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July - Duke Energy Employee Advocate
Deregulation - December, 2001 - Page One

“The seeds of its destruction (Enron) were sown by a lack of management honesty” - The Motley Fool

Duke Energy and Morro Bay are Fighting

Coastal Alliance - December 9, 2001

The long honeymoon between Duke Energy and the City of Morro Bay appears to be over.

After supporting Duke's plan to replace and expand the 46-year-old Morro Bay Power Plant at almost every step during the past two years, the City now may become an adversary of Duke over the $9 million package of revenues and benefits that Morro Bay was supposed to gain from backing the project.

Their failure to reach agreement on the $9 million package after months of negotiations was revealed in a status report filed by the City with the California Energy Commission (CEC) on Nov. 20. The report also described how Duke has failed to reimburse the City for about $250,000 in expenses for environmental and legal consultants to review the proposed project.

As a result of these disputed matters and other unresolved issues, the City Council on Nov. 26 voted 4-1 to become an intervenor in the CEC's review of Duke's proposed project. Mayor Rodger Anderson voted against intervenor status, which allows the City to become a legal party to the CEC review of the project and gives it more clout in the proceedings.

Anderson said a big reason why he voted against intervention was that the City would have to spend its own money and "will not get a penny of this back." However, in a report to the Council, city attorney Rob Schultz stated that "the City and Duke have an operable cost reimbursement agreement, which entitles the City to be reimbursed for costs incurred in review of the Duke project." In addition, Schultz said, CEC rules provide for certain reimbursements of costs incurred by the City as intervenors.

In addition to becoming an intervenor, the Council joined other groups in requesting another delay in the CEC review, which began in October, 2000, and was originally expected to be completed with a decision by the CEC this month.

If differences with Duke are not resolved, the City will seek "conditions of certification (by the CEC) that embody the same concepts included in the agreement regarding revenue guarantees to the City (and) cost reimbursement," according to a statement submitted to the CEC.

The sticking point in the dispute over the $9 million agreement is renewal of an outfall lease allowing a new Duke plant to continue to use public tidelands for discharge of cooling water from the plant into Estero Bay. The outfall facility is considered essential if Duke is permitted to continue using water from the Morro Bay National Estuary.

A preliminary CEC staff report has recommended that any new Duke plant be prohibited from using that water for cooling because of scientific studies showing it would kill nearly one million fish a year, but the question has not been decided.

The City's status report said Duke proposed more than 1,000 changes to the lease drafted by the City, most of which the City regards as "not negotiable." The City submitted the lease to Duke last February, but Duke did not respond until a few weeks ago, the report said.

It also noted that failure to approve the lease "will seriously hinder and delay the scheduling and progress of this case," which already is far behind schedule and is facing further postponements. It now appears a decision by the CEC will be made next spring at the earliest.

The City has tried to discuss the cost reimbursement issue, the report said, but Duke "has failed to meet and confer in good faith except to provide written notice that it disputes all of the City's invoices and that the CEC should be asked to arbitrate."

In deciding to intervene, the Council acted on a recommendation by Schultz, who said in his report that intervention would help the City oppose components of the project "which are unacceptable to the City." The CEC had scheduled the start of hearings in late December to consider evidence on the project with other hearings to occur in early January. But at a pre-hearing conference in Morro Bay on Nov. 29, a delay was requested by the City, the CEC staff, the California Coastal Commission staff and the Coastal Alliance on Plant Expansion (CAPE), a nonprofit citizens group. No decision was made, however.

A pre-hearing conference statement prepared by Schultz said the City is not ready to participate in the hearings with regard to a number of issues and needs more time "to finalize the ...Outfall Lease" and to review all the information that has been docketed with the CEC.

The Council has asked that the evidentiary hearings be consolidated and put off until 30 days after the CEC's Final Staff Assessment of the project, which had been set for Dec. 14 but is subject to change. CAPE, which also is an intervenor, has filed a status report with the CEC, also calling for postponement of any hearings in December because so little time has been allowed for study of the first part of the Final Staff Assessment, which was released Nov. 15.

CAPE supports the proposed ban on diversion of water from the Estuary by a new plant because of the findings of environmental damage to the Estuary. CAPE also seeks tighter controls on the increased toxic air emissions that it would produce.

A Duke spokesperson told the Council on Nov. 26 that Duke had no position on the City becoming an intervenor but asked the Council not to request a delay in the review schedule. He said Duke believes it has lived up to the agreement for reimbursing the city and the matter should be resolved by the CEC.

Previous Morro Bay article:

Morro Bay Project Falls Farther Behind

Enron's 'Con'

Washington Post - by Richard Cohen – December 9, 2001

As usual, I was awakened by a sudden draft through the closed windows, saw the curtains ominously rustling and sensed instantly that someone was in my bedroom. Without even looking up I knew it had to be my grandfather, this long-dead immigrant of socialist leanings. I knew I was in for another of his wearying lectures with his tiresome references to "the working man." He was holding a newspaper.

"This Enron," he said without so much as a greeting. "You know from it?"

"Sure," I said. "The Houston-based conglomerate which just went bust. It was seventh on the Fortune 500, worth almost $50 billion. It sold everything. Electricity, natural gas -- even water."

"It sold smoke," he yelled. "It sold the Brooklyn Bridge over and over again. It sold the uptown version of dream sheets and prayer handkerchiefs, only it used brokers and banks and not guys in fedoras and shiny suits. A bunch of con men."

"Oh, no, grandpa," I said with weary resignation. "These were some of the most upstanding people in the land. The chairman, Kenneth Lay, is a friend of the president's. He's an innovator, a major success story. He was even considering writing a book telling how he did it all. It might have been as important a book as Jack Welch's or even Lee Iacocca's. Unfortunately, Enron misstated its profits . . ."

"Misstated? Is this how you college people talk? They lied."

"No, you don't understand. They set up partnerships and dealt in derivatives."

"They lied. They said they made maybe half a billion more than they did. That's a lie. I was in business myself once. They 'misstated' what they made by $140 million one year and $250 million in another and then $140 million again in another year. This is a lot of misstating. This is what they really sold -- misstatements."

"It's all very complicated," I explained. "But don't worry, the SEC is looking into it."

"Don't tell me not to worry. I worry about the workers. These people had their money in the company's 401(k) plan. Their company was encouraging them to buy worthless stock -- $90 one day, zip the next. And when the stock started to fall, the company locked down the retirement so the workers couldn't sell. Now they have nothing. This company ripped off their own workers."

"Yes," I agreed, "many of them lost all their savings. They're busted."

"But not the big shots. This Lay character made more than $200 million. Others in the company made almost as much. Tell me, you think it's right that the big shots get to be rich while the workers get to go to some soup kitchen?"

"You're talking class warfare."

"I'm talking fairness. And anyway, how come it's class warfare when the rich are asked to give back what they steal? How come it's not called justice?"

"It's the market system. There's always risk."

"But not for the bosses, with their options and golden parachutes. The workers get a parachute that doesn't open."

"The market will correct itself," I pointed out.

"And what does your president say, this George Bush? Nothing! Not a word about these poor workers. And what about the Treasury secretary, this O'Neill character? Nothing! No indignation. No anger. Roosevelt would have said something. Truman would have screamed bloody murder. Even Teddy Roosevelt -- did you know I once met him? -- would have blasted them for stealing from their own people. But Bush . . .? Don't get me started."

"Enron is in bankruptcy now. We call it Chapter 11. The creditors will be taken care of."

"You can go from chapter one to chapter 11 and not find anything for the workers. Chase Bank will get something and Barclays Bank will get something and the lawyers will make out like bandits, but the workers, I'm telling you, are going to get nothing. They lost their jobs, they lost their savings, and some lawyer is going to give his wife a nice Packard car and a rock for his tootsie."

"There's no Packard anymore."

"There's no anger anymore, either. I want you should write something, Mister hot-shot columnist. I want you should say something about the workers."

"Okay, let me talk to some experts."

"You don't need experts. You only need to use your common sense. Use your heart. The bosses exploited the workers. Maybe they should be tried by military tribunal."

"Now you've gone too far."

"Okay. Maybe. Listen, I gotta go. Give my love to your mother. She'll be 90 in July. Don't forget."

"Don't worry about . . ." I started to say. But then I felt a breeze from nowhere and my grandfather was gone. I tried to go back to sleep, but couldn't.

I wonder how the Enron bosses can.

Execs Got $55 Million Before Bankruptcy

Forbes – by N. Weinberg, L. Cook – December 6, 2001

NEW YORK - Enron paid out $55 million in bonuses to executives and other employees two days prior to filing for bankruptcy, the company confirmed today. A total of 500 employees received bonuses.

"In order to protect and maintain the value of the estate, we wanted to retain key employees in critical businesses," said Mark Palmer, an Enron spokesman.

The so-called "stay-on" payments were made Nov. 29 in exchange for select employees' agreeing to remain at Enron for 90 days. Enron filed for restructuring Dec. 2 in the biggest bankruptcy filing in history. Enron has $50 billion in assets and booked $101 billion in sales last year.

Still unclear is the legality of the payments and whether they were disclosed by Enron in documents filed with the Securities and Exchange Commission or bankruptcy court. The bankruptcy court will likely allow the payments to stand because they are immaterial in a failure of Enron's size, says Peter Chapman, editor of Bankruptcy Creditors' Service, a Trenton, N.J., newsletter. "The $55 million is a drop in the bucket compared to Enron's annual payroll of $2.3 billion," he said. The only requirement with stay-on payments is that "the people authorized to sign the checks signed the checks."

That is likely to be little consolation to Enron employees, who caused an uproar last month when Chairman Kenneth Lay was set to walk away with $60 million after selling the troubled firm to Dynegy, another Houston energy firm. Lay agreed to forgo the payment. However, the Dynegy deal ultimately collapsed.

Meanwhile, at least 4,000 Enron employees have received pink slips since the company's bankruptcy filing, reportedly with $4,500 in severance pay. Many have lost their retirement savings, which Enron's 401(k) had invested heavily in company stock. Former employees and shareholders have both filed lawsuits against Enron.

Enron’s Biggest Losers: Employees

The New York Times – by Paul Krugman – December 5, 2001

When a seemingly profitable enterprise suddenly goes bankrupt, there are surely lessons to be learned. When that enterprise is the most admired company in America, lauded by business theorists as the quintessential 21st-century corporation, one wonders if it is the tip of an iceberg. And how many of us have, without knowing it, booked passage on the Titanic?

It will take time, and many legal proceedings, before the full story of Enron's collapse becomes known. But one thing is already clear: The case shows how adept corporate executives have become at shifting risk away from themselves and onto others, in particular onto their employees. Enron's leaders have walked away from the debacle chastened but very, very rich. Many of Enron's employees — no doubt including the loyalists who sent irate letters every time I criticized the company — have lost their life savings.

Behind this disaster for ordinary workers lies a little-remarked sea change in America's retirement system. Twenty years ago most workers were in "defined benefit" plans — that is, their employers promised them a fixed pension. Today most workers have "defined contribution" plans: they invest money for their retirement, and accept the risk that those investments might go bad. Retirement contributions are normally subsidized by the employer, and receive special tax treatment; but all this is to no avail if, as happened at Enron, the assets workers have bought lose most of their value.

It's easy to make the theoretical case for defined-contribution plans. Such plans expand an employee's choices; he can choose how much to save, and how to invest his money. And more choice is ordinarily good.

But the sad fate of Enron's employees highlights the difference between theory and practice. As Gretchen Morgenson of The Times pointed out on Sunday, workers across the country have been cajoled or coerced into holding a high proportion of their retirement assets in their employers' own stock. The exploitive nature of this financial incest was emphasized by Enron's now-notorious "lockdown," in which — purely by coincidence, say executives — new rules forced employees to remain invested in the company's stock just as the firm began its death spiral. So much for freedom of choice.

And even when employees have real choices, one wonders whether they fully appreciate the risks. The shift away from old-fashioned pensions coincided with an enormous bull market; surely many workers who have never seen stock prices fall since they became investors underestimate the risk of capital losses. One hopes that corporate collapses will not become commonplace. Still, it's highly likely that millions of American workers will have near- Enron experiences, learning to their dismay that big chunks of their retirement savings have evaporated. They will be left dependent on the one great defined-benefit program that remains: Social Security. That is, if it's still around.

The Bush administration's commission on Social Security reform issued its latest report last week, just as Enron entered its death throes. Most of the criticism of that commission's work, my own included, has focused on its, yes, Enron-like accounting: items seem to migrate onto or off the balance sheet to suit the commission's convenience. Thus when the Social Security system takes in more money than it pays out, as it does at present, this has no significance — the federal budget is unified, you see, so it doesn't mean anything when one particular piece of it is in surplus. But in 2016, when the Social Security system starts to pay out more than it takes in, there will be a crisis — Social Security, you see, must stand on its own. But the commission resorts to bogus accounting only to make the case for its ultimate objective: to convert Social Security from a defined-benefit system, which guarantees retired Americans a certain basic income, to a defined-contribution system, in which the unwise or unlucky can find themselves destitute in their old age.

Some analysts I know think Social Security will be converted to a defined-contribution system, not because it is a good idea but because the financial industry — which has enormous clout in our money-driven political system — has so much to gain from the conversion. I hope they're wrong. But if they are right, the fate of Enron's poor employees, victimized by a management team they thought was on their side, may truly be the shape of things to come.

Reshaping the Battlefield of Deregulation

The New York Times – by J. Kahan, J. Gerth – December 5, 2001

WASHINGTON, Dec. 3 — The bankruptcy of Enron has Washington debating the way it oversees the $200 billion power industry. But there is no consensus on erasing the legacy of deregulation that the company's political largess helped forge.

Congressional leaders and top regulators are moving forward on what had been Enron's No. 1 objective: a push to reduce local control of electricity transmission lines so that energy merchants like the Enron Corporation can use them to transport and sell power.

But the politics of power are shifting, and some of Enron's longstanding opponents — chief among them the Southern Company of Atlanta, which owns many local power monopolies — see a fresh chance to slow deregulation, or even roll it back.

Among those who have called for inquiries into Enron's collapse are Representative Billy Tauzin, a prominent Republican from Louisiana who is chairman of the House Energy and Commerce Committee; the Senate majority leader, Tom Daschle, and Senator Jeff Bingaman, a Democrat of New Mexico who is chairman of the Senate Energy and Natural Resources Committee.

All are vowing to get to the bottom of one of the most precipitous business reversals in history. And some members of Congress say Enron's downfall, on the heels of California's energy meltdown early this year, proves that Washington must demand more disclosure from energy traders, holding them at least to the standards of Wall Street firms.

"Enron is the sequel to California, it's all part of the one-year story line," said Representative Edward J. Markey, Democrat of Massachusetts, who focuses on energy regulatory issues in the House. "We can't leave energy products in the regulatory shadows. It hurts both investors and consumers."

Other influential officials are in no rush to turn back the clock on deregulation.

"We have had a number of false starts, and it would be crazy not to take a look at the lessons we can learn," said Nora Brownell, one of President Bush's appointees this year to the Federal Energy Regulatory Commission. "But we should not leap to the conclusion that competitive markets do not work."

The Bush administration, along with some Democrats — including Mr. Bingaman and William Massey, a Democrat on the energy commission — continue to favor plans advanced by Enron that would pry open regional electricity markets.

"We have to look carefully at the causes of consequences of Enron's collapse," Mr. Bingaman said. "But I don't see anything in this that would keep us from moving ahead with open transmission access and these types of things." The durability of such views is a sign of how effective Enron was during the last decade in keeping Washington at bay as the company pushed to restructure the electricity industry and limit government oversight of new energy markets.

Enron and its employees were the largest contributors to President Bush's campaigns over the years, and Enron gave more money to politicians in the last election cycle than did any other energy company. Since 1993, its employees and its chairman, Kenneth L. Lay, have donated nearly $2 million to Mr. Bush. In the 2000 election cycle, more than $1 million was donated to federal political campaigns, most of it to Republicans.

Mr. Lay also had powerful friends. He recruited Wendy L. Gramm, the top commodities regulator in the administration of President Bush's father and the wife of Senator Phil Gramm, Republican of Texas, to serve on Enron's board in 1993. The appointment came just five weeks after Ms. Gramm helped push through a ruling at the Commodity Futures Trading Commission that exempted many energy contracts from regulation.

Last year, as Congress and the Clinton administration debated whether to exercise more oversight of the financial instruments used by Enron and other companies to trade energy contracts, Mr. Lay courted Linda Robertson, a senior Treasury official who was the department's liaison with Congress.

Ms. Robertson twice accepted paid trips to talk with company executives while she was still employed at the Treasury, her financial disclosure shows. The measure that became law, the Commodity Futures Modernization Act of 2000, specifically exempted energy trading from the regulatory scrutiny applied to brokers of money, securities and commodities.

Ms. Robertson, who became the head of Enron's Washington office, did not return a phone call seeking comment. Last spring, when the Bush administration drafted a new national energy policy, Mr. Lay had a 30-minute meeting with Vice President Dick Cheney to discuss the report. The policy blueprint endorsed breaking up monopoly control of electricity transmission networks, an Enron goal that was spelled out in a memorandum Mr. Lay discussed during his meeting with Mr. Cheney.

Enron also had an unusual opportunity to influence Mr. Bush's choices for the Federal Energy Regulatory Commission, which oversees the markets in which Enron operates. Mr. Lay met Mr. Bush's personnel adviser, Clay Johnson, to discuss nominees. When Mr. Bush picked people to fill two vacant Republican slots on the five-member commission, both had the backing of Enron as well as other companies.

Enron did not always get its way in Washington. It failed to win regulatory exemptions for some futures products it wanted to trade, for example. And with Enron now discredited, its longtime nemeses like the Southern Company hope to turn the regulatory agenda in a direction that favors their interests.

The Southern Company has long been Enron's main challenger for influence in Washington. The company has nurtured a loose coalition of Southeast lawmakers — the Senate minority leader, Trent Lott of Mississippi, most prominent among them — in support of its view that the states should retain leeway in deciding the pace and scope of energy deregulation.

So far this year, its political action committees have outspent all other energy companies, including Enron and big oil companies like Exxon Mobil, in supporting members of Congress, according to the U.S. Public Interest Research Group. Southern strongly opposes efforts to diminish the power of local regulators to supervise electricity pricing, production and transmission.

"We have long felt that Enron's vision of open markets does not work with electricity," said Dwight Evans, executive vice president of the Southern Company. "I think our credibility has been enhanced by recent events."

Mr. Evans said that the Federal Energy Regulatory Commission under Mr. Bush had tried to "design systems that meet what Enron needs." Congress should slow the commission, Mr. Evans argued, or risk a fresh bout of instability and volatile prices.

Some states have halted the introduction of open markets for electricity. Nevada, Oklahoma and New Mexico are among those that have put off deregulation, while California and a few other states that once promoted unfettered competition are debating ways to reimpose regulatory control.

Enron's assiduous efforts to keep its energy trading free of government interference could be another casualty of its collapse.

As the value of energy contracts soared into the hundreds of billions of dollars — at one point up to half all electricity and natural gas transactions passed through Enron's trading operation, by some estimates — Enron scrambled to hold off Congress and regulators.

But some regulatory experts now say that Enron's collapse is reminiscent of the failure of Long-Term Capital Management. Long-Term Capital was the hedge fund based in Greenwich, Conn., that operated without direct federal oversight and, by some accounts, threatened world markets when its elaborate portfolio of derivatives crumbled in late 1998.

With its exemption from scrutiny in hand, Enron revealed relatively little about its trading portfolio, leaving analysts guessing how it had made its profits. Enron's secrecy was one factor that caused investor confidence to plummet in recent weeks, after the company revealed some unorthodox financial arrangements that benefited top executives. "Enron was getting very heavily into derivatives, and along with Wall Street banks, they went to bat to keep us away," said Michael Greenberger, who was director of trading and markets at the Commodities Futures Trading Commission until September 1999. "This should be as scary for regulators and Congress as Long- Term Capital was."

Representative Markey agreed that Congress should demand more oversight of energy trading. He said regulators should begin requiring transparency from companies like Enron, while examining the adequacy of their capital and the stability of their trading portfolio, much as banking and securities regulators do for companies in their domain.

"We'll do it now," he said, "or we'll do it when we get the next shock."

Enron Touched the Sun

Employee Advocate – – December 1, 2001

The Motley Fool has published a good article about the demise of Enron. The parallels between Duke Energy and Enron are uncanny. There are an embarrassment of similarities between Duke and Enron, even down to almost the same number of employees!

Click on the link below to read the article. Ask yourself if any of the statements apply to Duke, as well as Enron.

Enron as Icarus

Forbes on Enron

Employee Advocate – – December 1, 2001

The quote below is from a Forbes article on Enron:

“No one has suggested that President Bush gave any favors to Enron either as president or as governor of Texas, where Enron is based. But Enron as a company gave massively to both political parties and it had a major political agenda: the deregulation of energy markets. That deregulation will also face scrutiny.”

Deregulation - November 2001