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

“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

Pressure on Energy Companies

Dow Jones - December 30, 2001

(12/17/01) - LOS ANGELES - The recent string of credit-ratings downgrades and falling share prices in the energy sector has trading companies - already chastened by the collapse of Enron Corp. (ENE) - taking yet another look at the risks their counterparties pose to their operations.

Some companies said Monday it's business as usual, but that they're monitoring the situation. Others said they've been paring exposure to power and gas companies whose stock prices, bond prices and credit ratings have come under pressure over the past week.

The moves aren't nearly as severe as those taken to deal with Enron, which was moved out of the market in a period of just weeks by counterparties as its troubles mounted. But they could mean increased costs and fewer opportunities for some companies caught in the fallout of the one-time market leader's meltdown. "We don't talk about specific counterparties," said Al Butkus, a spokesman for Aquila Inc. (ILA), a top trader of electricity and natural gas. "But you can look at our past record in dealing with Enron, and that should speak for itself."

Aquila aggressively cut its exposure with Enron well before the company was downgraded by credit-ratings agencies on Nov. 28 and filed for Chapter 11 bankruptcy-law protection Dec. 2. Under Pressure

Energy companies like one-time Enron suitor Dynegy Inc. (DYN), Calpine Corp. (CPN), Mirant Corp. (MIR) and NRG Energy Inc. (NRG) have seen their share prices hammered and access to the capital markets crimped, as investors have grown wary of energy companies' high leverage and hard-to-decipher earnings.

Shares in those companies have fallen 28%, 40%, 47% and 20%, respectively, in the past 10 days. On Friday, Moody's Investors Service dropped Calpine and Dynegy's debt ratings one notch, leaving Calpine in junk-bond territory and Dynegy just one notch above. Both remain on watch for further downgrades. Dynegy President and Chief Operating Officer Steve Bergstrom confirmed in a conference call Monday that his company has been the subject of a "modest" increase in letters of credit demanded by trading counterparties since Enron's collapse, although he said volumes on Dynegy's Internet-based trading platform DynegyDirect are up 20% since Enron's meltdown.

Overall, the industry is paying more attention to trade credit and collateral after Enron, Bergstrom said. "There's a lot more focus," he said.

Some companies have moved more aggressively to trim exposure to troubled companies. Steps may run from cutting companies off to limiting business to shorter-term deals. A trader with one large trading company said the company had three levels of response to counterparties whose credit ratings are either put on review or downgraded.

"One is absolute mitigation, where the building is in flames, and that is Calpine," the trader said. "The second group is where we smell smoke, and that is Dynegy, NRG and Mirant. And right now, everyone is either smoking or in flames."

Calpine didn't respond immediately to a request for comment, but said in a press release Monday that the downgrade will have "no material impact" on credit requirements in its power sales agreements and that it continues to do business with its usual creditworthy counterparties.

Monitoring Developments

Other companies said they were monitoring the situation.

"Right now, it would be business as usual," said Ellen Averill, spokeswoman for Williams Cos. (WMB). "We have clear creditworthiness standards that we follow, and we follow these with all companies with which we deal."

Becky Nash, spokeswoman for Duke Energy North America, a unit of Duke Energy Corp. (DUK), would only say that Duke is "still operating using the appropriate credit limit with each company," but wouldn't reveal specific details.

Neither spokeswoman would say how the downgrades had affected their companies' treatment of Mirant or Calpine.

As seen with Enron's meltdown, business as usual doesn't necessarily mean companies aren't taking action. Traders' credit policies spell out how much value they can put at risk with counterparties, with limits determined by the counterparties' creditworthiness. As such, changes such as ratings downgrades can be expected to result in lowered exposure.

Before Enron, some companies may have let standards slide in some cases. Now, however, they're tightening up and calling for collateral when needed.

"They may not have been as diligent in the past asking for it, and now they are," said John Cassidy, a senior analyst covering energy companies at Moody's.

Jeffrey Foose, managing director for trading at Public Service Enterprise Group (PEG) unit PSEG Energy Resources & Trade LLC, agreed counterparties were going further to dot the I's and cross the T's.

"We've had more counterparites call us and tighten up documents and things that weren't signed," Foose said. PSEG is enforcing its credit policies, but won't reveal what that means for specific counterparties, he said.

Paul Patterson, an analyst with ABN Amro in New York, said credit quality issues among energy companies could substantially impact the industry.

"We are concerned that trading operations of lower credit quality companies may be required to post more collateral in order to maintain their current levels of trading activity," Patterson said.

Bush and Enron

The Wall Street Journal – by Bob Davis – December 30, 2001

(11/29/01) - For years, Enron Corp. Chairman Ken Lay has been George W. Bush's best friend in the board rooms of America's top corporations.

Since 1993, Mr. Lay and Enron have donated nearly $2 million to Mr. Bush's political career, making them Mr. Bush's biggest backers. When Mr. Bush was Texas governor, Mr. Lay, a Houston resident, helped him win passage of a state education reform plan that brought Mr. Bush national acclaim. During that fight, Mr. Lay got to know aides who become power players in the Bush White House.

Mr. Lay was confident enough of his friendship with Mr. Bush that he even needled him for needing arthroscopic surgery to repair a jogging injury. "I want you to know that at least one jogger [me] got past 50 without that surgery," Mr. Lay scribbled in a note to the governor in 1997. Still, as Enron faces its greatest crisis, Mr. Lay's influence and personal relationships with the administration have amounted to little. There appears to be no effort by the White House or Congress to bail Enron out of its difficulties, which are widely seen as self-inflicted. The White House had no comment on Mr. Lay's predicament, a spokeswoman said. Indeed, short of an actual bailout to help Enron meet its obligations -- such as an aid package approved by Congress or organized by government officials from private sources, such as in the rescue of the Long Term Capital Management hedge fund -- there is little Washington can do at this stage to help the company. Nor is there likely to be a bailout, since Enron has burned many bridges on Capitol Hill with its history of strong-arm lobbying tactics, congressional aides say.

That may reassure a cynical public, says Robert Mosbacher, Commerce Secretary in the first Bush administration and a longtime friend of the current president and Mr. Lay. "I don't see anybody being let off the hook," he said. Still, Andrew Wheat, research director for Texans for Public Justice, which tracks political giving in that state, says Mr. Lay's friends in high places may have given Enron a false sense of security. "Part of their hubris had to do with the fact that this is a corporation with U.S. presidents at its beck and call," he says.

Mr. Mosbacher says he introduced Mr. Lay to the Bush family around 1987, when he persuaded Mr. Lay to help raise money for George H.W. Bush's successful presidential bid in 1988. Several years later, Mr. Lay helped organize and raise funds for an international economic summit in Houston, where Enron is based, and made sure to include George W. Bush, then an executive with the Texas Rangers baseball team, in the planning.

Mr. Lay contributed $461,000 to the younger Mr. Bush's two successful gubernatorial campaigns. He also made Enron's fleet of corporate jets available to Mr. Bush and won his help in lobbying officials in other states considering Enron projects.

His influence with then-Gov. Bush was based on more than money. Mr. Lay was one of the state's leading business executives and deeply involved in Texas politics. Under Mr. Bush's predecessor, Democrat Ann Richards, Mr. Lay headed the Governor's Business Council, a state advisory board. Mr. Bush asked him to stay on the job to help develop an educational reform plan and sell it to the Texas Legislature.

In that capacity, Mr. Lay became close to several Bush aides, including political guru Karl Rove and communications adviser Karen Hughes, who have taken positions at the White House. He also got to know another leading Texas businessman: Dick Cheney, then CEO of Dallas oil concern Halliburton Co., who would become Mr. Bush's pick for vice president.

Unabashedly a Republican, Mr. Lay courted Democrats and was courted by them, too. During President Clinton's first year in office, he invited Mr. Lay to play golf. Mr. Clinton's ambassador to India pressed New Delhi on behalf of a huge power plant Enron wanted to build in that country. The project was approved. When California's energy problems exploded last year, the Clinton economic team turned to Mr. Lay for advice.

Politicians in both parties admired how Enron grew in deregulated energy markets. Along with Wall Street, they were wowed by how Enron turned itself from a gas-pipeline operator into the nation's largest trader of gas and electricity.

Against this backdrop, Mr. Lay was widely considered a top candidate for Treasury Secretary in the younger Bush's administration. Ultimately though, he was disqualified, Bush insiders say, as too closely identified with Mr. Bush, Mr. Cheney and others who worked in the Texas energy business for an administration that wanted to show it wasn't in the pocket of big oil companies.

Early on, Mr. Lay had unrivaled access to the administration. When the president's advisers debated a new energy policy in the spring, Mr. Lay was the only energy executive to be invited for a one-on-one session with Mr. Cheney, who led the effort. Mr. Lay also worked with Mr. Rove and others to successfully push for appointments to the Federal Energy Regulatory Commission, which oversees much of Enron's business. As Enron's problems multiplied and its fortunes plummeted, however, the White House was silent. During a several-hour long interview in the spring, Mr. Lay mused that his Bush connections could boomerang someday. "It could hurt, from the standpoint that, at some point, they lean in the other direction to make sure they don't face criticism," he said.

Enron Strains Under Scrutiny

New York Times – by A. Berenson, R. Oppel Jr. – December 30, 2001

(10/28/01) - At the beginning of this year, the Enron Corporation, the world's dominant energy trader, appeared unstoppable. The company's decade-long effort to persuade lawmakers to deregulate electricity markets had succeeded from California to New York. Its ties to the Bush administration assured that its views would be heard in Washington. Its sales, profits and stock were soaring.

And under the leadership of Jeffrey K. Skilling, its chief executive, Enron's arrogance had grown even more quickly.

The company, based in Houston, dripped contempt for the regulators and consumer groups that stood between it and fully deregulated markets -- for electricity, water and everything else. Everyone would win under deregulation, Enron said -- especially its shareholders, whose stock would soar as the company profited from creating new markets.

''We are on the side of angels,'' Mr. Skilling said in March, dismissing those who saw the company as a profiteer in California's energy crisis. ''People want to have open, competitive markets. They want fair competition. It's the American way…''

Vermont Shelves Deregulation

Associated Press – December 30, 2001

MONTPELIER, Vt. - The Vermont Public Service Board has determined that now is not the time to allow the state's power companies to begin competing for customers in one another's territories.

The decision against moving Vermont toward retail competition in the electric industry marks a 180-degree turnaround for a board that touted the benefits of such competition in a major order issued at the end of 1996.

That order, dubbed "The Power to Choose," by a board then chaired by Richard Cowart, prompted a debate on electric industry restructuring that took up much of the Vermont Senate's time in the 1997 legislative session, before passing there and dying in the House.

The new order from the PSB, now chaired by Michael Dworkin, punctuates declining fortunes in recent years for the idea of competition in the electric industry and means Vermont's utilities will remain regulated monopolies with set service territories at least in the near future.

The board "has learned many experiences from other states' experiences with electric restructuring," said a report by hearing officer Ann Thompson Bishop that was approved by the full board last week.

Not least among other states' cautionary tales has been that in California, where the wholesale power market was deregulated but retail prices were kept regulated. That resulted in huge increases in power costs and blackouts, as well as bankruptcies for power companies that were unable to collect enough at retail to pay their wholesale power costs.

Central Vermont Public Service Corp., which joined Green Mountain Power Corp., two years ago in asking that their territories be opened up to competition, aslo has had more recent misgivings, company spokesman Steve Costello told Vermont Public Radio.

"We certainly agree with the board on the New England market. There's not a really competitive market in new England yet and that's always been the first concern, that that has to be created before you can make any steps toward competition."

But the Department of Public Service, which represents ratepayers in utility matters and has strongly backed industry restructuring, still would like to see utility competition in Vermont, said Deena Frankel, director of consumer affairs and public information at the department.

"I think our position has not changed that wise restructuring offers benefits to the consumers of the state." she said.

Whom the Gods Would Destroy

New York Times - by Paul Krugman – December 30, 2001

(8/17/01) - Whom the gods would destroy, they first put on the cover of Business Week. When the Feb. 12 issue featured a cover photo of Jeffrey Skilling, you knew bad things were about to happen both to Enron and to its new C.E.O. Sure enough, on Tuesday Mr. Skilling resigned for ''personal reasons.'' The next day he conceded that the most important of those personal reasons was the 50 percent drop in Enron's stock since January.

Is this just another tale of extravagant expectations disappointed, the kind of story that has become all too common lately? No; this case has wider significance. Enron, based in Houston, is in the vanguard of a powerful movement that hopes to ''financialize'' (Enron's term) just about everything -- that is, trade almost everything as if it were stock options.

That movement is as much about politics as it is about business, and the company has not been shy about using its political connections to advance its cause. With the arrival of George W. Bush in the White House -- thanks largely to Enron, a prime mover behind his campaign --the sky seemed to be the limit.

But financialization looks more and more like a movement that has overreached itself.

Enron was originally a natural gas pipeline company, swaddled like all such companies in a tight regulatory straitjacket. In the mid-1980's, however, gas markets were set free. And Kenneth Lay, who was C.E.O. at the time and is returning to succeed Mr. Skilling, saw a great opportunity.

He transformed Enron from a company that delivered B.T.U.'s to one that dealt in contracts; as Business Week put it, the company became ''more akin to Goldman Sachs than to Consolidated Edison.'' Enron became the lead market-maker for the new, deregulated natural gas industry; since deregulation worked well for natural gas, which increasingly became the nation's fuel of choice, Enron's new role was highly profitable.

After gas, electricity.

As power deregulation became the rage across the U.S., Enron took on a key role as a broker for wholesale electricity. Soon the company was looking for new worlds to conquer: water supply, bandwidth on fiber-optic cables, data storage, even advertising space.

Then things started to go wrong. Enron abandoned its venture into water supply when it became clear that governments were reluctant to entrust so crucial a matter to the magic of the invisible hand. And skeptics found ample justification for their lack of faith when electricity deregulation, which was supposed to be a certified success story, went spectacularly astray in California.

True believers insist that the power crisis of 2000-2001, which transferred tens of billions of dollars from taxpayers to electricity-generating companies -- and quite a bit to Enron too -- was not a verdict on deregulation, that it was all the fault of meddling politicians who didn't let the market work. But this claim isn't particularly convincing, mainly because it isn't true. The real lesson of the California catastrophe was that the concerns that led to regulation in the first place -- monopoly power and the threat of market manipulation -- are still real issues today.

State and local governments, alerted by what happened in California, will henceforth be a lot more wary about deregulation. There's even a movement to reregulate electricity markets. And that means fewer opportunities for Enron, whose stock price depends on the expectation that it will keep finding new Californias to conquer.

Of course, the people Enron put in the White House are still there, and they seem to have learned nothing from California. It's true that the Bush administration sometimes compromises on its free-market principles -- it believes, for example, that energy producers need huge subsidies, even though the shortages those subsidies were supposed to correct have turned out to be imaginary (a recent cover story in Barron's warned of ''the coming energy glut'').

But otherwise the administration's faith in absolutely unregulated markets is unshaken. The new head of the Federal Energy Regulatory Commission -- the watchdog agency that conspicuously refused to do its job in California -- is, you guessed it, a Texan with close ties to the energy industry. And the administration continues to believe that ''financialization'' is the way to go on just about everything, from school vouchers to Social Security.

But it's wrong. And let's hope that it doesn't take a string of catastrophes to teach us that there are limits to what markets can do.

Deregulation - December, 2001 - Page 8