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Duke - Page 4 - 2002
Point of Rocks Versus Duke EnergyWashington Post – by David Snyder – May 10, 2002
(5/2/02) - New housing developments are visible on the horizon, and Washington seems closer every year, but the area around Point of Rocks is still unmistakably rural: Active farms still dot the landscape, which slopes gently from the nearby hills toward the Potomac River. Boat ramps and walking trails draw weekend tourists from Washington and Baltimore, each about an hour away.
Hidden beneath this bucolic veneer, however, is a wealth of resources that has recently prompted an explosion in interest from energy companies. Natural gas lines, large power transmission lines and a massive water supply centered here have raised the possibility that this landscape of farms and historic structures soon could be a hub for electricity generation in the Washington region. Local residents and a national environmental group are protesting the proposed plants.
With electricity deregulation in Maryland, the quiet riverside area has become a magnet for national power companies looking to build new power plants in areas that, under regulation, would have been unlikely spots.
Two proposals have made the most headway: Duke Energy North America's plan to build a 640-megawatt station that would cover about 25 acres near Point of Rocks in Frederick County, and Mirant Corp.'s proposal to significantly expand an existing power plant six miles south near Dickerson in Montgomery County.
Their proposals are part of a national move by power companies to search for new plant sites as states have started lifting some restrictions on power plant construction.
In Maryland, for example, deregulation means among other things that companies no longer have to show that the state needs new electricity to build a new plant. Instead, they can build a plant, if approved, even if the state does not need the power, and can send the electricity virtually anywhere.
About a dozen companies in the past year have shown interest in building plants in Maryland; seven have formally applied to the state. That compares with about one new power plant proposal every other year before deregulation, which passed the Maryland General Assembly in 1999.
Aside from the Montgomery and Frederick proposals -- two of the largest -- there are two small plants proposed in Prince George's County, one in Charles County, one in Cecil County and one in Dorchester County.
The area near the Potomac at the Montgomery-Frederick county line has had a surge in activity because it potentially contains, within a relatively small area, enough water, natural gas and transmission lines to accommodate several power plants. Five companies have shown interest in building within about a five-square-mile area; only Duke and Mirant have applied so far. A third, San Diego-based Sempra Energy, plans to apply to build a $300 million, 600-megawatt plant by the end of May, Sempra spokesman Tom Murnane said.
Many who live in the area are adamantly opposed to the proposed plants, especially at the Frederick County site, where there is little industrial activity.
A group of neighbors from Point of Rocks and Tuscarora have gathered in vocal opposition to Duke's proposal and succeeded in winning the support of the Frederick Board of County Commissioners. The commissioners have unanimously opposed the plant, saying it violates county planning efforts that have been decades in the making. The Public Service Commission makes the final decision.
"This land has been zoned to be agricultural since Frederick County has had zoning," said Lisa Baugher, a Tuscarora resident who lives within view of the proposed Duke site and has led efforts to oppose the plant. "Once they put a power plant right in the middle of this, we risk losing that protection."
Opponents of the Duke plant also say a power plant would put undue strain on the area's already taxed water resources.
"They don't understand the severity of the water shortage until they come up here where you can see the bottom" of the river, said Jodye Roebuck, who lives near the proposed site.
Roebuck and others also have raised questions about air quality and health concerns, particularly in light of a study published in March in the Journal of the American Medical Association linking fine-particle pollution -- such as that produced by power plants -- to cancer.
Duke spokeswoman Kate Perez said that the proposed plant would meet all necessary guidelines by the Environmental Protection Agency regarding air pollution, and that the company has made a concerted effort to ensure that even in drought conditions the plant would not strain the area's water supply. She said Duke plans to build three large ponds, holding 22 million gallons of water each, to hold as reserves in case drought prevents the plant from drawing water from the Potomac.
The plant would be a part of 761 acres of farmland that Duke has obtained the rights to purchase; the facility would cover about 25 acres. As a "merchant plant," it would sell its power to nearby states, rather than providing electricity only for the region.
Duke, based in Houston, has indicated it will seek a permit to draw 7 million gallons of water a day from the Potomac. Perez said the company's projected daily water use is 4.66 million gallons. "We can't just go in there and turn on a spigot and run," she said. "We've got to be mindful and considerate stewards of the resources."
As currently proposed, the plant would be powered by natural gas. About 90 percent of the water used by the plant would be vaporized, so only about 10 percent of the water pulled from the Potomac would be returned.
Early designs showed 161-foot-tall smokestacks, but last week Duke said they were considering reducing those to 128 feet, in response to community concerns about the plant's effect on the area's aesthetics.
The National Audubon Society has voiced its disapproval of the Duke plan on grounds that it would further deplete the endangered water systems surrounding the Potomac.
"Heretofore we have always had enough water, but the reality is that all up and down the East Coast that's changing," said Stella Koch, Virginia conservation associate for Audubon. "In that context, [the Duke] power plant is a bad idea."
The first round of hearings on the Duke proposal began last year and concluded earlier this year. A second round of public hearings was scheduled to begin this month.
However, Duke recently requested a delay, saying it wanted time to study the possibility of decreasing the height on the proposed plant's smokestacks. The schedule of hearings, therefore, will change; no precise dates have yet been set, said Pete Dunbar, director of the state's Power Plant Research Program, which coordinates the power plant approval process.
By late fall or early winter, a Public Service Commission hearing examiner will assemble a year's worth of testimony and legal proceedings, and forward a final set of recommendations to the commission.
The Public Service Commission could approve the power plant without any exceptions, or it could approve the plant with several exceptions, such as limitations on size or operation. Or the commission could deny the plant -- something that has happened only twice in the 31-year history of the state's power plant approval process, Dunbar said.
In many ways, the commission is dealing with an entirely different world from that before deregulation. It is looking with interest at the Duke and Mirant proposals to see how several new issues will be handled, Dunbar said.
For instance, it is unclear from the deregulation legislation passed in 1999 how much authority the state has to deny plants, and on exactly what grounds. Under the old system, the prime factor was whether the state needed power. With that requirement gone, the state will be figuring new criteria on which to deny -- or approve -- plants.
"This [the Duke and Mirant plants] will definitely establish a lot of precedents," Dunbar said. Another issue is the cumulative impact of power plants.
The state compiles studies of the net sum of impacts of power plants on the environment and the water supply. But with several plants that have not fully committed to building, those studies become more complicated. Does the state include the potential plants in calculations, or not?
"The system is not set up to deal with hypothetical plants, and it's not clear how to deal with those," Dunbar said.
The Mirant proposal in Montgomery is undergoing the same review process, but as of now appears to face fewer potential obstacles than Duke's plan.
Atlanta-based Mirant applied to expand an existing coal-burning plant at its Dickerson site in May 2001. The proposal is to build a 740-megawatt plant near the existing plant, which opened in 1961.
Mirant, which bought the existing plant from Pepco in December 2000, originally wanted to begin construction on the expansion as early as this summer. The company has since scaled back its proposal so that the entire plant would not be built at once, but in several stages through 2006.
Mirant spokesman Steve Arabia said the company changed its plans because it does not believe the energy market will demand as much power as soon as the company originally anticipated.
"It's our risk to build this plant and operate it profitably," Arabia said. "If we build it and we can't sell the power, the financial risk falls on our heads."
The Sugarloaf Citizens Association, which has battled new industrial projects in the area for 30 years, has voiced opposition to the project. But an expansion of the plant has been planned for nearly a decade, and the area is heavily industrial. These factors could make it much easier for Mirant to win approval of the proposal. In addition, Montgomery County officials have not explicitly opposed the expansion, though county attorneys have filed as an "intervening party," meaning their input will be heard by the Public Service Commission hearing examiner. County Council member Nancy Dacek (R-Upcounty), who represents the area, has expressed concerns about the water the new plant would need.
"My problem with all of these proposals is their effect on the water flow in the Potomac," Dacek said. "In low-flow times, if you've got a lot more [water pulled from the Potomac], it's going to be a problem."
Jane Hunter of the Sugarloaf Citizens Association said Montgomery's upcounty has its share of industrial projects -- a trash incinerator, a power plant, a composting facility. Hunter and others complain such heavy industry is not in keeping with the surrounding area, much of which county officials have designated as an agricultural preserve.
"There's about 3,000 contiguous acres of industrial ground in the agricultural preserve," Hunter said. "In March, there was a significant compost fire over here. We've got natural gas lines, 10 million-gallon tanks of diesel. . . . We don't need more of this."
To check out the Point of Rocks protest site, click the link below:
Enron Focus Turns to Duke and OthersCBS MarketWatch – by Russ Britt – May 8, 2002
(5/7/02) - SACRAMENTO, Calif. (CBS.MW) -- A California state senator doesn't think Enron was the only company manipulating the state's energy markets, and he's out to find the others.
State Sen. Joseph Dunn wants to find out if Enron rivals participated in the same games as California was brought to its knees during the electricity crisis of 2000 and 2001.
And U.S. Senator Diane Feinstein, D-Calif., urged Attorney General John Ashcroft to launch a criminal investigation to determine whether Enron or any other company violated federal fraud statutes.
In documents released Monday, Enron appears to admit tactics used to drive up prices in California and said its competitors did the same.
So Dunn, a Democrat from Garden Grove, said he's asking energy companies Tuesday whether they took the same liberties as Enron, and he wants a response within five days.
"They (Enron officials) were clearly the masters of the game," Dunn said. "Others learned quickly from Enron's behavior."
On Monday, Enron turned over memos that outline the practices it used to drive up prices. The memo spurred a response from President Bush, who called for a "vigorous" investigation into California pricing practices. Other lawmakers said they planned their own probes.
In one of its practices, which it called "Death Star," Enron scheduled electricity transmissions that conflicted with congestion along power grids in order to get paid for later relieving that congestion.
In another, called "Ricochet," contracts were ping-ponged in and out of the state to drive up prices.
But Enron also said in a memo to its lawyers that these practices are common. "According to one trader," the memo said, "this is the 'oldest trick in the book' and, according to several of the traders, it is now being used by other market participants."
Said Dunn: "In our view, all of the large market participants engaged in these games in one way or another."
He included Dynegy, Reliant Energy, Duke Energy, Williams Cos. and Mirant in his request for information.
Energy traders' denials
Four of the companies -- Williams, Mirant, Duke and Dynegy -- issued responses. All stressed that their practices were within the law.
"Williams traders engage in business practices that are entirely legal and are considered fair and honest dealings," said Paula Hall-Collins, Williams spokeswoman.
Dynegy spokesman John Sousa said there was no "collusion" between itself and any of the other traders.
Mirant spokesman James Peters said the company "plays by the rules" and is working to reform the state's broken deregulated system. He indicated Tuesday's reports were not surprising.
"I think there's nothing new being reported today," he said.
And Duke spokesman Terry Francisco issued a statement that read: "Duke Energy conducts its business appropriately and with integrity. We are confident our practices are well within all of the parameters and tariffs of the market rules."
Enron's documents were turned over to Dunn, who is heading a committee that is examining market manipulation, and to the Federal Energy Regulatory Commission.
FERC would not comment further on the documents or why it chose to release them. FERC has been under fire from state officials for dragging its heels on the California power crisis.
FERC officials said they still were investigating the power crisis.
Was it illegal?
Several questions linger over what to do about Enron, Dunn said. The problem is there are no laws with teeth in them to make Enron pay for its apparent sins.
"This document is what I refer to as the 'jailhouse confession,'" Dunn said.
California consumers won't see a dime since the company has gone bankrupt, and there appear to be no federal violations, Dunn said, because nothing indicates antitrust behavior.
Enron could face criminal charges under Section 395 of the California Penal Code for willfully making a false statement to affect market prices. That crime is a misdemeanor, but Dunn said Enron could face a number of counts. It is unclear, though, who at Enron could be charged or convicted.
Enron also could be on the hook for violation of the state's unfair business practices act.
Still, as Dunn said: "The bottom line is we haven't done what we need to do to prevent this from occurring."
Attorney general investigating
Attorney General Bill Lockyer's office still is investigating market manipulation and could not say whether the memo would result in any charges, spokeswoman Sandra Michioku said.
S. David Freeman, chairman of the California Power Authority, said the deregulation system that was created in the state was set up with the help of Enron and other power companies.
"They kind of made the law. They then stretched the law," Freeman said. "It may be tough to find that what they did was criminal, but what they did was a crime."
Dunn is proposing legislation that would enforce penalties if a trader is found to have manipulated the market.
All major energy traders lost ground in trading Tuesday. Dynegy was off $2.59 to $12.26, Williams was down $1.61 to $16.90, Reliant fell 37 cents to $25.53, Mirant lost $1.34 to $9.75 and Duke gave back 69 cents to $36.33.
Duke Power Project Hits RoadblockPlantExpansion.org – Press Release - April 29, 2002
(4/26/02) - In the most important development of the nearly three-year struggle by Duke Energy to build a new power plant in Morro Bay, the California Energy Commission staff today recommended against allowing the plant to divert water for cooling purposes from the ecologically-fragile Morro Bay National Estuary.
Duke officials had said they would not spend some $800 million to replace the existing 47-year-old plant with a new, larger one if it could not use water from the Estuary. Duke's plan was to divert nearly 400 million gallons of water a day from the Estuary, killing up to 33% of its fish, larvae and eggs annually, according to studies by marine scientists hired by regulatory agencies.
Instead, in its final recommendations on the proposed project, the staff recommended an "alternative closed cooling system that avoids use of Morro Bay for cooling water." It concluded that "dry cooling," which employs a series of fans to cool the plant's generators, is the "best available technology" and is the preferable option.
Although the Regional Water Quality Control Board (RWQCB) also has authority over whether the plant would be allowed to divert Estuary water, the Energy Commission (CEC) staff report said "we currently believe that the (board) will require dry cooling as the Best Technology Available." If so, the RWQCB's concurrence on dry cooling would unite the CEC staff and the board against diversion of Estuary water by a new plant. The board's staff earlier had said that "habitat enhancement" might be feasible as a compensation for diverting water and killing fish, but the CEC report indicated that dry cooling is now favored by the RWQCB staff.
The Coastal Alliance on Plant Expansion (CAPE), a nonprofit citizens group that has intervened in the CEC review process, has for the three years advocated effective environmental and public health protections as conditions for approval of the new plant.
"We are elated that the CEC staff, after extraordinarily careful study and evaluation of the proposed plant's effects on the Estuary, has courageously concluded that this national estuary should not be subjected to the great and possibly permanent harm that a new and larger power plant would inflict," said Henriette Groot, president of CAPE. "We feel vindicated that our very deep concerns have been recognized as legitimate and deserve to be addressed."
The CEC report's main conclusion stated that "Staff is not able at this time to recommend approval of the project as currently proposed due to significant impacts to aquatic biological resources resulting from the proposed continued use of once-through cooling using sea water. Use of once-through cooling would result in significant impacts to aquatic biological resources." Once-through cooling refers to continual diversion of water from the Estuary through intake channels and its discharge in Estero Bay adjacent to Morro Rock.
Questions had been raised about the feasibility of building a plant with dry cooling chambers as part of the overall structure, primarily because of potentially increased noise and visual impacts. But the CEC staff said, "This report finds that both the dry cooling and hybrid cooling technologies are feasible for use at the Morro Bay Power Plant." Hybrid cooling uses a combination air and a recirculated fresh water. The CEC staff concluded that noise and visual impacts could be reduced to insignificant levels through the use of "super low-noise fans" and design technologies.
The CEC report, as required by law, also identified a number of alternative sites for the proposed plant, if it could not meet the recommended conditions. They include two just north and east of Morro Bay and four in Fresno and Kings counties.
The staff report will be the subject of the last set of CEC evidentiary hearings on the project. They are scheduled in Morro Bay on June 4-7.
Duke originally filed an application with the CEC to build a new plant on Sept. 1, 1999, but withdrew it several months later after consultants hired by the City of Morro Bay severely criticized the project because of predicted adverse environmental impacts. Duke filed the current application under CEC review on Oct. 23, 2000. The review was originally scheduled to be completed with a CEC decision last December, but delays in analyzing the project, including some requested postponements by Duke, have extended the review to 18 months.
A decision by the CEC is expected by mid or late summer.
Previous Morro Bay article:
Duke’s Deadly, Dirty AirThe Charlotte Observer – by Bruce Henderson – April 20, 2002
(4/19/02) - Power plant emissions from Duke Energy and seven other utilities could cause premature deaths in 560 adults a year in the Carolinas, even after more effective pollution controls are installed, says a study by a consulting firm.
Abt Associates did the report on fine-particle pollutants for the Rockefeller Family Fund, a New York philanthropy that advocates for the environment and other causes. Abt is an air-pollution consultant for the Environmental Protection Agency, and the EPA's former enforcement chief served as project manager for the study.
Abt focused on eight utilities, including Duke, that the government has sued over power-plant emissions. It estimates premature deaths and illnesses, by state, that would be caused by fine particles from each utility in 2007.
"We thought it was time to point some fingers" at those utilities, said Rob Kaplan, a spokesman for Rockefeller.
The report based its estimate on 2007 because that's when new federal limits on power-plant releases are to be in place. It says emissions by then will lead to 5,900 premature deaths among people 30 or older in the United States. It would also cause 4,300 additional cases of chronic bronchitis and 140,000 asthma attacks a year.
EPA officials in Research Triangle Park, where the agency researches the health effects of air pollution, couldn't be reached Thursday.
Duke said its eight coal-fired power plants meet federal and state standards, and that the company is investing hundreds of millions in new pollution controls. Duke serves more than 2 million customers in the central and western parts of the Carolinas.
An electric industry group said it doubts the study's methodology and conclusions, which haven't been reviewed by science peers for publication.
"The scientific evidence is not there that would link power-plant emissions, as opposed to other sources of particulates, as a main cause of specific health effects," said Jayne Brady of the Edison Electric Institute.
Abt, however, says its findings are conservative. The computer models Abt used to produce the estimates are the same it uses on behalf of the EPA, Kaplan said.
Power plants are believed to produce at least 75 percent of the state's fine-particle pollution, an N.C. Division of Air Quality spokesman said. Sixteen N.C. counties, including Mecklenburg, and four in South Carolina have recorded fine-particle levels in excess of a new federal standard.
A study published last month in the Journal of the American Medical Association linked high concentrations to premature death from heart disease and lung cancer.
The Abt study says Duke's emissions alone will contribute nationally to the premature deaths of 550 people; 420 additional cases of chronic bronchitis; 596 additional hospital admissions; 14,000 asthma attacks and 110,000 lost days of work.
Only 157 of those deaths, and a proportionate amount of sickness, would come from the Carolinas. Emissions that form fine particles can travel hundreds of miles on the wind. Abt estimated that each of the eight utilities -- most of which are in the Southeast and Ohio Valley -- would be responsible for health problems in many states.
The study attributes 76 early deaths a year in the Carolinas to the Tennessee Valley Authority and 126 deaths to Atlanta-based Southern Co.
Duke said its coal-fired plants are among the most efficient in the nation. Pollution controls now being installed will reduce emissions of nitrogen oxide 75 percent by 2004.
"We're very proud of our coal plants," said Duke spokesman Tom Williams.
Williams said Duke will support an N.C. clean-air measure that would further reduce pollutants, if it allows the utility to recover the cost of new pollution devices from customers.
"We can only do what we're required to do," Williams said. "If the requirements change, we'll comply with them."
A 2000 lawsuit that charges Duke with modifying its coal-fired plants without upgrading pollution controls is still before a federal court.
Eric Schaeffer, listed as project manager for the Abt study, left as EPA's chief of civil enforcement last month and was hired as a Rockefeller consultant.
Schaeffer has criticized the Bush administration's enforcement of the Clean Air Act, saying it weakened the government's ability to force new pollution controls on the utilities it had sued.
Duke Earnings Drop 17%The Charlotte Observer – by Stella M. Hopkins – April 19, 2002
(4/18/02) - Weaker demand and lower wholesale prices for power and natural gas pushed first-quarter earnings down 17 percent for Charlotte's Duke Energy Corp.
The company earned $379 million, or 48 cents per share, down from $454 million, or 60 cents a share, in the comparable quarter last year. Sales declined 28 percent, to $11.9 billion from more than $16 billion last year when California's power shortage pushed up prices dramatically. Prices have since plunged.
Analysts had expected Duke to earn 35 cents to 45 cents a share, with a consensus of 41 cents, according to Thomson Financial/First Call. Analysts dropped their estimate from 70 cents last month after the company said it wouldn't meet those expectations.
With 11 new U.S. power plants, the $8 billion acquisition of Westcoast Energy and its peak season just beginning, Duke expects to meet full-year earnings forecasts of $2.54 to $2.78 per share.
"We're on plan, and we have a lot of momentum," said Robert Brace, Duke's chief financial officer. "A lot of new power plants will be on for our peak cooling season, May through September."
Duke stock closed Wednesday at $38.61, up $1.41, in New York Stock Exchange trading.
A mild winter and soft economy hurt earnings for Duke Power, though it remains Duke Energy's most profitable unit, and is the Carolinas' largest utility. Duke Power's operating earnings fell 16 percent, to $385 million.
The utility is in the midst of an investigation by Carolinas regulators of an employee whistle-blower's allegations that Duke Power improperly made accounting changes to reduce profits as reported to regulators. Regulators could order Duke to cut rates, based on the audit results.
The most significant issue is Duke Power's handling of an insurance distribution. Pending an external audit, expected to be complete this summer, the utility set aside $24 million from a distribution this year.
Duke Energy's wholesale power marketing arm sold more than twice as much electricity during the quarter. While the business has been growing, the surge followed the Dec. 2 filing for bankruptcy reorganization by Duke's Houston competitor, Enron Corp., amid allegations of grossly overstated profits and hidden debts.
"People want to do business with Duke," said Harvey Padewer, Energy Services' group president. "We have the financial wherewithal and the physical assets to back up our obligations."
The trading volume increase couldn't offset lower prices, and earnings for the unit tumbled 81 percent, to $67 million.
This unit includes Duke's power sales to California, which last year were the target of fierce national criticism as prices -- and profits -- soared while the state struggled with blackouts. Regulators and legislators are investigating allegations of price manipulation by Duke and others.
Milder weather, more generating capacity and conservation slashed West Coast power prices, and Brace doesn't expect a return to last year's volatility. But a heat wave this week on the East Coast shows how dramatically power prices can shift.
In a large Northeastern market, power has sold this week for as much as $110 a megawatt hour, compared with last week's price of about $30. An average Carolinas home uses one megawatt hour per month. "We only need a little bit of a tug from the weather, and prices jump up," Brace said.
-- STAFF WRITER RICK ROTHACKER CONTRIBUTED TO THIS ARTICLE.
Corporate Ethics: Right Makes MightBusinessWeek – by Heesun Wee – April 18, 2002
conduct. Doing the right thing also generates more tangible dividends
(4/11/02) - After the dust from the Enron collapse settles, one positive outcome may arise. CEOs, take note: The energy trader's demise provides an important lesson in the value -- the necessity, really -- of having a corporate conscience and a culture built around knowing the difference between right and wrong.
It's tempting to brush aside business ethics as a nebulous, well-intentioned subject suitable for Business School 101 but of little practical value in the real world. Big mistake. A 2000 survey by the Ethics Resource Center found that 43% of respondents believed their supervisors don't set good examples of integrity. The same percentage felt pressured to compromise their organization's ethics on the job. That's a startling number, two years before Enron imploded.
Now we know the heavy toll that ignoring ethics can exact. Former top Enron executives Jeffrey Skilling and Kenneth Lay insist they were too preoccupied running the global company to know the details of murky, off-the-books partnerships used to hide debt or to question auditor Arthur Andersen's willingness to allow such transactions. It remains to be seen whether prosecutors pursue any criminal charges beyond the felony indictment of Arthur Andersen for destroying documents.
With Enron the subject of a grand-jury investigation, scrutiny of top execs' behavior is about to intensify. So far, the details that have emerged about the Houston-based energy giant paint a picture of a Wild West culture that sublimated everything to the goal of driving up the stock price. "In this competitive, capitalistic system of ours, of course you have to have financial targets and goals that keep you pointed in the right economic and competitive direction," says W. Michael Hoffman, executive director of the Center for Business Ethics at Bentley College in Waltham, Mass. "But you've also got to tell employees you can only meet those goals with the framework of our ethical values."
Indeed, the story of Enron is fast becoming a textbook case for how not to lead a business. While Lay was busy exercising his stock options and pocketing profits, he was promoting Enron shares as a bargain to employees. Some Enron executives pressed UBS PaineWebber to take action against a broker who advised some Enron workers to sell their shares. The brokerage firm fired the broker within hours of the complaint, e-mail messages released by congressional investigators show.
Enron was "a swagger place," recalls Doug Schuler, associate professor of management at the Jones Graduate School of Management at Rice University, who worked for Enron's government affairs department for six months, from February to July of last year. While Schuler conducted research on political activities and corporations and wasn't schmoozing with gung-ho traders, he said the profits uber alles work culture was evident.
Enron hired top graduates from top schools, and the perennial question among colleagues seemed to be, "Can you make the deal?" Schuler recalls. "If you're really a clever person, you make the deal. If you're not clever, you're going to work for [rival] Reliant or Duke because you're not going to last long," he added.
Lay and Skilling both vehemently insist that they encouraged employees to work with integrity. Enron had an ethics code. But "at Enron, ethics was simply a piece of paper with three Ps -- print, post [in the company lunch room], and then pray that something is actually going to happen," says Stuart Gilman, president of the Ethics Resource Center in Washington, D.C.
Perhaps Skilling and Lay couldn't know all the goings-on at Enron, as they claim. However, "people at the top tend to set the target, the climate, the ethos, the expectations that fuel behavior," says Thomas Donaldson, a business ethics professor at the Wharton School at the University of Pennsylvania. Adds Steven Currall, associate professor of management, psychology, and statistics at Rice: "I don't think it's an adequate defense for a CEO to say, 'How could I know everything that's going on?' It doesn't absolve them of responsibility."
Practicing good business ethics creates dividends that go beyond avoiding legal disaster. A host of studies have shown that employees who perceive their companies to have a conscience possess a higher level of job satisfaction and feel more valued as workers. The 2000 Ethics Resource Center study canvassed corporations and nonprofits across the country. Among its findings: Managers' efforts to instill good business ethics were welcomed overwhelmingly by workers.
"We found a strong connection between employees' perception of their leaders and their own ethical behavior," says Josh Joseph, top researcher of the ethics center. Workers also said their own behavior was influenced by the perceived ethics of direct supervisors and co-workers.
So, how do you create a positive work environment in which standards for behavior are clear and employees serve as role models for one another? Some businesses promote an ethical work atmosphere, along with salary, as a way to woo top talent. At Illinois-based health-care giant Baxter, employees are encouraged to chat up the company's ethics program as a recruiting tool.
Sometimes, fostering ethics can mean crossing national borders. Motorola, also based in Illinois, published a global ethics guide in 1998 to help managers who work abroad. A sample question: What do you do if you're in a country where payments are expected in business dealings? Motorola's code says no. The upshot of the ethics guide: Just because you're not at headquarters doesn't mean you throw your company's standards out the window.
How not to instill an ethos in the workplace? Enron also provides a textbook example, say experts. It required employees to sign a code of conduct statement before joining. However, emerging details suggest that any efforts related to a meaningful ethics program may have been window dressing at best. For example, the Enron board twice suspended the company's ethics code in 1999 to allow two outside partnerships to be led by a top Enron executive who stood to gain financially from them, according to a report Houston law firm Vinson & Elkins prepared for Enron.
Companies should instead take a page from health-care giant Johnson & Johnson, where core values have long held center stage. J&J employees periodically survey and evaluate how well the company is adhering to its code of ethics, called "Credo" responsibilities. Their opinions are relayed to senior managers, and any possible shortcomings in the Credo are promptly addressed.
Small wonder that, when the Tylenol scare hit in the '80s and seven Chicago residents died after ingesting cyanide-laced capsules, J&J managers knew what they had to do -- even without consulting with then-CEO James Burke, who was on a plane as the news broke. By the time Burke landed and caught up with his top managers, they already had called for all Tylenol products to be pulled off shelves and for production of all Tylenol items to be halted.
VALUES IN ACTION
The J&J managers ignored advice from consultants and attorneys who had argued such dramatic steps might harm the Tylenol brand and imply the contamination was the work of a J&J employee. "In the end, it was a joint consensus agreement around the company's values, the No. 1 value being that the health of our customers comes first before anything else, including stockholder value," says Donaldson of Wharton. "This is a story about a company that really lived its values."
Bentley College's Hoffman points out that the decision to do right was a gut reaction. "Ethics is a matter of developing good habits, and it doesn't happen overnight," he says. "It happens through repetition and a long process of development."
You'll find the roots of a companywide commitment to ethics in the top suite. In 1991, a bid-rigging scandal surrounding senior Salomon Brothers officials in connection with U.S. Treasury securities pushed the Wall Street trading house close to bankruptcy. Enter billionaire Warren Buffett.
"GIVE ME A CALL."
As one of his first actions as interim CEO, Buffett wrote a letter to his managers. "It basically said, 'Here's my home phone number in Omaha. If you see anything unethical, give me a call,'" recalls Donaldson. Managers indeed called Buffett, and they collectively came up with a plan to rehabilitate Salomon's tattered reputation. CEOs also can send a clear message about conduct by making business ethics part of performance reviews -- along with meeting transparent financial targets, experts say.
"The vast majority of CEOs are ethical and diligent in watching over these issues," says Rice's Currall. "But many of them have got so much on their plates it takes something like Enron to really get their attention, to get them to reevaluate their policies and procedures, and to ensure they're not guilty of some of these same things."
The implication is clear: Business ethics aren't just the province of the Ivy Tower. After Enron, smart CEOs will realize that an honest, transparent, and trustworthy culture can also bolster employee morale and ultimately guard shareholder value.
The Me-Too-EnronEmployee Advocate – www.DukeEmployees.com – April 8, 2002
In the April 15, 2002 issue of Fortune, Duke Energy was referred to as the “Un-Enron.” The primary difference between Enron and Duke was that Enron owned an energy trading business and Duke owned a trading business and power plants. Duke has not been accused of hiding losses, which is what brought Enron down. To the contrary, Duke is being audited to determine if they concealed profits!
But to imply that Duke is the complete opposite of Enron is a bit much. In fact, Rick Priory, CEO, used Enron as an example to emulate. Precisely, he wanted the price-to-earnings ratio of Duke stock to be more in line with that of Enron stock. Duke’s power plants were downplayed. It was repeatedly stated that Duke was not a power company, that it was an energy company.
The trip to Manhattan was undoubtedly a very bad experience for Mr. Priory. A Charlotte Observer article related that when Mr. Priory presented his plan for leading Duke to glory, the Wall Street types laughed in his face!
The audience had just heard Ken Lay speak about Enron. They were just not too impressed with Mr. Priory’s presentation. Perhaps that was the moment that he made a secret vow to be more like Enron.
Mr. Priory is evidently still burning from this experience. He is still trying to prove the Wall Street crowd wrong. He makes grand promises to investors, but breaks promises to employees.
First, he alienated the workforce by gutting benefit plans. The employees were dumped in an all-out attempt to impress Wall Street by making promises and mimicking Enron.
Now that Enron has imploded in the most scandalous of ways, where does that leave Mr. Priory? Will Wall Street forgive his flip-flopping? (“We are just like Enron. – We are not anything like Enron.”) Can he turn to employees for sympathy? He could, but may find guffaws instead!
The article raves about Duke’s revenues, but another article in the same issue of Fortune (below) details the questionable methods used in calculating these revenues. The article stated: “Profits--they seem to be mostly real at Duke…” That’s comforting - sort of.
The article points out that Duke’s regulated “unit's steady stream of earnings balances out the risk in more volatile business areas like unregulated power generation and energy trading.” The regulated units are exactly what Mr. Priory has been trying to trash for years! He has been wanting to roll the dice. But, gamblers and day traders do not always win.
The article mentioned that Bill Grigg was the CEO from 1994 to 1997. It quoted Mr. Grigg as saying: "I'm deep Duke." Not deep enough it appears. It was while Mr. Grigg was CEO that the cash balance pension conversion was formulated. This single act broke the retirement promises that all of Mr. Grigg’s predecessors had made to the employees for decades. Mr. Priory was waiting in the wings to become the next CEO, and was only a very willing accomplice to the act at that time. The conversion took place as Mr. Priory rolled into office in 1997. Everything has been downhill for the employees every since.
Mr. Priory was referred to as “Grigg’s handpicked successor,” and as not being “quite as deep Duke.”
Duke Energy started out as Duke Power, located in North and South Carolina. Some could view Mr. Priory as a Carpetbagger coming down from New Jersey to straighten the local yokels out. (Hey, these people talk slow and think even slower. Pulling the wool over their eyes should be a snap!) The pervading Southern anti-union sentiment could be cultivated to keep wages suppressed. It would be like shooting fish in a barrel!
Mr. Priory was quoted as saying: “…we didn't fall victim to short-term fads or accounting tricks.” The ongoing audit by two utility commissions will have the last word on that matter.
The financial “tricks” that Enron used were marketed to companies by Wall Street investment firms. This is also how cash balance pension conversions become so widespread. Companies made money selling them as ways to take pension money from employees. If there’s a scam going, there will always be a “promoter” to sell it to others!
It was stated that Duke listened to all of the flaky accounting plans being promoted, and “just said no.” But when the cash balance pension conversion were being peddled, it seems that Duke only wanted to know where to sign! One cannot practice ethics only half the time and stay out of trouble.
The article mentioned the controversial Moss Landing Power Plant in California. The protests against this site continues.
It could be said that Duke is not exactly like Enron, but it is still the closest thing to Enron. Duke is not an Un-Enron, if fact, it once tried to be a “Me-Too-Enron.”
Duke, Enron, and Energy FuturesFortune – by Carol J. Loomis – April 8, 2002
(Monday, April 15, 2002 Issue) - Of all the accounting weirdness around--could anyone ever have dreamed that accounting would vie with pedophilia as front-page news?--the aspect that has most fundamentally affected the FORTUNE 500 is the handling of what are called "energy trading contracts."
These things, almost single-handedly, made Enron one of the largest companies on our list--No. 7 in 2000 and No. 5 this year. These contracts have also caused many other energy and utility companies to show big to enormous increases in revenues from what they originally reported for 2000. A company many of our readers have most likely never heard of, Idacorp (formerly known as Idaho Power), leaped onto the list thanks to a 454% revenue increase; at American Electric Power revenues rose 347%; Calpine's jumped 233%. Another company, Mirant, which was spun out of Southern Co., is popping up on the list for the first time with an astonishing $31.5 billion in revenues--more, for example, than Dell or Motorola. All these figures were blessed by the authorities that FORTUNE has always relied on: companies' outside auditors and their watchdog, the Securities and Exchange Commission.
We will explain these wacky revenue leaps. But first, an explanation as to why the Greatest Leaper of them all, Enron, is fifth on our 2001 list. To begin with, Enron, going by the restated financials it issued for the first nine months of last year, inarguably was a huge company. In fact, its $139 billion in revenues for nine months exceeded General Electric's full-year revenues of $125 billion.
Then, on Dec. 2, Enron went into bankruptcy (a fact that doesn't disqualify it from the 500 list), and it has yet to report fourth-quarter results. The missing quarter, in which we knew revenues had fallen dramatically, gave us a problem. So we took a stab at estimating full-year revenues and concluded they might reach a maximum of $160 billion. But rather than create a precedent of using revenue estimates on the FORTUNE 500 list, we decided to rank Enron based on its nine-months revenues of $139 billion--and that figure is what makes it fifth on our list, behind Wal-Mart, Exxon Mobil, GM, and Ford. (Had we used the $160 billion estimate, Enron would still have trailed Ford.) Given the questions that hang over Enron's profits, assets, and stockholders' equity, we didn't think we could report plausible figures for those categories.
So how valid are Enron's mountainous revenues? To answer that you need to understand a bit about energy trading contracts. These are commodity contracts, mainly for natural gas, oil, and electricity, and they are entered into by traders hoping to earn a profit on future shifts in market prices. The traders are not only energy companies but also--and this is a fact that's important to our revenue tale--Wall Street firms such as UBS Warburg, Salomon Smith Barney, J.P. Morgan Chase, and Morgan Stanley.
So let's imagine a contract for $1 million of natural gas (we'll skip the btu details), to be delivered six months from now. If a Wall Street firm sold this contract, nothing called "revenues" would ever be created. Instead, the firm would periodically mark the contract to market--that is, measure the profit or loss earned on the contract--and, when time came to report, put that dollar result into an income statement item called "trading gains and losses" (which is considered revenue on the FORTUNE 500). In accounting parlance, this is known as reporting "net."
But in the 1990s many energy and utility companies, with Enron apparently acting as Pied Piper, began to report a lot of contracts "gross," meaning that in our example they put the $1 million value of that contract directly into revenues. They concurrently offset those revenues with a roughly equal cost for the gas, and thereafter measure profit and loss just like the Wall Street firms. All other things being equal, they end up with an identical profit to what the Wall Street firm makes. But there's obviously a monster difference in reported revenues--zero dollars in the Wall Street case, $1 million in the energy case.
Stoking the Furnaces
Big volume in energy trading contracts, and a hot method of accounting for their revenues, have put the four biggest energy companies--Enron, American Electric Power, Duke, and El Paso--into the upper reaches of the FORTUNE 500.
The situation is obviously bizarre: two companies entering into identical contracts and getting entirely different revenue effects. Just how bizarre can be seen by the case of UBS Warburg, which like any good Wall Streeter reports its energy trading contracts net. It has, however, just bought Enron's North American trading operations, which in Enron-land were for the most part reporting gross. Under UBS, that will cease: Energy trading contracts done out of the former Enron offices will be reported net. Bingo! Revenue liposuction.
The opposite outcome--bust enhancement?--is shown by the strange case of Idacorp. Throughout the first half of last year, it was a "net" presenter of energy trading contracts, an approach that gave it $617 million in revenues. In the second half, it switched to gross, and restated those first-half revenues, more than quadrupling them to $2.7 billion! An Idacorp spokesman says the company went to gross because that's "standard" in its industry for energy trading contracts.
Just how the industry got to this point is peculiar. Wall Street firms have long had rules that require them to report net. But for energy companies, historically, accounting law was simply silent on this subject. Then Enron began in the mid-1990s to report on a gross basis. Why? Enron's annual reports certainly don't answer the question. Besides being, in general, invincibly murky, they state no policy for revenue recognition.
A number of energy companies that FORTUNE checked with could cite no accounting standards in existence in the mid-1990s that validated gross reporting. Indeed, a partner in the national office of a Big Five accounting firm told FORTUNE that "this kind of reporting just sort of grew up."
Andrew Sunderman, a trading executive at Williams Cos., one of the few energy-related companies still reporting net, says he believes many of the companies that switched to gross reporting got "fascinated with growth in the revenue line." They were reacting, he thinks, to the revenue-valuing views of Wall Street analysts. Williams itself has stuck to net, says Sunderman, because it mirrors the way the company manages its trading risk. He thinks grossing up revenues just clouds the picture.
Plainly the practice produces at least one financial perversity, putting a dismal cast on profit margins. Dynegy, for example, may be No. 30 in revenues on the 500, but it is No. 317 in return on revenues.
If there was initially no authoritative support for gross reporting, a pillar materialized in 1998, when the Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board (FASB) specifically debated how energy trading contracts should be handled. When gross vs. net came up for decision, the task force actually reached a preliminary conclusion that all contracts should be presented net--which would have financially shriveled Enron and others. But then, says FASB's Tim Lucas, who chairs EITF, "somebody pointed out we really didn't know enough about what we were talking about, and we backed away"--all the way, in fact, to declaring straight out that either gross or net was okay. "With hindsight," says Lucas, "maybe it would have been nice if we had gone a little further--or even more than that." He calls gross vs. net a "good issue," meaning that the divergence in the way companies report deserves the attention of FASB or its EITF arm.
Robert Herdman, chief accountant of the SEC, whose five months in that post have been Enron-challenged, appears to agree. He told FORTUNE he is "sure" the EITF will again take up the question of energy trading--a telling comment, because the SEC often sets EITF's agenda. And when that moment arrives, said Herdman, "it would certainly be sensible and consistent with other EITF activities with respect to revenue recognition to deal with and narrow this one way or the other."
A small example as to why net might be better than gross: Suppose two energy companies wanting to appear both big and vibrant connived to trade, between themselves, a multitude of contracts, all presented "gross." This scheme would do nothing for profits, but for both companies it would create giant revenues. These folks might whip right by Wal-Mart on the 500 list.
How about that for a possible plot? It's not absurd to imagine, says EITF's Lucas, adding, "There's some overlap between that and the Global Crossing issue." According to allegations that are now part of an SEC investigation (and that have been denied by Global Crossing), the company swapped fiber-optic capacity with competitors for no other purpose than to create, by accounting, revenues and profits. No question about it: The creativity of corporate accounting knows no bounds.
Jacqui Gates Quits April 30The Charlotte Observer – April 6, 2002
Duke Energy veteran Richard "Stick" Williams has been named vice president for diversity and ethics, replacing Jacqueline Gates.
Williams, 49, joined Duke in 1979 as a financial analyst and worked his way up to vice president of business and community relations in North Carolina, based in Durham. In that capacity, he worked with consumer organizations, regulators, elected officials and community leaders.
A native of Greensboro, Williams graduated from UNC Chapel Hill with a bachelor of science degree in accounting. He is a member of the boards of trustees at Brevard College and at UNC Chapel Hill. The post was created in October 2000.
Gates, the first to occupy it, described her role this way: "All corporations, including Duke, need a leader to help focus their attention on process and policies to make sure there's a level playing field."
Gates has accepted a job as ethics officer at the World Bank in Washington. She will leave Duke April 30.