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

“Enron was a major player during the utilities deregulation debate, for which Bush lobbied actively, and
in ‘tort reform,’ making it harder to sue corporations for the damage they do” - San Jose Mercury News

Is Bush Still an Enron Fan?

L. A. Times – by Robert Scheer – December 27, 2001

If you follow George Bush's thinking on how to fix our broken economy, you would throw a few hundred million in tax breaks to his buddies who bankrupted Enron. Not simply because they bankrolled his ascension to the Texas governorship and the White House but, more important, because they are modern alchemists who make money out of nothing.

Nothing is what Enron is to its once-loyal employees, who lost those private savings accounts that Bush is always touting; some of them will now have to live on Social Security, which the president it seems is hellbent on bankrupting.

Nothing is what Enron is to its many small stockholders, including California's public workers, whose state pension fund was heavily invested in the now-bankrupt company. Nothing is what Enron is to consumers in California and half a dozen other states forced to seek expensive long-term electricity contracts because of Enron's shenanigans in the energy market.

Nothing is what Enron is to the people of India and other countries, still eating the ashes of spectacular Enron promises.

But Enron's millions found their way into the bank account of company Chairman Kenneth L. Lay - close family friend and financier of the political careers of Bushes, junior and senior.

Equally fortunate was Jeffrey K. Skilling, the former CEO who masterminded Enron's meteoric rise and who resigned in August, cashing out tens of millions before Enron's crash.

Bush's Army secretary, Thomas White Jr., is another former top Enron executive who also managed to sell his $50-million to $100-million stake in the company well before shares dropped from $90 to 29 cents. Karl Rove, top White House political advisor, had a smaller $250,000 stake that, as far as I can determine, reporters have not asked him about. Neither have they asked Bush's economic advisor, Lawrence B. Lindsey, or Trade Representative Robert B. Zoellick, both of whom went directly from Enron to the White House, if they are now in the ranks of the suddenly poor.

The most important question for America's economic future should be directed to the president himself: Does he still believe in the miracle of Enron? Why, after Enron's collapse, does Bush still insist on a stimulus package that rewards high-flying executives while resisting extending unemployment insurance and medical coverage to workers thrown out of their jobs because of the mismanagement and other acts of economic stupidity by companies like Enron?

"Stupidity" is used charitably, when motives that appear more mendacious will be explored, we hope, by congressional committees planning to get to the bottom of the smelly Enron mess during February hearings.

Can it be a mere intelligence deficit that led Enron's ex-CEO to claim to the New York Times that he didn't know how the company came to overvalue its assets to the tune of $600 million, that he didn't know of the highly suspect investment partnerships conducted by his chief financial officer - his most trusted aide - and that he is without a clue as to the reasons behind Enron's collapse?

"We're all trying to figure out what happened," Skilling said. That eerily dumb if not totally disingenuous statement haunts at a time when we're trying to figure out what happened to a U.S. economy that has fallen into recession on Bush's watch.

Enron was Bush's model for economic progress, and Enron's Lay was the one individual consulted most closely in private meetings with Vice President Dick Cheney and other top administration officials during development of their environment-busting plan to "solve" our energy problems.

Bush's Enron advisors were the chief zealots in his kitchen cabinet pushing for unregulated markets combined with tax breaks for rich companies. Enron won handsomely on both counts.

The idea that what's good for the super-rich is good for the economy remains Bush's economic mantra. It's a bankrupt philosophy, as witness the Enron debacle. For an even more ominous example, look no further than the current total collapse of the dramatically deregulated economy of Argentina. Food riots in a once prosperous society are not a pretty sight.

Energy Execs Gain Millions

Los Angeles Times – by Jerry Hirsch - December 24, 2001

(6-13-01) - Top executives and directors at many of the large power companies that California officials accuse of profiteering from the energy crisis have collected tens and even hundreds of millions of dollars through stock sales.

Beginning early last year, these executives exercised options and sold stock for huge gains at two, three and even 10 times the level of prior years, according to a study by The Times of trading data supplied by First Call/Thomson Financial and federal regulatory filings.

Most of the energy companies would not discuss specific trades by executives, but said that granting stock options is a standard practice used to compensate top managers and other key players.

In selling in the last year, the executives have demonstrated a knack for timing the transactions near the top of the market, a logical strategy, executive-pay experts said. Indeed, many of these companies' shares have fallen since the bulk of the stock sales.

But critics say it is the energy crisis in California and the West that has driven up corporate profits at these companies--including AES Corp. of Virginia, Duke Energy Corp. of North Carolina and Houston-based energy concerns Enron Corp. and El Paso Corp. The crisis created a bull market for publicly traded power companies--and made the shares held by the executives especially lucrative.

Enron Chairman Kenneth L. Lay netted $123 million in option transactions last year, according to a filing with the Securities and Exchange Commission. That was nearly three times his gains the previous year and nearly 10 times what he made in 1998.

Lay has made additional gains this year. He has cashed in options and sold shares to net nearly $23 million since November, while holding on to 50,000 additional shares with a market value of $2.5 million, according to First Call/Thomson Financial data.

Meanwhile, Jeffrey K. Skilling, Enron's chief executive, netted more than $62 million last year in options gains.

Other executives are exercising options for huge gains but then holding on to the shares. Roger W. Sant, chairman of AES, bought 436,500 shares in the Arlington, Va.-based company Oct. 26, paying $1.62 a share and producing a paper gain of more than $21.5 million at the time of the transaction.

But some also cashed out large holdings acquired over years. For example, Robert Hemphill Jr., a longtime AES executive who now serves on its board of directors, has sold $50 million of the company's stock in the last 13 months.

David Arledge, a director of El Paso Corp. and former executive at a company acquired by the Houston natural gas firm, has sold nearly $27 million in stock since Nov. 1.

Cashing in when an industry is hot is typical of corporate executives in the U.S., said Graef Crystal, a Las Vegas-based expert on executive compensation. But when an individual's transactions approach or cross the hundred-million-dollar level, he said, the gains become unusual.

California officeholders and policymakers expressed outrage but not surprise at the transactions. "It is part of a pattern of smart trading by these guys," said state Sen. Debra Bowen (D-Marina del Rey), who chairs the Senate Energy, Utilities and Communications Committee. "The mentality is to get everything that you can and then ride out the bust.

"I think they are figuring that by this time next year the party will be over and they will be left sitting in a room with plastic cups half-filled with stale beer," Bowen said.

Said Loretta Lynch, president of the California Public Utilities Commission: "It stands to reason that if the companies are making exorbitant profits, then the individuals who run the companies are also making exorbitant profits."

Government Agencies Investigating Firms

Indeed, the stock sales have taken place against a backdrop of acrimony between state officials and the power companies.

Last month, Lynch told The Times that state investigators have uncovered evidence that a "cartel" of power companies shut down plants for unnecessary maintenance to create shortages and thus increase prices and profits. Lynch did not name the companies.

State and federal agencies are investigating the actions of several of the big energy companies, seeking to verify charges that they have conspired to boost prices by limiting construction of power plants, in one case, or by limiting the amount of natural gas available in the power-hungry California market. Executives at firms not accused of price gouging also have cashed in.

Ann B. Curtis, chief financial officer of Calpine Corp., a San Jose-based power plant builder and generator, has netted more than $10 million in option transactions in the last year. That compares with a total of $5 million in the four previous years.

Some analysts say the transactions are to be expected, considering the changing nature of the power industry.

"Unlike at the old-line utilities where insiders rarely sell, we've grown accustomed to insider sales at the diversified power producers," said Paul Elliott, a First Call/Thomson Financial analyst. "I'm not convinced that these sales raise any red flags at this point."

Although no one is saying that any of the stock trades were illegal, critics link the value of the transactions to the profits streaming out of California.

"The generators have no shame," said Steve Maviglio, a spokesman for California Gov. Gray Davis. "It speaks to how there has been a massive transfer of wealth from California and the West to Texas and the Southeast."

In reporting record financial results for the first quarter of this year, Enron said it posted a 281% increase in revenue to $50.1 billion and a 20% increase in net income to $406 million.

The company did not break out numbers for its California business but did note that it sold nearly twice as much electricity in North America compared with a year earlier, and that sales of natural gas had risen by a third.

Lay, the Enron chairman, "has given himself very generous stock options over the years," compensation expert Crystal said.

"You might think of him as a farmer who has planted thousands of acres of stock options. Now he is harvesting a bumper crop. What he is harvesting is the hard-earned paychecks of California workers and taxpayers."

Mark Palmer, an Enron spokesman, declined to talk about executives' stock trading activity.

"All Enron employees are shareholders. How they decide to use that as a form of compensation is completely up to them," Palmer said. "Mr. Lay is not going to talk about his compensation."

A spokesman for AES also declined to talk about stock sales by its employees.

Other companies were more willing to discuss such sales.

"Many of these people have a lot of stock, and this [is] an opportunity to diversify their personal portfolios at an opportune time when Duke's stock is up," said Terry Francisco, a spokesman for Duke Energy.

Francisco said many of the sellers at Duke continue to hold large amounts of the company's stock. That also holds true for executives of the other firms.

Calpine Chief Executive Peter Cartwright, for example, sold nearly $20 million in his company's shares since May 2000, when wholesale electricity prices started rising and the state's energy crisis took root. His remaining holdings have a market value of more than $400 million, according to SEC filings.

'Getting Out While the Getting Is Good'?

El Paso spokeswoman Norma Dunn noted that Arledge, one of the largest sellers, was CEO of Coastal Corp., a company acquired by El Paso, and chose to sell some of his holdings after the merger.

One factor in the heavy sales of energy company shares is that executives at these companies may be reading the changing marketplace and seeing increased political pressure to rein in energy prices, analysts said.

"They may feel that this power game is not going to go on forever, so they are getting out while the getting is good," said David Moreland, a benefits consultant with CMG Consulting Inc. in San Jose.

Much of the executives' gains stem from the common practice of granting low-priced options to management. At Calpine, for example, both Curtis and Cartwright gained millions of dollars selling shares purchased from the company at just 7 cents and $1.07 a share and then sold for more than $40 a share. Companies grant these options as an incentive for management to increase the investment value of shareholders. They provide for giant payoffs without the company having to fork out cash.

Yet there is a cost to the company, analyst Crystal said. The deals increase the number of shares outstanding, incrementally diminishing the holdings of other investors.

When the option tab hits tens of millions of dollars or more, the company is in essence handing the money to executives rather than using it to expand the company, Crystal said.

"This is not the tooth fairy," he said.

* * *

Executives' Stock Deals

Here are some energy executives who have recently cashed out large numbers of options:

Kenneth Lay, chairman of Enron, netted $123 million in option transactions in 2000, triple his 1999 level and almost 10 times his 1998 net.

Jeffrey K. Skilling, chief executive of Enron, filed regulatory documents May 16 announcing his intention to sell 140,000 shares of Enron stock for $7.98 million. In 2000, he netted more than $62 million in similar transactions.

Robert D. Doty Jr., chief financial officer of Dynegy, exercised options at $1.47 a share to purchase 40,000 shares of the company's stock Oct. 4. He then sold the shares for $54.66 each, netting $2.13 million.

Lou Pai, chairman and chief executive of Enron Energy Services, filed regulatory documents May 18 and May 29 announcing his intention to sell 390,000 shares of Enron stock for $21.17 million.

Peter Cartwright, chairman and chief executive of Calpine, from Feb. 22 to March 2 exercised 188,000 options to purchase shares of his company at prices ranging from 7 cents to $1.07. He netted $11.81 million.

David Arledge, a director of El Paso Corp., sold company stock for $23.28 million March 6 and 7.

Harvey Padewer, president of Duke Energy Corp.'s Energy Services division, sold Duke stock for $12.26 million in February, netting $2.99 million.

Why Was No One Minding The Store? – by Arianna Huffington - December 24, 2001

(12/19/01) - The headline-grabbing Enron scandal is proving to be a cattle prod thrust deep into the haunches of the political establishment. Suddenly, members of Congress are falling all over each other in an effort to grab a piece of the Enron investigation limelight. No fewer than eight House and Senate committees are already holding hearings or plan to hold them in the near future.

But where were all these guardians of the public interest when Enron's executives were playing fast and loose with the books while bilking employees and investors out of their life savings? Maybe they were at the bank cashing all those campaign checks doled out by free-spending Enron executives -- or having a free lunch with one of the company's high-powered lobbyists.

Nor were our political leaders the only ones asleep at the switch. Where, for instance, were the "independent" Wall Street experts who, despite having serious doubts about how Enron actually made its money, kept touting the company, helping send its stock price soaring? Clearly, the market bulls were all too eager to buy into the company's bull.

And where were the "independent" financial journalists who, instead of digging for answers, collectively genuflected at the mere mention on the Enron miracle? (The editors of Fortune voted Enron the "most innovative" of the magazine's "most admired" companies six years in a row.)

And where were the "independent" members of Enron's board of directors, some of whom Enron rewarded with lucrative consulting contracts or generous donations to their favorite charity?

Unfortunately for Enron's investors and employees, we know exactly where the bankrupt behemoth's longtime auditor, the accounting firm of Arthur Andersen, was while the company was being looted: double-dipping as highly paid consultants. Arthur Andersen pocketed a cool $27 million from Enron while also inspecting the company's books. Now there's a recipe for objectivity. It's just a tad harder to blow the whistle when you're making a mint.

How, you might ask, can such a mega-million dollar conflict of interest be legal? Well, actually, we have the new head of the Securities and Exchange Commission (SEC) -- the government body charged with regulating this kind of financial monkey business -- to thank for that.

Here's what happened: Last year, then-SEC Chairman Arthur Levitt proposed a long-overdue ban on accounting firms performing additional services for companies they are auditing -- precisely the sort of dual relationship Arthur Andersen had with Enron. But his efforts were beaten back by a furious lobbying campaign mounted by the accounting industry's uber-lobbyist, Harvey Pitt, a man who has made a career out of butting heads with the SEC.

So when the Bush administration got around to naming its choice to head the watchdog agency this summer, who do you think they picked? That's right, SEC nemesis Harvey Pitt. Which is a little like naming Osama bin Laden to run the Office of Homeland Security.

Now I'm not saying that Pitt is corrupt -- just the wrong man for the job. Soon after taking office, the new chairman promised to turn the SEC into a "kinder, gentler" agency. But, as the Enron debacle proves, we don't need regulators who are kind and gentle -- we need them to be vigilant and unrelenting.

In another example of our leaders' blurry oversight, many of those on the Hill now calling for the heads of Enron officials were noticeably silent when Pitt sailed through his confirmation process. Which is not surprising given the cozy relationships that permeate that world. Just last week, Pat Shortridge, a top aide to Dick Armey who had recently left his office to lobby for Enron, quickly returned to work for the House majority leader as soon as the Enron gig turned sour.

A host of changes are clearly needed to ensure that the Enron fiasco isn't repeated. Some are legislative, some involve campaign finance reform. But these will all take time. We need something that will show that Washington is ready to get serious about minding the public good -- and not just hogging the scandal spotlight.

Which is why Harvey Pitt should resign before the year is out. I'm sure he won't be out of work long -- I hear the folks at Enron could use a good lawyer.

More Enron Pension Games

The Wall Street Journal – by Ellen E. Schultz - December 24, 2001

Many Enron Corp. employees will suffer even greater losses to their retirement income than was immediately apparent in the wake of the energy-trading company's sudden downfall.

It is well known that many Enron employees will take big hits in their 401(k) retirement-savings plans because much of their investments were in company stock. What has been largely overlooked is that the pensions of many employees also will be reduced as a result of complex, interrelated changes involving pension and retirement-savings plans.

The decline wasn't caused by investments in the pension plan, which by law cannot invest more than 10% of its assets in the company stock. Rather, it stems from ways that companies such as Enron have increasingly coordinated their pensions, 401(k)s and employee stock ownership plans (ESOPs) to reduce costs for the company and shift investment decisions to employees. Enron had no comment.

Lawmakers, reacting to the decimation of the savings of many employees in Enron's 401(k) have begun calling for legislation that would hold savings plans to the same standards as pensions. Employees suffered steep losses in their 401(k) plans because more than 60% of the assets were in Enron's stock at one point, and the stock has dropped to about 50 cents a share from a peak of $90 last year.

But Enron's situation reveals that employees' retirement benefits are exposed to company stock in more than their 401(k) plans.

Employees share some of the responsibility for this overexposure. That's because to some extent employees could have limited their retirement-related holdings of Enron, if they had taken the right steps at the right time, though many didn't because the stock was long a highflier.

One of these is Kenneth Parrish, an electrician at Portland General Electric, an Enron subsidiary, who essentially has lost additional benefits related to his pension from Jan. 1, 1999. That was when the pension plan for unionized employees, including Mr. Parrish, was changed. The pension benefit they already had earned was frozen; instead of continuing to add to the pension, the company gave a cash contribution of 5% of employees' pay to their 401(k) plan, where they could put it into a variety of investments, including Enron stock.

Unfortunately, Mr. Parrish and many others elected to put the pension-related contribution into Enron stock, along with his own 401(k) savings. "It seemed like such a good investment," says Mr. Parrish, who is 43 years old. Moreover, the company's matching contribution to his 401(k) was in Enron stock that couldn't be sold till the employee turned 50. As a result, the value of his savings plan, including the pension amounts, fell from about $200,000 to a couple of thousand dollars.

Mr. Parrish, a single father of two daughters, who are 16 and 17, now isn't sure what he will do. "I got doubly slammed," he says. "Not only did I lose all my retirement savings, I lost the pension savings, too." He is selling his house and planning to buy a trailer. "This ruined me," he says.

Meanwhile, salaried workers at Enron had a different kind of pension arrangement that exposed them to fluctuations in Enron stock. The company coordinated their pension plan and their employee stock ownership plan, so that the value of their ESOP accounts permanently erased benefits in their pensions.

That is because Enron had a "floor-offset" arrangement, which has been used by many companies, including Hewlett-Packard Co. and Airborne Inc. These arrangements are intended to provide participants with the "better of" the two plans, the savings plan (either an ESOP or a profit-sharing plan) and the pension.

In a simple floor-offset arrangement, if an employee leaves the company and his ESOP account is worth, say, $60,000, the company figures out how much this would be worth if it were converted to an annual pension in retirement. In this case, the ESOP's equivalent value might be $6,000 a year in retirement. If the employee has already earned a pension worth $50,000 a year in retirement, the employee wouldn't get $56,000 a year -- the combination of the two -- but just $50,000. (The $6,000 annual ESOP value is subtracted from the pension, so the person ends up with an annual pension of $44,000, plus the $6,000 a year from his ESOP account of $60,000.)

If the ESOP performed really well, and was worth, say, $70,000 a year if converted to a pension, the employee would simply keep the ESOP, and not get the pension. If the ESOP didn't perform well, the pension would serve as the "floor" benefit. In other words, even if the ESOP fell to zero, the employee would still have his full pension of $50,000 a year.

But it didn't work this way at Enron, even though the ESOP accounts have become virtually worthless because of the decline in Enron's stock. In an unusual arrangement, Enron calculated the ESOP "offsets" based on the price of the stock from 1996 to 2000, when it was trading between $37.75 and $43.44. It then used the locked-in value of the ESOP accounts to permanently offset the value of pensions that employees had earned between January 1987 and January 1995.

In other words, Enron has reduced the amount of the pension by subtracting the former -- and far higher -- value of the ESOP, even though the ESOP today has virtually no value and thus can't make up for the difference.

Employees might have been all right if Enron stock had continued to rise, because gains in the accounts could eventually have made up for the permanent offset. (The increases would have depended completely on stock appreciation, because the company stopped contributing to the ESOP in 1995.)

"It was as if someone assumed the stock would never drop," says Stephen Bruce, a pension lawyer in Washington, D.C. "It was a bad deal if the stock dropped," he says, because this precluded employees from ever making up for the permanent offset.

Employees will still receive their pensions -- albeit at the reduced values. How much employees lost depends on the size of the pension they had earned, and the value of their ESOP accounts from 1996 to 2000.

Employees did have some opportunity to protect themselves from the subsequent exposure to Enron stock in their ESOP. One time each year from 1996 to 2000, employees could transfer one-fifth of the value of their ESOP accounts into a 401(k) or an Individual Retirement Account and diversify out of company stock.

Separately, Sens. Barbara Boxer (D., Calif.) and Jon Corzine (D., N.J.) said Tuesday they will propose limits on the amount of company stock employees can hold as part of their 401(k) retirement plans.

The proposed legislation would limit employee 401(k) investments in company stock to 20%, and it would limit to 90 days the period of time an employer can require its workers to hold a matching stock contribution before divesting themselves of it.

-- Bryan Lee contributed to this article.

Deregulation - December, 2001 - Page 4