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DukeEmployees.com - Duke Energy Employee Advocate

Duke - Page 5 - 2002

“We Are Not All Crooks” - Chairman Chuck Watson, Dynegy - Houston Chronicle

Firms Deny Enron-Style Trading

L. A. Times – by Nancy Rivera Brooks – May 24, 2002

Marketers defend behavior as FERC widens probe to include natural gas sellers

Some of California's biggest electricity players on Wednesday denied Enron-style manipulation of California's electricity market, but a few admitted to federal regulators that they engaged in some types of trading that critics contend may have worsened the state's energy woes.

All of the companies defended their behavior as legal and within the rules of the state's electricity markets run by the California Power Exchange and the California Independent System Operator, according to filings Wednesday with the Federal Energy Regulatory Commission.

Williams Cos. said it found no "Enron-style trading strategies" but did identify a small volume of trades "that have some of the characteristics described in the Enron memo but which were engaged in for entirely different reasons." Williams, which markets electricity from four California power plants owned by AES Corp., said it legally sold California power outside the state, but did not re-import it at a higher price.

Internal memos disclosed this month show that Enron Corp. exported power and then brought it back for sale at a higher price--a tactic it dubbed "ricochet."

"We are--and always have been--very different from Enron," said Steve Malcolm, chief executive of the Tulsa, Okla.-based energy company.

The Enron memos were disclosed May 6 by FERC as part of its probe of California's troubled energy markets. The revelations outraged state officials who long had claimed that the energy crisis was exacerbated by trading tactics.

Two days after releasing the memos, FERC broadened its investigation and ordered scores of power sellers--from power plant owners to traders to municipal utilities--to state whether they used the same sorts of strategies.

The ploys included creating congestion on transmission lines and then being paid to relieve the congestion, and selling power out of state and then reselling it back into the state at higher prices. The Enron memos said rival companies had adopted some of the same tactics.

Energy consultant Robert McCullough was skeptical of the power sellers' claims that they did not use the kind of tactics that Enron pioneered. "Obviously, admissions of guilt will be grudging at best," he said.

FERC did not release the responses, but several companies issued statements on their filings to FERC.

Investigation to Include Sellers of Natural Gas

Separately, FERC on Wednesday widened its investigation of questionable trading strategies to include sellers of natural gas in California and other Western states. The investigation of "wash" trading--prearranged deals in which a company sells a given volume of a commodity to another firm and then buys it back at the same price--had been focused on electricity marketers.

Of the large power plant owners in California that have been repeatedly accused of manipulating the state's power markets and of not running power plants to peak capacity, only Calpine Corp. gave itself a completely clean bill of health. Duke Energy Corp., Dynegy Inc., Mirant Corp. and Reliant Resources Inc. denied using most of the Enron strategies--particularly the most controversial--but acknowledged limited trading practices of the type that FERC is questioning.

* Duke, which operates four California power plants, said it did not use the strategies detailed in the Enron memos but did engage in "other activities that have some of the characteristics described in the Enron memoranda, but are within market rules."

The Charlotte, N.C.-based Duke said it bought power from the California Power Exchange and exported it out of state to meet power obligations, but only during 11 hours of more than 9,000 hours during which the PX was in operation in 2000 and 2001. Duke said it occasionally appeared to create congestion, but those power deliveries were scheduled for legitimate business reasons.

* Houston-based Dynegy denied using the tactics of Enron but acknowledged submitting estimates to Cal-ISO for power needs that were too high. Dynegy said it did so on the assumption that the state's utilities would submit estimates that were too low, resulting in a balanced schedule.

* Atlanta-based Mirant, another California generator, did not release its FERC filing but said in statement that it was able to deny eight of the 10 Enron strategies. The company said it submitted false load schedules to Cal-ISO, but did so with the grid operator's approval. Mirant also said that, on a single day, it sold power outside California and bought back a similar amount for resale within the state. A Mirant spokesman declined to say whether a profit was made.

* Houston-based Reliant Resources repeated a previous admission that it infrequently overscheduled power on the state's electricity grid and shipped power out of state when California was starved for megawatts. Reliant noted that Cal-ISO had the power to cut exports during electricity emergencies, but never did so.

"Our practices were proper and lawful, aimed at serving the public interest while delivering shareholder value," said Hugh Rice Kelly, Reliant's general counsel.

Enron's 'Ricochet' Technique Decried

The Los Angeles Department of Water and Power and the Bonneville Power Administration, which were criticized during the crisis for charging high prices, denied using the Enron trading tactics. Spokesmen for the two public power marketers expressed dismay that Enron used DWP and BPA transmission lines to work some of their schemes.

Enron was able to pull off its "ricochet" technique at times by sending power to Oregon over transmission lines owned by the DWP and back into California over BPA lines to evade price caps on in-state power. Cal-ISO could not tell that the power it was buying had originated in California because it does not control the DWP or BPA transmission lines.

Duke Denies Manipulations

The Charlotte Observer – by Stella M. Hopkins – May 24, 2002

(5/23/02) - After a two-week internal review, Duke Energy Corp. said Wednesday it did not engage in market-manipulating trading practices described by lawyers for Enron Corp.

"We believe everything we've done is well within the market rules and tariffs," Jim Donnell, a unit president with the Charlotte energy company, said during a teleconference.

Duke's disclosure comes in response to a May 8 order from the Federal Energy Regulatory Commission, which has intensified its probe of market manipulation during California's energy crisis.

The commission grants, and can revoke, traders' ability to charge whatever the market will bear for wholesale power, or market-based rate authority.

The commission told about 150 power marketers to admit or deny engaging in trading practices Enron lawyers documented late in 2000 while preparing for investigations arising from the crisis. The tactics were a blueprint for profiting from the state's newly deregulated and fragile power market, which also suffered severe shortages.

California says it is due $9billion in refunds for overpriced power it bought during the crisis that began two years ago and brought days of rolling blackouts early in 2001. The crisis waned last spring as new power plants came on line, conservation reduced usage and the commission implemented price caps.

The Enron memos detailed practices -- with code names such as Death Star, Fat Boy and Ricochet -- designed to increase congestion on power lines, profit by selling California power out of state and get paid for energy that was never delivered.

Duke identified several sets of transactions that had characteristics of the Enron practices, sometimes going beyond the commission's order. In each case, Duke said there were valid business reasons for its transactions.

Energy consultants, industry watchers, lawyers, legislators and economists have all said power marketers gamed California's market for profit. Proving it has been difficult because of huge trading volume in a complex market with much of the data shrouded in secrecy.

"We know we are talking about a lot of odd behavior," said Robert McCullough, an Oregon energy consultant with extensive experience in California markets.

The Enron lawyers' memos provided details, and the next step is to match the tactics with the market's operation and results, McCullough said.

The process might be helped by the commission's requirement that beginning July 31, companies -- loathe to release prices -- will have to file more complete quarterly trading reports.

On Tuesday, the commission also told Duke and other power marketers to disclose so-called wash transactions.

This trading practice, known as round-tripping, involves selling and quickly buying back, from the same company, at the same price. The transactions can make market demand appear greater, which can drive up prices.

During the height of California's crisis, for a very small amount of power, Duke charged the highest reported price.

Last week, Duke said it had $1.1billion in trades that had the characteristics of wash transactions. In nearly all the cases, Duke said its traders didn't know they were dealing with the same customer.

Feds Demand Phony Energy Swap Data

Associated Press – May 23, 2002

WASHINGTON (AP) - Federal regulators are demanding to know by the end of next week what companies conducted phony energy swaps that inflated revenues and trading volumes in electricity markets, possibly affecting prices.

In an expansion of its investigation into manipulation of Western power markets, the Federal Energy Regulatory Commission on Tuesday directed 143 energy trading companies to confirm or deny under oath whether they engaged in such trades.

The action came as five major energy traders in recent weeks acknowledged participating in fake trades in which they exchanged identical amounts of electricity at exactly the same time and at the same price.

Disclosures of the phony power swaps - also known as ``wash trading'' or ``round-trip trading'' - raised further questions about the conduct of an electricity market that already had been shaken by disclosure of alleged price manipulation in California by Enron Corp. prior to that company's bankruptcy.

While such trades are not illegal, they are viewed by federal regulators as highly questionable and may have artificially increased electricity prices because they exaggerated trading activities and inflated expectations of industry growth.

Neither industry analysts nor federal regulators have a clear understanding how widespread the practice may have been in recent years as the volume of wholesale electricity sales soared along with power prices across the West. Unlike trading of other commodities, most power trades did not have to be disclosed publicly or to regulatory agencies.

On Tuesday, Williams Cos. of Tulsa, Okla., became the latest energy trader to acknowledge that some of its activities involved trades ``with round-trip characteristics,'' although the company said they were not reported as revenue. They ``didn't add a nickel to our revenues,'' Williams chairman Steve Malcolm said in a statement, although he did not elaborate why the trades were made.

Previously, Dynegy Inc. and Reliant Resources Inc., both Houston-based, as well as Michigan-based CMS Energy Corp. and Duke Energy Corp., based in Charlotte, N.C., had revealed that they had engaged in such power swaps.

Reliant said Tuesday it had revised its first quarter 2001 financial statements to adjust for bogus trades that had artificially inflated the companies revenue by $1.2 billion, or about 14 percent, for the quarter. Reliant previously disclosed it had engaged in such trading for several years.

CMS, based in Dearborn, Mich., revealed last week that it had overstated its revenues by $4.4 billion, thanks to the phantom trades in 2000 and 2001 with Dynegy and Reliant. CMS Energy chairman, William McCormick Jr., said Tuesday the company broke no laws or regulations in the trading and has no reason to restate earnings.

Duke Energy Corp., based in Charlotte, N.C., said Sunday its trading unit had $1.1 billion in round-trip transactions since 1999, or about 1 percent of all its electricity trades. The company called the trades legitimate.

The trades involve simultaneous swaps of power between two companies at an identical price and volume. The companies claim they made no profit on the transactions, but the trades served to enhance each company's trading volume and reputation.

FERC ordered companies to report any such transactions by May 31, including an explanation on ``the methods and rationale'' used to determine the price, how the transactions were executed and identification of any traders that were involved.

The commission also demanded any communications or correspondence, including e-mail or telephone logs, pertaining to such transactions or knowledge about them by corporate officials.

The order is part of an investigating begun by FERC in March into allegations that Enron and other energy traders had manipulated power markets in California and other parts of the West, driving up prices sharply in 2000 and early 2001.

The investigation took on additional momentum after FERC earlier this month received internal Enron documents that outlined how the company had sought to manipulate the California electricity markets. The Securities and Exchange Commission and the Commodity Futures Trading Commission also are investigating round-trip trading.

‘We Are Not All Crooks’

Houston Chronicle – by Michael Davis – May 22, 2002

Duke Energy, Dynegy, and Reliant Resources Admit to Round -Trip Trading

(5/18/02) - Dynegy's chairman defended the company's ability to weather a financial crisis, but its shares continued falling Friday.

Chuck Watson said the Houston energy company has access to the liquidity it needs to continue operations if its credit rating sinks to junk bond status.

In addition, the company is working to increase its cash on hand and available credit by $1 billion by year's end. It plans to do this in variety of ways, including asset sales, partnerships and joint ventures.

As of May 14, Dynegy had $1.25 billion of liquidity, $590 million in unused borrowing capacity, $360 million in cash and more than $300 million of assets that can be quickly sold, such as natural gas and crude inventories, according to a recent filing with the Securities and Exchange Commission.

Dynegy's shares have been hammered by skittish investors fearing the company was spiraling into a financial collapse. As recently as April 2, its shares closed above $30 per share. On Friday, Dynegy's shares closed at $7.02 per share, down 63 cents.

At this point, the credit ratings agencies are a major concern for energy trading firms.

If Dynegy's credit ratings are downgraded to junk by Standard & Poor's and Moody's Investors Service, it would trigger demands that the company post $301 million in cash collateral on two of Dynegy's projects. Those are Catlin Associates, which holds stakes in Midwest power plants, and West Coast Power, in which Dynegy holds a 50 percent stake.

"The bar has risen," Watson told shareholders. "The whole market structure is demanding more credit and liquidity."

He added that the stock price does not reflect the value of Dynegy's holdings, which include power plants, pipelines and natural gas storage and processing plants.

"I am very disappointed, and I take it personally," Watson said of the company's depressed stock value. Telling stockholders, "We are in a crisis," Watson repeatedly tried to reassure the smattering of shareholders and employees at the meeting that there was a huge difference between Dynegy and Enron. He blamed the media for painting Dynegy with the "Enron brush."

Dynegy has come under fire lately for engaging in a trade with CMS Energy designed to inflate its revenues and trading volume. In these round-trip trades, a party buys and sells an identical amount of power or natural gas.

Watson said CMS approached Dynegy to do the bogus trade, not the other way around as was earlier reported.

The trade was done over Dynegy Direct, the company's electronic trading operation, but the trade was never booked as revenue or included in the trading volume numbers Dynegy reported to federal regulators, Watson said.

"We have always said volume means nothing; revenue means nothing," Watson said. "What really matters is net income."

Reliant Resources has admitted it also engaged in round-trip trades, but it did book the trades as revenues and added them to its volume numbers. Two of its top trading executives resigned this week after that became public.

Duke Energy disclosed Friday that it, too, had conducted round-trip trades totaling about $1 billion over three years, from 1999 to 2001.

The company said the trades accounted for less than 1 percent of its trading revenues during the three-year period. The trades were used to "validate real-time prices," not to increase revenue, Duke said.

Watson said the furor over the round-trip trades was indicative of how the atmosphere for companies that trade energy has been poisoned by the collapse of Enron.

"A year ago that story would not have been on the front page," he said, noting that he regretted having done the trades and would not handle any such transactions in the future.

Dynegy has been one of the companies that have come under fire in California as an investigation into market manipulation during that state's power crisis has broadened.

Watson said the company did nothing illegal in California. "We are not all crooks," he said of power companies operating in California. "It is time to stop this and quit using it for political purposes."

Blue Ridge Coalition versus Duke Energy

Associated Press – May 22, 2002

FOSTERS FALLS, Va. - About a dozen people attended a rain-dampened rally at New River Trail State Park to protest a planned natural gas pipeline and power plant in Southwest Virginia.

The rally Saturday was the first of a series of activities planned by the Blue Ridge Coalition. The group was formed to oppose Duke Energy Corp.'s proposed Patriot Extension pipeline, which would run through parts of Tennessee, Southwest Virginia and North Carolina, and a 620-megawatt gas-fired electric power plant planned for Wythe County.

In addition to Saturday's rally at the park, the group plans a series of walks along the proposed pipeline route, ending on May 25 with another rally at the state park.

Liz Murphy, a coalition member who organized the event, said she was disappointed with the turnout Saturday morning but remained hopeful that more people would attend later events.

The Federal Energy Regulatory Commission gave preliminary approval to the pipeline in March. FERC said the availability of natural gas service would bolster industrial development in the region.

Some area residents say the project will destroy the beauty and environment of the New River and its surrounding mountains and countryside.

Duke Admits ‘Round-Tripping’

The Charlotte Observer – by Stella M. Hopkins – May 21, 2002

(5/18/02) – After an internal review, Duke Energy Corp. said Friday it engaged in a trading practice under scrutiny by federal securities regulators, but said its actions were legitimate and not intended to inflate financial results.

The practice, known as "round-tripping," involves selling and quickly buying back, from the same company, at the same price. Such wash trades first surfaced during the technology boom and are not unique to the energy industry. In Duke's case, the trades involve natural gas and power.

Because the sale and buyback is at the same price, wash transactions do not typically affect profits. But the transactions can make market demand appear greater, which can drive up prices. By inflating revenues or other financial results, the trades could also mislead investors, a violation of securities laws.

"We've seen enough of this that we believe it is a problem, and we intend to address this as expediently as possible," said Charley Niemeier, the chief accountant for the Securities and Exchange Commission's enforcement division.

Round-tripping is the latest scandal to hit the energy industry, already under pressure after the collapse of Enron Corp. in the nation's largest bankruptcy filing. Duke's announcement follows revelations that other energy-trading companies greatly overstated revenues using such trades.

"We don't believe we've uncovered any instance where any trader of Duke was trading in order to pump revenues," said Duke's Chief Risk Officer Richard Osborne.

Charlotte's largest Fortune 100 company said it reviewed its power and natural-gas trades from 1999 through last year. During that time, the company had $107 billion of trading revenues. Of that, $1.1 billion of trades, or about 1 percent, had round-tripping characteristics.

Duke said that in nearly all the trades, its traders were using an electronic exchange or working through brokers and didn't know they were trading with the same party.

For about $125 million of trades, traders made the deals to determine a market price for the power. Osborne said such trades are needed to satisfy an accounting rule.

"We don't think either of these (trading activities) is wash trading in the sense that wash trading has been discussed," Osborne said.

To avoid the appearance of a wash transaction while continuing to satisfy accounting requirements, Osborne said Duke has changed its trading practices.

In another trading issue, Duke and dozens of other power traders have until Wednesday to comply with orders from federal energy regulators investigating manipulation in California's wholesale power market.

On May 8, the Federal Energy Regulatory Commission told traders to say whether they'd engaged in trading tactics detailed in memos by Enron lawyers.

The tactics were a blueprint for manipulating prices in the wholesale power market during California's energy crisis.

The extent of questionable trades Duke acknowledged Friday is far less than those of other companies.

Reliant Resources Inc. said Monday such trades inflated its revenues by 10 percent since 1999. The Houston energy company withdrew a $500-million debt offering because of the trades. On Thursday, two of its top traders resigned.

On Wednesday, CMS Energy Corp. said it eliminated $3.4 billion of previously reported revenue and expense for the first three quarters of last year because of such trades. The company, based in Dearborn, Mich., said it is cooperating with an SEC inquiry as well as a request for information from the Commodity Future Trading Commission. On Thursday, its head of trading resigned.

The disclosures have slammed stock prices, including that of Dynegy Inc., which last week revealed wash trades.

Duke stock closed Friday at $33.52, down $1.18, or 3.4 percent, in New York Stock Exchange trading.

While not commenting on any individual company, Niemeier said: “To the extent that transactions are entered into solely for financial-reporting purposes and are materially misleading to investors, we would find that violates the federal securities laws.”

Duke Agrees Coal Leads to Smog, Acid Rain

DailyPress.com – by Terry Scanlon – May 17, 2002

(5/16/02) - Burning natural gas to produce electricity is healthier than burning coal.

It's not just environmentalists that say that. Duke Energy North America, the company that wants to build a coal-burning power plant in Windsor, agrees. Toxic emissions from smokestacks at coal-fired plants lead to smog and acid rain.

The company's Web site even says that the country is moving away from the use of coal, in part, because of its impact on air quality. The company says the majority of future power plants - as many as 97 percent - will be fueled by natural gas.

"Unlike coal, natural gas produces no sulfur oxides, no heavy metals and far less nitric oxide," says a statement on the company's Web site, www.dena. duke-energy.com

Nonetheless, the company wants to build a coal-fired plant in Windsor that could pollute the air throughout Hampton Roads.

A coal plant is a good idea in Windsor because coal is cheaper, it is easily accessible there and the company needs to maintain a diverse energy supply, said Bryant Kinney, a spokesman for Duke Energy.

"It's a good location for the shipment of coal itself," he said, stressing that the project is in a "very preliminary" stage.

The company is eyeing a 200-acre site along a railroad line in Windsor. Coal headed to the ports already passes through the town on the railroad.

Environmentalists say the new plant would further pollute the air above Hampton Roads, which is already inching toward sanctions from the federal government that could include emission inspections for cars.

Other forms of power generation, especially nuclear and hydroelectric, have other environmental drawbacks, environmentalists concede, but burning coal to produce electricity pollutes the air more than any other type of electricity generation, environmentalists say.

On hot summer days, the emissions from coal plants combine with the sun to produce low-level ozone pollution, which is also known as smog, that triggers asthma for some people.

A report released Wednesday, which was produced by a former U.S. Environmental Protection Agency enforcement officer, claimed that coal-fired power plants lead to nearly 6,000 premature deaths each year across the country.

"Natural gas is far superior to coal in terms of impact on air quality," said Jeff Gleason an attorney who specializes in air quality with the Southern Environmental Law Center.

Even with coal used instead of natural gas, there's a new method - gasification - that dramatically reduces toxic emissions, Gleason said.

There are no flames in the process. Instead chemicals are used to convert the pulverized coal into a gas, which generates the electricity.

Although Duke has said they plan to be environmentally friendly, environmentalists are disheartened by the company's track record.

The federal government sued Duke - as well as seven other power companies - in late 2000 for violating the Federal Clean Air Act at eight coal-fired plants in North Carolina.

The existing Duke plants, as well as many others around the country, were exempt when the new air-quality standards were first passed in 1970.

However, the law was later amended to require any plant that makes major modifications to also install equipment that would get the plant's smokestacks in compliance with the regulations.

The EPA claims that upgrades made to the eight Duke plants between 1988 and 2000 constituted "major modifications" and the company therefore has to lower their toxic emissions from those plants. Duke argues that the work was maintenance and therefore the company should not lose its exempt status.

The new plant in Windsor would be required to meet EPA standards.

Rick Priory Named in Lawsuit

The Washington Times – by Tom Ramstack – May 15, 2002

(5/10/02) - Attorneys for the California lieutenant governor plan to file court documents soon that could cause Enron Corp.'s directors to forfeit the multimillion-dollar bonuses they paid each other shortly before declaring bankruptcy and force them to pay damages out of their personal assets.

The legal maneuver is a rare phenomenon in civil cases that courts normally reserve for when there is evidence of criminal conduct by a corporation's top executives.

"The liability for the conduct flows directly to the individuals that engaged in it," said Michael Aguirre, attorney for California Lt. Gov. Cruz Bustamante. "If corporate officers were aware of these practices, then they become personally liable for the wrongdoing."

The bank accounts and other financial assets of the corporate directors could be frozen by the courts after the "prejudgment motion" that Mr. Aguirre and other attorneys are preparing.

Depending on the outcome of the litigation, the money and, perhaps other property, could be seized to pay Enron's debts and liabilities.

"Individuals that act illegally implicate the corporation but they also implicate themselves," Mr. Aguirre said.

He referred to both the "retention bonuses" paid to Enron's directors and to new evidence this week that the company joined other energy companies in manipulating West Coast energy prices to increase their profits. The Enron documents released Monday night described how the energy trading company sought to cash in on California's energy crisis in 2000 and 2001.

During the crisis, wholesale energy prices shot up tenfold. California is seeking $9 billion in overcharges for electricity.

The Senate Energy and Commerce Committee plans to meet next week to investigate the charges.

Members of the California congressional delegation held a press conference yesterday to condemn Enron and other energy companies they accuse of extracting large profits from consumers concerned about an energy shortage. They also called for a criminal investigation.

The evidence of market manipulation came from documents Enron's new management turned over to federal and state investigators this week. The documents show Enron consciously created congestion on power lines to cause shortages and transferred electricity out of state to avoid price controls.

They then profited from the higher prices consumers were forced to pay because of the apparent shortage. They also gave names to their manipulative strategies, such as "Death Star," "Fat Boy," and "Get Shorty," according to the documents.

"It's stunning that they can be so cynical in the way they named their various strategies," said Rep. Maxine Waters, a California Democrat. "They made a joke of it, of raping us, of taking our taxpayers' money."

She agrees with California officials' plans for freezing the assets of Enron executives.

"That would be fine with me," Mrs. Waters said.

Rep. Bob Filner, a California Democrat, advocates imprisonment for executives of Enron and any other corporations that defrauded consumers.

"California is in great debt because of the criminal action to which we were subjected," Mr. Filner said. "They stole $40 [billion] to $50 billion from us."

He also said the energy executives should be forced to repay the company's liabilities from their personal assets.

"I want to take the assets they stole from California and other people," Mr. Filner said.

Mr. Aguirre said the bonuses Enron's executives paid each other months before declaring bankruptcy probably qualify as a "fraudulent transfer" that could be seized by a court.

"It would be very hard to believe that they weren't," he said.

Although he refused to name the corporate directors who will be subject to his prejudgment motion, a lawsuit filed May 2 in California Superior Court by Mr. Aguirre on behalf of the state's lieutenant governor names 14 executives from energy companies.

They include Keith Bailey, chief executive of the Williams Companies, A.W. Dahlberg, chief executive of Southern Co., R. Steve Letbetter, chief executive of Reliant Energy and Richard B. Priory, chief executive of Duke Energy.

Enron executives will be added to the list with the prejudgment motion, Mr. Aguirre said.

"That's what we're doing right now, identifying which Enron executives we're going to add to the complaint," Mr. Aguirre said.

The Justice Department is conducting its own investigation of Enron and other energy companies.

Although Justice Department officials have not decided whether they will try to seize personal assets of the corporate directors, they have not ruled it out as a possibility.

"It's way too premature to say," said Bryan Sierra, Justice Department spokesman. "We'll take a look at any tool we have."

In a March 7 policy statement, President Bush called on the Securities and Exchange Commission to use its authority to force corporate directors to repay funds they receive fraudulently.

"If anyone is illegally manipulating markets, they need to be held accountable," said White House spokeswoman Claire Buchan.

Duke Over-Development of River Questioned

Associated Press – May 15, 2002

CHARLOTTE, N.C. (AP) - The U.S. Interior Department has joined critics who say Duke Power's management of the Catawba River lakes does more to encourage new home-building than to protect the environment.

Part of the department's concern focuses on Riverfront Townhomes in Mount Holly, near where a marina might be built on the Catawba.

In filings to the federal agency that polices Duke, the department complains of the ``disproportionate'' amount of development along lake shorelines. Key wildlife habitat isn't being adequately protected, it says. Duke defends its policies, saying critics expect it to exert more control over development than its legal authority allows.

The criticism was lodged as the Federal Energy Regulatory Commission, or FERC, decides whether to approve Duke's revisions to its shoreline management plan. This key document classifies every mile of shore by its current or future uses, such as for power plants, homes or wildlife habitat.

Where Duke fails, the Interior Department and others claim, is in balancing the lake's recreational, scenic and environmental uses with development.

Duke's authority over the lakes extends only to the high-water line. The shoreline plan can't dictate where homes and businesses are built. But the plan does say where piers, docks and marinas could be allowed _ affecting the development that goes with them.

The growing number of such projects, officials wrote to FERC, ``contribute to the imbalance between shoreline development and shoreline protection.''

In addition to the two under review, the commission has approved the construction of four group docks serving Lake Norman subdivisions since June, records show. The docks will accommodate 262 boats.

U.S. Fish and Wildlife biologist Mark Cantrell said the agency has found ``drastic impacts'' to fish, birds and other wildlife on Norman's shoreline, where more than 60 percent of the shoreline is classified developed. Shoreline set aside for wildlife is often besieged by barking dogs, lawnmowers and roaring boats, he said.

``Lake Norman is probably the shining example of how not to balance the natural resources on the shoreline with the use of the reservoir, probably the shining example in the Southeast,'' Cantrell said.

The N.C. Wildlife Resources Commission and Riverkeeper Donna Lisenby, in separate comments on Duke's proposed shoreline plan, complain that people who don't own property on the lakes are being shut out of access.

The Interior Department and Lisenby have asked for formal roles in FERC's decision-making on the shoreline plan.

Duke Profits on Death of Employees

The Charlotte Observer – by Sara Lunday – May 13, 2002

(5/12/02) - Some of Charlotte's biggest companies -- Bank of America Corp., Wachovia Corp. and Duke Energy Corp. included -- stand to reap profits from life insurance policies purchased on current and former workers.

In some cases, the policies may have been purchased without the workers or their families ever knowing. Company-owned life insurance, known in industry jargon as COLI, has exploded in popularity as some of the nation's biggest companies look for investment tools and a way to reduce federal taxes, consultants say.

When workers covered by the policies die -- in some cases years after leaving an employer -- the companies can collect hundreds of thousands of dollars in tax-free income, cash that goes straight to their bottom lines. Survivors of the deceased workers typically get nothing.

Employers aren't required to notify workers of COLI policies. However, some of the Charlotte area's biggest companies said they have notified all employees covered by the policies, but declined to say how they informed the workers. Most of those companies said they cover only officers and higher-level executives.

Use of COLI policies have raised outcries from human rights activists and prompted federal legislation calling for disclosure. Stuart Gilman, president of the Ethics Resource Center, a nonprofit group in Washington, said the policies allow companies to profit from their workers' -- and ex-workers' -- deaths. "I think this is sort of corporate exploitation -- gambling on employees' lives," Gilman said.

Employer-purchased life insurance is hardly new. Companies have long bought policies to cover the lives of top executives. With COLI policies, however, even some lower-ranking workers are covered -- workers normally deemed inessential to business operations.

According to recent reports in The Wall Street Journal, some of the nation's biggest banks hold billions of dollars in COLI insurance on current and former workers. And in some states, rank-and-file workers and their families have sued companies that failed to notify workers of the policies. Some have demanded a portion of death benefits.

As the number of COLI policies has grown to cover a larger number of lower-level workers, some companies and insurance firms have referred to the coverage as "janitors insurance" or "dead peasants" insurance, the Journal reported.

In one case cited by the Journal, an insurance consultant for Winn-Dixie Stores Inc. fired off a memo in 1996 saying, "I want a summary sheet that has... the Dead Peasants in the third column."

Winn-Dixie, based in Jacksonville, Fla., has about 170 stores in the Carolinas. Mickey Clerc, spokesman for the grocery-store chain, said last week that the memo was not requested or instigated by Winn-Dixie executives. Instead, it was written by an insurance broker at Coventry Financial in Pennsylvania.

Coventry's chief, Alan Buerger, who confirmed that the company did work with Winn-Dixie in 1996, said he wasn't sure if the company had written the memo: "That was six years ago."

If an employee of his firm wrote the phrase, he said, it was a reference to ex-Winn-Dixie employees no longer covered by COLI. Buerger said some company-owned policies did not cover an employee who had left the company.

"All I know is we in the industry never used the expression of `janitors insurance' and the only use for `dead peasants' was for ex-employees," he said.

Increased scrutiny

Tax breaks are the biggest lure of COLI policies, Carolina companies say. Premiums paid on the policies also act as investments that build up tax free. Or, in some cases, companies can borrow against the investments much as individuals borrow against their 401(K) retirement plans. Then there is the tax-free payout when workers die. U.S. Rep. Gene Green, D-Texas, introduced a bill last month that would require companies to notify employees and their families of COLI policies. Currently only five states require notification. North Carolina is not one of them.

At last count, Green's bill had 36 co-sponsors and a similar bill had been introduced in the Senate.

"I believe in free enterprise, but that's just not the way I think businesses should make money," Green said. "They ought to produce a product and not make money on the loss of an employee or former employee or in some cases their families."

On a separate track, the Internal Revenue Service launched an investigation after a federal law changed in 1996 to ensure that COLI policies are used for legitimate business purposes. An IRS spokesman confirmed that the agency is investigating more than 85 companies that it says took $6 billion in illegal tax deductions from COLI investments. In was unclear if any of those companies are based in the Carolinas.

Skyrocketing use

The amount of premiums paid by large corporations to corporate-owned policies increased 60 percent in the last two years. Premiums on such policies surged to $2.8 billion in 2001 from $1.5 billion in 2000, according to CAST Management Consultants Inc.

George Braunegg, executive vice president with CAST, said companies large and small use income from COLI policies to help fund employee benefits. CAST, based in Los Angeles, is a banking and insurance management consulting firm. One of its clients is Bank of America.

For years, companies have used a form of COLI insurance to guard against the deaths of executives -- usually calling it Key Man's insurance. Companies bought the policies under a theory that top executives were crucial to a company's operations, and that their untimely deaths could result in corporate setbacks. But in the 1980s, company-owned policies became more common, and were extended to lower-level workers. This was spurred in part by changes to states' rules governing the policies. Companies also became more interested in tax savings.

No law dictates how companies may use money derived from the policies -- also called BOLI for bank-owned -- and local companies say they use the cash payouts in a variety of ways.

Duke Energy, which has a limited version of corporate-owned life insurance that covers its managers and board members, donates money to charities upon certain directors' deaths, according to its annual report. The donations, up to $1 million, go to a charity selected by the director.

Not all local companies, of course, are purchasing COLI insurance.

Nucor Corp., the country's most profitable steel producer, expressed alarm that companies would use employees in such a way.

"We do not do this, never have done this and don't plan on doing this," said Jim Coblin, vice president of human resources at the Charlotte-based company.

Officials at other major employers in the Charlotte area -- US Airways Group Inc., Family Dollar Stores, Lowe's Cos. Inc. and the Charlotte-Mecklenburg Schools -- said they, too, have not purchased the policies.

Booming bank business

The policies have long been popular investment tools for financial services firms, industry experts and area bankers said. Bank of America, Wachovia and BB&T Corp., which own BOLI policies, said insurance proceeds are used as an investment tool, and money earned goes into a separate pool to offset the cost of providing employee benefits such as medical insurance.

In Wachovia's case, income from corporate-owned life policies covers about 10 percent of benefit expenses. The newly merged company says it earned about 3 percent of its 2001 operating earnings -- about $75 million -- from such policies. The bank said it notifies workers if they are covered by the policies. About 25 percent of Wachovia's 80,000 employees are in the plans, officials said.

Bank of America, which has 11,000 local employees, declined to say how many workers are covered by the policies.

Ken Harris, a higher-level Charlotte banker who asked that his employer not be named, said he was unaware that the policies existed and doesn't know if he is covered by one. Still, he said, he wouldn't mind so long as the bank was making money.

"As long as it's not hurting my benefits," he said.

Executives at BB&T, the nation's 13th-largest bank, have used bank-owned insurance for about 10 years, with policies on about 1,200 employees who rank vice president or higher.

"It's based on full disclosure," said spokeswoman A.C. McGraw. "Each employee that would be in the program is written a letter and has the opportunity to sign in or out."

Income from the policies contributed about 4.5 percent, or $43.8 million, to the company's overall earnings last year.

BB&T, like other Charlotte-area companies, said it uses income from the policies to offset the cost of providing employee benefits. Last year it offset those costs by 11 percent, McGraw said.

Two years ago, as banks used the policies in increasing numbers, the Comptroller of the Currency, a federal agency that regulates national banks, updated its guidelines on BOLI policies.

The "purchase of life insurance must address a legitimate need for a bank," guidelines state.

First Commerce Bank, which has 32 employees, began buying BOLI policies three months ago to boost its investment portfolio, said bank president Wes Sturges. Employees covered knew in advance because they were required to have physical examinations, he said.

Some other community banks, such as The Scottish Bank and First Charter Corp., are considering buying the policies, and experts said they expect the use to increase as more companies look for ways to pay for increasing benefits costs.

Lingering ethical questions

While local companies contacted said they reveal the use of COLI policies to employees, it is unclear how many actually know they are involved.

Insurance industry consultants said employees in most cases sign consent forms. However, some are asked to sign the forms when they are first hired and are reviewing other documents.

"They might have signed 10 pieces of paper at once," said Jeff Messner, who owns JRM Consulting in Denver.

Employees for some Charlotte companies, who asked that they not be named, said they had misgivings about the policies.

Kevin Keany who works for a mutual fund service company under contract with Bank of America, said that if he is covered he'd like to know how the insurance proceeds are spent.

"I have mixed feelings about it," he said.

Duke Ordered to Report on Prices

Bloomberg News – by Daniel Taub – May 12, 2002

Also published by The Charlotte Observer on May 10,
where Stella Hopkins made contributions to the article

WASHINGTON - Charlotte's Duke Energy Corp. is among the companies that must "admit or deny" trying to manipulate prices during California's energy crisis, according to U.S. regulators.

The Federal Energy Regulatory Commission has ordered 150 sellers to report by May 22 whether they used techniques similar to those mentioned in Enron Corp. memos detailing how to exploit California's deregulated market. The memos, released Monday, show the bankrupt energy trader created fake congestion on power lines and employed other tactics to boost profits.

FERC's request will force companies to explain the part they may have played in driving up California prices 10-fold last year. Traders who don't comply may lose the privilege to charge what the market will bear. The companies' answers to FERC may expose them to suits and the prospect of paying billions in refunds.

"FERC has a much larger stick than we do," said Joseph Dunn, a Calif. state senator who has been investigating power-price manipulation. "We can't revoke their market-based rate authority. That is the biggest stick."

Duke Energy, a major California power supplier, is "reviewing the order to understand the specifics," said spokesman Terry Francisco.

"We anticipate fully complying with the FERC order, as we have done in the past."

Last year, Duke's operating earnings more than tripled in the business unit that includes power trading. Like other power marketers, including Enron, the company has emphatically denied manipulating markets.

Early in 2001, as California's power crisis began producing blackouts, Duke sold a very small amount of power to the state at the highest reported price of the crisis. Duke did not get paid what it billed.

Duke's average prices on power sales to the state last year were generally among the lowest, according to an Observer analysis.

"We're confident we're within ... the market rules," Francisco said.

California Gov. Gray Davis and other politicians have pressured FERC to investigate whether Enron was alone in manipulating energy prices. Davis has criticized FERC for having close ties to the industry and a lax approach to preventing abuses.

"If there's any evidence of illegal market manipulation, this administration will go after it," White House spokesman Ari Fleischer said in an interview.

It may be difficult for all power traders to respond to FERC's request by the May 22 deadline, said Gary Ackerman, executive director of the Western Power Trading Forum, a trade group representing electricity providers.

FERC had already ordered generators to preserve records of sales during the energy crisis, which drove California's two largest utilities to insolvency and brought six days of blackouts.

"The companies are going to have to do some serious research, dig out memos and e-mails, and see whether their traders did these things," Ackerman said.

Among the other companies contacted this week are Dynegy Inc., Williams Cos., Calpine Corp., Mirant Corp., and Sempra Energy. They all said they will comply with FERC's order.

In memos turned over to FERC on Monday, Enron attorneys discussed how its traders used strategies with names such as "Death Star," "Get Shorty" and "Load Shift" to manipulate the market.

Referring to another strategy, "inc-ing," the Enron lawyer who wrote the memo said, "Although Enron may have been the first to use this strategy, others have picked up on it, too."

Power traders face the prospect of criminal, civil and regulatory actions in California. State law makes it a misdemeanor to use fraud to affect the market price of any kind of property.

Duke - Page 4 - 2002