www.DukeEmployees.com - Duke Energy Employee Advocate
Deregulation - November, 2001
as serious questions emerge about its bookkeeping" - New York Times
Enron’s ImplosionEmployee Advocate – http://www.DukeEmployees.com – November 30, 2001
An article in The New York Times took note of the irony in the implosion of Enron: "There is a certain irony that Enron, a champion of deregulation, now becomes a poster child for the need for strong regulation on Wall Street."
We would like to add that Enron is also a poster child for strong regulation of the energy markets!
Enron’s FallEmployee Advocate – http://www.DukeEmployees.com – November 26, 2001
If you want the details of why Enron failed, The Wharton School has published a good report. Essentially, they tried to soar to greatness by speculation and “creative” bookkeeping, a dangerous combination. Deregulation was going to save the day.
They grew tall fast, and fell hard. Maybe those that were so envious of Enron will not follow in their footsteps!
Click the link below to read the Wharton article:
California Now Faces Power SurplusAssociated Press – by Karen Gaudette – November 25, 2001
California officials, who scrounged around for enough electricity to keep the lights on earlier this year, could find themselves stuck with a big - and costly - power surplus over the next decade, a state analysis says.
Ratepayers could find themselves paying as much as $3.9 billion for the unused electricity, according to the analysis.
The reason: The state earlier this year signed long-term contracts to buy power at high prices, in an emergency effort to stabilize the market and keep electricity flowing.
But since then, electricity demand has fallen, in part because of conservation, and prices have dropped, too.
"It's sort of the final absurdity of the California energy crisis," said Doug Heller of the Santa Monica-based Foundation for Taxpayer and Consumer Rights. "It started for us just paying too much for power. Now we're paying too much for power that we don't even use."
The analysis of those long-term contracts was done for the legislature by the state Department of Water Resources. The department projected electricity demand and supply over the next decade.
It concluded the state will end up re-selling about a third of the purchased electricity, at losses close to 80 cents on the dollar.
The department said energy bought at an average price of $75 per megawatt hour earlier this year will go for just $16 in 2002.
The findings are fueling criticism from consumer advocates and others that Gov. Gray Davis' administration overpaid for electricity when it signed the long-term contracts, which lock the state into paying a fixed price for electricity even if market prices drop.
Among California's biggest suppliers of electricity is Charlotte-based Duke Energy, which sold power to California for more than $140 per megawatt hour for a time earlier this year. And Duke Energy's price was among the lowest of providers.
Consumer advocates have called on Davis to renegotiate the more than 50 long-term contracts. Electricity in California is now so abundant that homeowners are not being warned to turn off their Christmas lights as they were last year.
The surplus is attributed to conservation and to more businesses buying power directly from wholesalers, rather than through the state.
Davis has defended signing the contracts, saying they helped the state avoid more rolling blackouts and prevented two other utilities from following Pacific Gas and Electric Co. into bankruptcy.
Some analysts fear the surpluses will discourage further development of renewable energy such as wind and solar and stop companies from building new power plants.
Enron’s Retirement Plan Is a VictimThe New York Times – by Richard A. Oppel Jr. – November 24, 2001
(11/22/01) The rapid decline of the Enron Corporation has devastated its employees' retirement plan, which was heavy with company stock, and has infuriated workers, who were prohibited from changing their investments as the stock plunged.
Through the 401(k) retirement plan, employees chose to put much of their savings in Enron shares, and the company made contributions in company stock as well. But around the time Enron disclosed serious financial problems last month, the company froze the assets in the plan because of an administrative change. For several weeks, as the stock lost much of its value, workers stood by helplessly as their retirement savings evaporated. They were not allowed to switch investments at all — even though the plan had far less risky choices.
The unfortunate timing caps a year of pain for Enron's workers. At the end of last year, the 401(k) plan had $2.1 billion in assets. More than half was invested in Enron, an energy conglomerate. Since then, the stock has lost 94 percent of its value.
At Portland General Electric, the Oregon utility acquired by Enron four years ago, some workers nearing retirement have lost hundreds of thousands of dollars. The utility has lined up grief counselors to help them work through their problems.
"We had some married couples who both worked who lost as much as $800,000 or $900,000," said Steve Lacey, an emergency-repair dispatcher for Portland General. "It pretty much wiped out every employee's savings plan."
"Shortly after it was frozen, the articles started coming out about some of the questionable activities of Enron," Mr. Lacey added. "The stock took a tremendous drop, and we were pretty much helpless."
The loss serves as a grim reminder of the danger of relying too heavily on one investment. Stock plunges similar to Enron's have also wiped out the retirement savings of many employees of the Nortel Networks Corporation, Lucent Technologies Inc. and Global Crossing Ltd.
The loss by Enron's workers also stands in stark contrast to the profits made by some senior Enron executives, who sold stock during the last few years. Enron's chairman, Kenneth L. Lay, made $20.7 million during the first seven months of 2001 by exercising stock options — and more than $180 million by exercising options during the three prior years. Last week, Mr. Lay agreed to forgo a $60 million severance package after Enron traders and employees made clear how upset they were that he would profit from the proposed acquisition of the company by Dynegy Inc. while they were suffering.
Enron — which is already the subject of a Securities and Exchange Commission investigation of transactions among Enron and partnerships headed by the company's former chief financial officer, Andrew S. Fastow, and a number of shareholders' suits — now has an additional legal problem.
On Tuesday, Steve W. Berman, a lawyer from Seattle who represented states against the tobacco industry, filed a lawsuit in Federal District Court in Houston seeking class-action status on behalf of Enron employees who lost money on the stock through their retirement plan. The lawsuit says that Enron schemed to pump up the price of the stock artificially and violated its fiduciary duty to its employees by failing to act in their best interests.
"They were promoting Enron as a retirement investment vehicle and matching employees' contributions with Enron stock, when they knew the stock was overvalued, and that's a breach of their fiduciary duties," Mr. Berman said in an interview yesterday.
What's more, he said, the assets were frozen on Oct. 17, with the stock at $32.20, even though Enron executives knew there would be imminent disclosures about the company's accounting practices. "They knew the worst news was about to come out, but they froze the stock," he said.
Enron closed yesterday at $5.01.
The company declined to comment on much of the allegations because of pending litigation. A spokeswoman, Karen Denne, said that the change in plan administrators had been in the works for a number of months and that she did not know the exact date the change was put into effect.
Like many other big companies, Enron made its contributions to the plan in company shares. But employees also chose to put much of their own contributions into the stock, lured by its stellar past performance. The company says that 89 percent of the Enron stock in the plan wound up there because employees chose it, and 11 percent was the company's contribution.
"A lot of people believed in the stock, so it wasn't just the company match," said an employee at Enron's headquarters in downtown Houston. "It was their own money, too. People are just shell-shocked." The stock's past performance had lured many workers. Last year, as the stock soared, total assets in the 401(k) plan rose more than 35 percent.
About 57 percent of Enron's 21,000 employees participate in the 401(k) plan. The company generally matches employee contributions at 50 cents on the dollar, up to 6 percent of their salary, with Enron stock, which cannot be sold and put into another investment until the employee reaches age 50. But Ms. Denne said workers otherwise "have a range of options" in which to invest their money.
Gerry O'Connor, a senior consultant with the Spectrem Group, a consulting firm based in Chicago, said it was not uncommon for companies to freeze assets when administrators were switched. "If you don't, you can wind up with misallocated money, wrong statements, and all kinds of complicating factors," he said.
But a heavy dose of assets in one company stock has been a concern to many specialists in retirement planning. Employees are taking "a lot of risk, but they don't think of it as such," Mr. O'Connor said.
"They say, `You know, I work for this company, and we're doing great.' "
In addition to the swoon in their 401(k) plans, Enron employees have watched the value of their stock options wither. Enron gave a far larger percentage of employees options than most companies do, but now, with the fall in Enron shares, nearly all of those options are worthless.
Enron's tumbling fortunes have come as a particular shock to some of its workers in Oregon. About 95 percent of the 2,700 employees of Portland General, which Enron recently agreed to sell to help it raise badly needed cash, are invested in the 401(k) plan, said Scott Simms, a spokesman.
The losses, he added, have hit everyone "including officers all the way through to other staff." "It's certainly not something in which certain employees have lost out and others haven't," he said. "It was the same plan for everyone."
In an interview with The Oregonian in Portland, Peggy Y. Fowler, Portland General's chief executive, said the asset freeze was an unfortunate coincidence. "The timing couldn't have been worse," she said.
"We refer to our retirement program as a three-legged stool — Social Security, the company pension and the 401(k)," Ms. Fowler said. "One of the legs has been cut off."
Scandal of Overpaid CEOsThe Philadelphia Inquirer – by Matt Miller – November 21, 2001
Scientists thought it impossible, but we may finally be getting a precise measure of the outer boundary of corporate shame. It goes like this: If you're a CEO who's already made $300 million from stock options by cooking the books, then when the hoax is exposed and your wrecked firm is taken over, a further $60 million severance payout makes even you blush.
That's one lesson to draw from the meltdown at Enron, the high-flying energy firm that turns out to have been a house of cards. The business headlines make it sound as if CEO Kenneth Lay's decision to waive his contractually guaranteed $60 million severance is the act of a statesman, but a closer look suggests it's a signal of shame.
Lay led Enron as it grew from a pipeline operator over the last decade to become the nation's largest energy trader, a business Lay basically invented. But Lay's innovations apparently included some creative accounting, through which Enron overstated its earnings in the last five years by nearly $600 million, an inflation that helped boost Enron stock. These were the same years when Lay exercised stock options that gave him the bulk of the $300 million he's earned at the helm.
While Lay has presumably tucked most of those millions away in other safe investments, Enron employees whose stock sits in 401(k) plans have seen its value drop by 90 percent as the firm's woes have emerged.
This gap between the boss and the rest no doubt helps explain the revolt that took place the other day as terms of Enron's humiliating sale to smaller rival Dynegy were being finalized.
When word of Lay's severance package swept through the firm, "quite a bit of concern was raised," said a corporate spokesman. Translated, that means Enron's top traders screamed bloody murder about the idea that the boss would make out like a bandit even as the company went down the tubes.
And so Lay backed down. Unfortunately, however, Lay's ethic of entitlement is the norm in corporate America, as showcased in an underappreciated Fortune magazine June cover story on "The Great CEO Pay Heist."
Fortune reporter Carol Loomis spoke to seven heavyweights who serve on the compensation committees of big company boards of directors - many of them CEOs themselves. She promised them anonymity in exchange for candid views on the state of CEO pay. Listen to what they said - and remember, these aren't left-wing radicals talking, but major corporate leaders:
And don't hold your breath for reform. "Government isn't going to change anything," said one of Fortune's cynical insiders. "We're not going to turn into Cuba. When you've got some smart lawyer (advising management) ... working against two members of Congress ... it's no contest."
Morro Bay Project Falls Farther BehindCoastal Alliance – Press Release – November 18, 2001
(Nov. 13, 2001) Duke Energy's plan to replace and expand the Morro Bay Power Plant, already mired in delays, fell farther behind schedule Tuesday, Nov. 13, when the most significant recommendations by the California Energy Commission staff on whether to approve the controversial project were postponed again.
Duke's plan has been under review by the Commission for 13 months and a final decision was scheduled next month. But that decision now is not expected until next April or May at the earliest. The latest delay may put the decision off on the $650 million project until mid-year. The longer it takes the Commission to approve the new plant--if it is approved and if Duke accepts the conditions that the Commission may impose--the longer it will be before the plant is operational and the less need the state will have for its energy output. Even if construction were to begin in mid-2002, a new plant would not be finished until 2005 when California is projected by state agencies to have a major surplus of electricity.
As a result of the revised schedule for review of the project issued Nov. 13, the Commission staff's recommendations will be divided--some were released Thursday, Nov. 15. But the most controversial ones are to be released on Dec. 14. All the recommendations (termed the Final Staff Assessment or FSA) were originally scheduled to be issued last July, which was later put off until Nov. 14.
The issues that have caused the most controversy and pose the biggest obstacle to approval of the project--the staff's finding that the plant would cause significant adverse effects on the Morro Bay National Estuary by killing nearly one million fish a year--will not be addressed until Dec. 14. An earlier staff report (termed the Preliminary Staff Assessment or PSA) cited these effects and recommended against further diversion of water from the Estuary to cool the plant. It proposed use of "dry cooling," which would circulate water within the plant like in a radiator and use little or no Estuary water.
Of the 16 issues on which the staff is scheduled to make recommendations on Wednesday, Nov. 14, only air quality is expected to be a subject of controversy. The Air Pollution Control District has found that the new plant will be in compliance with air quality standards. However, the Coastal Alliance on Plant Expansion (CAPE) has challenged that finding of compliance and has asked the Commission to impose stricter controls because of the fact that ground-level concentrations of toxic air emissions from the plant will increase. CAPE is also asking the Environmental Protection Agency for health protections from the additional plant pollution under federal law. Evidentiary hearings on the 16 issues reviewed in Part 1 of the FSA are scheduled to take place during Dec. 17-19, 2001. But in issuing its revised review schedule, the Commission said matters that are contested may be postponed until a second set of evidentiary hearings set for Jan. 7-18. Therefore, air quality as a contested issue could be postponed until the January hearings when the issues involving effects on the Estuary are now scheduled to be considered.
The delays in reviewing the project by the Commission have been the result of Duke modifying its plan on Oct. 19, Duke's delays in providing information requested by the Commission's staff earlier this year and additional studies needed by the staff to determine the feasibility of alternatives to the project as proposed by Duke.
CAPE is a nonprofit citizens group that was formed in mid-1999 to monitor Duke's plan to build a new plant that will be operated at a higher level and produce more energy. CAPE now supports the Commission staff's recommendations that diversion of water by a new plant be prohibited because of the killing of fish and that dry cooling be used if the plant is built. Duke has stated publicly that it will not build the plant if dry cooling is its only cooling option.
CAPE's web site at www.plantexpansion.org offers a wide array of information about the project. For more information, call 772-8426 or 772-2524. Reports and other documents about the Morro Bay project are available on the Energy Commission web site at www.energy.ca.gov/sitingcases/morrobay/documents/
Previous Morro Bay article:
Enron Stock Crash Burns EmployeesEmployee Advocate – http://www.DukeEmployees.com – November 18, 2001
The Oregonian reports that as Enron’s stock crashed, it evaporated millions of dollars of the employee's 401 (k) savings. You know that executives do not like to take losses, so they cashed in. Executives and directors sold off more than $136 million worth of stock over the last year.
What did the employees do? Well, the company had a special deal for the employees. On October 17, the company froze the employees accounts! That’s right. The employees were forced to hold their Enron stock while it crashed. It is amazing how the rules always seem to favor the rule makers. “Coincidentally,” the stock crash coincided with the account freeze! The stock dropped from $33.84 to below $9 during the freeze. Gary Kemper said: "I don't believe it was a coincidence at all." His savings went from a high of $756,000 to $87,750 after the freeze.
Some employees are, understandably, furious. They feel that the company hyped its stock to the end, and then locked them into it. Alan Kaseweter said: "I just feel like I've been stolen from and lied to." You know, that’s exactly what employees say after being forced into a cash balance pension plan!
Employees, who bought the company’s hype, had all of their savings in Enron stock. Remember, what happened to Enron’s stock price can happen to any stock.
Does the following remind you of any company? Enron has traded: wine futures, communications bandwidth, and derivatives based on the weather. Enron was recognized as the most admired corporation in the country four years running, by Fortune magazine. Now you know the true worth of Fortune magazine’s hype.
Enron’s executives and directors are facing five lawsuits by investors.
The Rise and Fall of EnronThe New York Times – November 3, 2001
Earlier this year, most companies would have loved to have Enron's problems. Californians resented the energy trading company's huge profits during their energy crisis, and Democrats in Washington raised questions about Enron's influence within the White House and about the cozy relationship between Enron's chairman, Kenneth Lay, and Vice President Dick Cheney. Nobody seemed better positioned to thrive during the Bush presidency than this Houston-based apostle of deregulation.
Wall Street was impressed with Enron's strategy of swooping into formerly regulated markets to broker contracts for natural gas, electricity or unused telecom bandwidth. The company was celebrated as a paragon of American ingenuity, a stodgy gas pipeline company that had reinvented itself as a high-tech clearinghouse in an ever-expanding roster of markets. Enron's push to force utilities into the Internet age with its online trading systems, at a seemingly handsome profit, became an epic tale of the dot-com revolution.
It now appears that Enron's tale may be more cautionary than epic. Enron envy has crashed, along with the company's stock price, as serious questions emerge about its bookkeeping. Enron disclosed earlier this month that $1.2 billion in market value had vanished as a result of a controversial deal it entered into with private partnerships run by its chief financial officer, Andrew Fastow.
Most alarming was Enron's reluctance to shed light on management's wheeling and dealing. "Related-party transactions," as the accountants call them, are fraught with conflicts of interest. Though much remains to be learned about these transactions, their scope and lack of transparency suggest that Enron may have in effect created its own private hedge fund to assume some of the risk and mask the losses of its complex trading. The extent to which company insiders profited from the partnerships is not yet clear.
Enron has scrambled to dampen Wall Street's concerns, acknowledging its credibility problem while insisting on the health of its core businesses. On Wednesday it brought in William Powers, the dean of the University of Texas School of Law, to review the transactions. The Securities and Exchange Commission has launched its own formal investigation. Mr. Fastow was forced to resign, following Jeffrey Skilling, the man credited with driving Enron into new cutting-edge businesses, out the door.
Enron's former admirers on Wall Street, mindful of recent scandals involving high-profile companies doctoring their earnings, and of the spectacular collapse of the Long-Term Capital Management hedge fund in 1998, are alarmed. Carole Coale of Prudential Securities summed up the prevailing sentiment when she told The Times: "The bottom line is, it's really difficult to recommend an investment when management does not disclose facts." Analysts, as well as the media, are not entirely blameless. Enron did mention, albeit in passing, the troubling related-party deals as early as March 2000. But few analysts bothered to raise questions at a time when the company's revenues, profits and stock price were soaring.
Harvey Pitt, the new Securities and Exchange Commissioner, must pursue the Enron inquiry aggressively in order to assure investors that he will be as vigilant as his predecessor, Arthur Levitt, when it comes to protecting the integrity of financial markets. Indeed, even if Enron is cleared of any wrongdoing and regains some of its past luster, as it well might, the company that preaches the merits of self-regulating marketplaces has reminded us all of the need for a strong regulator on Wall Street.