializes in civil and criminal securities cases. "One, the [government] got the cooperation of a witness, who is intimately involved, and they need that ... for issues of intent. And No. 2, by pleading guilty to a felony, it makes it possible for them to charge others as co-conspirators."

Michael Ramsey, the attorney for former Enron chairman Ken Lay, said at a press conference he doesn't believe Lay will be indicted. Asked how it was possible Lay could not have known about what Kopper and Fastow were doing, Ramsey said people failed to understand the structural organization of Enron.

Fastow was fired as Enron's CFO last October, as the company's scheme unraveled.

"As managing director of the global finance department, Kopper is key," Ajamie said.

Not only can he reveal information about the off-balance-sheet partnerships and who benefited from them, Kopper can also relate to prosecutors how Enron conducted its business internationally.

"There have been allusions ... that our government is looking at Enron's relationships around the world," for possible violations of the Foreign Corrupt Practices Act, Ajamie said.

Kopper's cooperation isn't likely to result in a plea agreement for Fastow or other top-level management, at least not now, Ajamie predicted. One reason is that prosecutors are seeking prison time and restitution.

"On these types of prosecutions, they do as they do in other cases, starting with people on a lower level and working on cooperation deals so they can prosecute and bring serious charges against the senior officers," he said.

Ajamie says he believes the government's chief targets now are Fastow, Lay, and Jeffrey Skilling, the former chief executive who resigned several months before the scandal came to light.

Enron Official to Come Clean

New York Times – by Kurt Eichenwald - August 21, 2002

A former Enron finance executive, long considered by federal officials as a crucial potential witness in the criminal inquiry into the company's collapse, has agreed to plead guilty to at least two felonies and cooperate with the investigation, people involved in the case said yesterday.

The plea by the executive, Michael J. Kopper, is scheduled to be entered today before Judge Ewing Werlein Jr. in Federal District Court in Houston. It will be the first time criminal charges have been brought in the Enron investigation against a former company executive.

Under the terms of his agreement, people involved in the case said, Mr. Kopper will surrender $12 million of illegally obtained money and plead guilty to conspiracy to commit wire fraud and money laundering. At the same time, people involved in the case said, the Securities and Exchange Commission is expected to file a civil fraud complaint against Mr. Kopper, a former managing director in the company's global finance unit.

Wallace L. Timmeny, Mr. Kopper's lawyer, did not return a call seeking comment. Bryan Sierra, a Justice Department spokesman, declined to comment on the case, as did an official from the S.E.C.

While Mr. Kopper's name is far from the best known of the former Enron executives who have been propelled into the national spotlight since the company filed for bankruptcy protection, the transactions in which he participated at Enron have become the centerpiece of the criminal investigation. Indeed, he was a primary participant in establishing and running the off-the-books partnerships that investigators have said Enron used to hide debt and improperly increase earnings.

As a result, Mr. Kopper has been something of a brass ring for criminal investigators: a man intimately involved in many of the transactions being examined by prosecutors and who maintained a close personal and professional relationship with one of the main subjects of the investigation, Andrew S. Fastow, the former chief financial officer who controlled partnerships that played a central role in Enron's downfall.

After a summer of rapid arrests and charges in other corporate fraud cases, the plea bargain with Mr. Kopper signals that the Enron task force is following the more traditional approach in white-collar prosecutions: building a case from the bottom up, with lower-level executives implicating their superiors. Indeed, lawyers and other legal experts said that because of the potential significance of Mr. Kopper in the continuing investigation, enormous pressure will now be brought to bear on other potential defendants to negotiate their own deals.

"This is the first crack we have seen in what had been up until now a united front among former executives," said Robert A. Mintz, a former federal prosecutor who is now a partner with McCarter & English. "This is definitely the first volley in the government's march toward charges being brought against the upper echelon of Enron."

While Mr. Kopper will be the first former Enron executive to plead guilty, he is not the first defendant charged in the case. Earlier this year, David B. Duncan, who was the chief auditor of the Enron account at Arthur Andersen, pleaded guilty to obstruction of justice in connection with the destruction of documents related to Enron's audit. And in June, three bankers formerly with a division of National Westminster Bank were charged in a criminal complaint of participating in a fraud with Mr. Kopper and Mr. Fastow. Neither Enron executive was charged in that complaint.

According to people who have spoken to government investigators, however, the filing of the criminal complaint against the bankers was intended to show potential witnesses — particularly Mr. Kopper — the magnitude of the evidence that the government had been able to obtain even without their cooperation. The intent, these people said, was to put even more pressure on Mr. Kopper, 37, and other possible witnesses to reach their own deals and cooperate.

At least one of the expected criminal charge against Mr. Kopper stems from the same transaction from 2000 that resulted in the complaint against the three bankers. In that deal — involving a partnership known as Southampton Place — Mr. Kopper and a small group of Enron insiders transformed secret, short-term investments in the partnership into tens of millions of dollars in profits that arguably belonged to the company. In the complaint against the bankers, the government contended that Mr. Kopper and Mr. Fastow used the same partnership deals to defraud National Westminster of $7.3 million.

Mr. Kopper was also at the center of transactions involving a partnership known as Chewco, which he formed in 1997 to engage in deals with Enron. Under accounting rules, at least 3 percent of Chewco's capital had to come from independent investors for Enron to keep the partnership's financial results off the company's books. Chewco falsely purported to meet that standard, with Mr. Kopper and others having set up a secret side deal that served to disguise that fact.

Last year, when Enron bought out Chewco, Mr. Kopper and his domestic partner, William Dodson, received $12.6 million from the company, a huge gain on their original investment of just $125,000.

Throughout much of his time at Enron, Mr. Kopper also maintained a close relationship with Mr. Fastow, and became known throughout his division as the man who helped the chief financial officer with his off-the-books partnerships. Mr. Fastow at times worked extremely hard to benefit his friend. For example, last fall, as Enron was beginning to show its first signs of weakness, Mr. Fastow arranged for his friend to receive a payment from Enron of almost $3 million as part of the buyout of Chewco, despite warnings from internal lawyers that the company had no obligation to pay.

Even since Enron's collapse, the relationship of the two men has remained unusually close. According to Harris County, Tex., records, Mr. Fastow's parents bought a home in Houston owned by Mr. Kopper and Mr. Dodson, relying on an $850,000 mortgage from their son. In other words, Mr. Fastow effectively transferred hundreds of thousands of dollars to his friend just at a time when the investigations into Enron were beginning to pick up steam. Real estate agents in Houston said, however, that the purchase price was not out of line with the market value.

In the months since then, witnesses have told government investigators that Mr. Fastow occasionally called them about Mr. Kopper, asking if they remembered whether he attended particular meetings or what statements he may have made at particular times.

Mr. Kopper grew up in Woodmere a prosperous town on Long Island. In high school, he established a reputation among classmates and teachers as a quiet but ambitious student. He attended Duke, where he majored in economics before obtaining a second degree at the London School of Economics.

After working at the Toronto Dominion Bank, in 1994, Mr. Kopper joined Enron, where he soon found his place as an aide to Mr. Fastow.

‘Mother of All Investigations’?

Dow Jones – by Mark Golden – August 20, 2002

(8/16/02) - NEW YORK (Dow Jones) -- So, two really small utilities - Avista Corp. (AVA) in Spokane, Washington and El Paso Electric (EE) in Texas - were behind the $30 billion California energy crisis, and nobody realized it for two years!

Thank heaven the Federal Energy Regulatory Commission finally got to the bottom of why western U.S. power prices were around $300 a megawatt-hour for more than a year when the normal price is about $30. Of course, Enron Corp. (ENRNQ) took a lot of blame, too. That's our new, tougher energy cop under Chairman Patrick Wood - boldly pinning the blame on an entity that effectively ceased to exist nine months ago. As for the two small, living scapegoats, the cases thus far seem a colossal waste of human effort.

In short, the initial results of what Commissioner Nora Mead Brownell called "the mother of all investigations" - still ongoing after six months - are pathetic. A look at the case against Avista shows why. FERC on Tuesday launched an investigation of Avista, with potential punishments including forfeiture of profits and getting kicked out of the wholesale power market.

Here's why: Avista swore it hadn't executed Enron-like strategies, like "Death Star" or "Ricochet," or that it knowingly aided Enron in doing so. Enron subsidiary Portland General Electric, however, admitted to helping Enron and named Avista as a third party on some Ricochet trades.

FERC told Avista in a "show cause order" to explain the discrepancy, which Avista tried to do. FERC decided Avista's response was still less than forthcoming, that Avista may have participated in Enron's misdeeds and that the company admitted to routinely acting as a middleman between affiliates such as Enron Power Marketing and Portland General in order to allow transactions to proceed which affiliates would be forbidden to undertake directly.

Yes, But What About The $30 Billion?

What does all of this have to do with the $30 billion California electricity disaster? Absolutely nothing. The Avista transactions were done between April 6, 2000, and June 15, 2000. Power prices first spiked May 22 of that year, after more than half the deals in question were done. The electricity sold amounted to 2,549 megawatt-hours at an average price of $34/MWh, for a grand total $87,000 worth of juice, according to Avista's June 14 response to FERC's "show cause" order.

FERC says Avista admitted in its filing to routinely acting as a middleman between affiliates, including Enron's. But Avista admitted no such thing and was clearly misquoted.

As the utility's response puts it: "These transactions are de minimus even to a small utility like Avista Utilities, and would barely amount to a rounding error in the California or northwest markets each day." Strangely, the FERC didn't release these details about the transactions. Nor did it make Avista's June 14, 2002, response public, even though it has made most other documents in the investigation available on its Web site. Normally, all FERC documents are public unless a company requests confidentiality and FERC agrees. Avista made no such request.

"I have no idea why that's not on there," FERC's lead investigator on the matter, Don Gelinas, said in an interview. "It should be. It's got to be an administrative glitch."

Avista itself - caught short in a skyrocketing market - suffered when western power prices soared. By June 2000, Avista had prohibited its utility traders from doing any unnecessary business. Avista was never a registered seller to the California Independent System Operator, though it did sell the state some power on a few emergency days, as ordered by the FERC.

As for helping two affiliates trade, such deals are allowed by FERC as long as the affiliates make the same offers available to other parties simultaneously.

The deals on which Avista was the middleman clearly weren't available to the rest of the world. Avista, which should have known better, still doesn't seem clear on what the affiliate-trading rules are, and it could get a slap on the wrist for what it did.

Not Core, But A Great Message

Gelinas agrees all this has little to do with the California energy crisis.

"These Enron strategies pale in comparison to the lack of infrastructure and supply in California, the drought and the hot summer of 2000," he said. "That is the core issue. That's the message we're trying to get out here."

But on Wednesday, one typical headline read: "Regulators Report Evidence Of Possible Manipulation By Three Energy Companies." Avista's stock price has plummeted, and Moody's placed the credit rating of El Paso Electric on negative outlook Friday citing the investigation.

If FERC wanted to get out a supply-demand message, it failed. If it wanted weak scapegoats, it succeeded. Whatever it wanted, FERC wasn't disappointed with the reaction to its new investigation, Gelinas said.

"It's time for us to be the cop on the beat," he said. "If you break the rules, we're going to come after you. That's a great message to restore confidence in these markets."

Really? The FERC is also looking at high natural gas prices. On one day, the staff reported Tuesday, Enron conducted 227 trades for delivery at one California location as prices rose about 30%. Of the 227 trades, 174 were made with the same counterparty.

Strangely, FERC doesn't name the counterparty. It says price manipulation may well have been taking place, but no investigation was initiated.

It's a good bet the unnamed company isn't bankrupt, is bigger than either Avista or El Paso Electric and has better connections in Washington, D.C.

The Mother of all Investigations

The Deregulation Blight

Wall Street Journal – by Andrew Caffrey – August 20, 2002

(8/16/02) - Utility regulators and officials in several states are moving to ensure that the financial problems that decimated companies in the wholesale-energy sector don't unduly hurt consumers of the electric companies they regulate.

The actions come as state regulators express frustration at their diminishing authority under electricity deregulation -- even though many supported such efforts -- as the power-generation component of electric service has shifted to wholesale-energy providers that are regulated by federal officials. Officials from numerous states criticized a proposal federal energy regulators released July 31 that would effectively join the nation's fractured local energy markets into a seamless single system. State officials say the proposal would further dilute their ability to shape their local markets.

While they don't have direct supervision over wholesale-power generators, state regulators can ensure that local utilities under their jurisdiction aren't dragged down in the tailspin of the merchant-energy sector. In almost all states, regulators set the terms of their utilities' capital structure and electric rates.

Minnesota's public-utility commission has initiated an "informal inquiry" of Xcel Energy Inc., officials said, to investigate how the Minneapolis company's local-electric utility, Northern States Power Co., is being affected by the widening financial problems of Xcel's wholesale-power generator, NRG Energy Inc. In a securities filing this week NRG warned it may run out of money in October and raised the possibility of filing for bankruptcy-court protection.

On July 30, Fitch Ratings, a New York credit-rating agency, downgraded Xcel's credit to junk status and lowered ratings on Northern States Power and three other Xcel utilities because of the parent's exposure to NRG. The lower rating is likely to lead to higher borrowing costs for Northern States Power, and Minnesota regulators want to ensure that the utility's customers don't get stuck with those extra costs. Regulators in two other states where Xcel owns utilities, Texas and Wisconsin, said they are monitoring developments but haven't initiated any inquiries.

Meanwhile, in New Jersey, Gov. James McGreevey recently appointed a task force to investigate how three local utilities accrued nearly $1 billion in additional costs purchasing power which they can charge back to consumers under that state's 1999 deregulation law.

In Ohio, Public Utilities Commission Chairman Alan Schriber said he has instructed staff to more closely monitor the books of local-utility companies' unregulated ventures for signs of trouble that could damage the company's regulated operations and lead to either higher rates or diminished service for consumers. Regulators also are trying to find out what kind of "firewalls" and other protections utility companies have between their regulated and unregulated businesses, "so we have confidence the regulated entities over which we have jurisdiction are not being subverted by problems in the unregulated businesses," Mr. Schriber said.

So far, such inquiries from Minnesota and Ohio remain the exception among state regulators. Mr. Schriber said he is surprised so few states have stepped up scrutiny of utility companies, but added, "it's going to catch on."

The Excel-NRG situation in Minnesota illustrates the risks for local utilities as well as the role state regulators can play in protecting their rate payers. NRG Energy is experiencing one of the more spectacular collapses of the new breed of unregulated wholesale-power companies that sold electricity at market prices rather than at rates determined by regulators. Such companies were hammered as wholesale-power prices plummeted during the past year or so amid a weak economy and a surge in supply, exposing the firms to huge debts incurred when they bought or built power plants.

Downgraded to junk status and struggling to repay some $9 billion in debt, NRG Energy's situation has gotten so bad that last week Shaw Group Inc., Baton Rouge, La., the contractor for a 1,200-megawatt plant NRG had been building in Holmesville, Miss., bought the plant from NRG after the company said it would miss a scheduled construction payment. NRG said it would suffer a pretax loss of $500 million on the sale.

NRG's problems have redounded on parent company Xcel, which now has to shore up its own finances in addition to NRG's. In early August Xcel was forced to renegotiate two lines of credit with lenders to remove a provision that would have triggered a default at the parent if NRG itself defaulted on its credit arrangements. NRG, meanwhile, said that unless its lenders delay a requirement that it post as much as $1.1 billion in collateral, much of it due Monday as a result of its credit being cut to junk, the company may have to consider filing for bankruptcy-court protection. NRG's acting president, Dick Kelly, said he is "optimistic" lenders will agree to delay the collateral posting.

Xcel has sought to reassure Minnesota regulators that NRG and the parent company's woes won't cause rates to go up for Northern States Power customers.

The regulators aren't mollified and seem especially concerned about credit concerns weighing on Northern States Power. "If short-term financing is unavailable from the market or Xcel, or significantly restricted, service quality could suffer," the Minnesota regulatory staff wrote in a briefing prepared for an Aug. 8 commission meeting. "In addition, Xcel and NRG's difficulties create a strong incentive to divert utility revenue to Xcel and Xcel resources to NRG that would otherwise have been used directly by the utility." Scott Wilensky, executive director of state public affairs for Xcel, said the company intends to provide more detailed financial information that it hopes will assure the Minnesota commission that Northern States Power won't pass along higher borrowing costs to rate payers, "to the extent" such costs are "attributable to our investments in NRG."

Deregulation - Page 20 - 2002