From: c..hall@enron.com
To: susan.mara@enron.com, alan.comnes@enron.com
Cc: eeinowski@stoel.com, pgboylston@stoel.com
Date: 2001-08-06 16:43:20+00:00
Subject: Quote of the day

"If municipal bond investors didn't buy bonds every time some adviser turned out to be a crook, there wouldn't be a municipal bond market." 

Energy crisis back on front burner 
Staffers' stocks rekindle political heat and may jeopardize power contracts. 
August 5, 2001 
By JOHN HOWARD
and JAMES B. KELLEHER
The Orange County Register 
Just when California seemed to be crawling out from under the wreckage of its year-old energy crisis, the state finds itself embroiled in a new crisis. 
In the past week, more than half a dozen advisers to Gov. Gray Davis, including some hired at taxpayer expense specifically to buy power from generating companies, admitted that they owned shares of generating companies or utilities. Five were fired, and one resigned. 
One of the state's top negotiators of long-term power-purchase contracts, consultant Vikram Budhraja, is the subject of an inquiry by the U.S. Securities and Exchange Commission. He disclosed he profited from trading shares of Edison International, parent of Southern California Edison, during days when the state was negotiating energy contracts and buying electricity to keep the firm from bankruptcy. 
These conflict-of-interest revelations represent more than an embarrassment for the governor. 
They also threaten to prolong a crisis that has already cost weary Californians as much as $100 billion by some estimates - easily the most expensive public-policy disaster in state history. 
If the contracts are found to have been compromised by state negotiators who had conflicts of interest, they could be nullified. If that happens, the state could find itself back where it was in January: scrambling to find reliable, inexpensive sources of power to stave off blackouts and avoid breaking the state budget. 
Some in Sacramento would like nothing better than to undo the contracts, which they say cost the state too much at $43 billion over 20 years. 
"The Legislature is dying to find a way out of those contracts," said Peter Navarro, a professor of economics at University of California, Irvine. 
"If there is any possibility that the conflict of interest can nullify some or all of those, then you will see some forward movement on this," Navarro said. 
Of course, if the state does renegotiate the contracts, it could wind up getting better prices. 
Assemblyman Fred Keeley, D-Boulder Creek, the author of California's electricity-purchasing law (AB1X), said there has been sentiment in the Legislature to renegotiate some contracts if possible. 
"I guess it would be too much to hope for to have the luck to have the ability to renegotiate or unwind some of the contracts," he said, adding that it was clear that under some contracts, the prices were high. 
However, "there are a lot of people like me who think the governor did exactly the right thing in these contracts by buying long, which is what we instructed him to do in AB1X," he said. 
The revelations come at an awkward time for the state. Last week, while the disclosures mounted, state Treasurer Phil Angelides was on Wall Street, trying to drum up interest in the $12.5 billion bond sale intended to repay the state for the $9.6 billion it has spent purchasing power for consumers so far this year. 
But so far, the disclosures don't seem to have raised more than an eyebrow or two on Wall Street. 
"What we're interested in is, are we going to get paid back?" said Mary Beth Syal, a municipal bond portfolio manager at Payden & Rygel, a Los Angeles investment firm with expertise in fixed income. "As a bondholder you really don't care about (conflicts of interest) except if there's fraud. Then it becomes an issue. Anything else and it really doesn't have an impact." 
Or as Zane Mann, the editor of the California Municipal Bond Advisor, put it: "If municipal bond investors didn't buy bonds every time some adviser turned out to be a crook, there wouldn't be a municipal bond market." 
The current crisis over conflicts of interest has its roots in January. With power prices skyrocketing, Southern California Edison defaulting on bond payments and energy producers threatening to push the state's utilities into bankruptcy and stop selling electricity into California, Davis declared an emergency - putting the state in the electricity-buying business. 
Davis tried to bring some expertise on board, hurriedly hiring consultants, buyers, schedulers and others, in what his spokesman, Steve Maviglio, concedes was a chaotic and desperate push. 
Many qualified people had already been hired by power-trading companies, leaving a small pool of candidates for the specialized tasks, said Maviglio. 
"DWR was in an emergency situation, and we hired the best people we could that were available," he said. "The number of people in the energy-buying business in California is limited. This is not a job where you just put an ad in the classifieds. There were not a lot of experienced traders in the field." 
In the rush to bring staff on board and keep the lights on in the state, however, Davis and his team neglected to get many of the new hires to fill out personal financial disclosures required by California's Political Reform Act. Under that law, state employees have 30 days to disclose their financial interests and must update them yearly. 
Then, last month, under prodding from Secretary of State Bill Jones, who blasted Davis' failure to ensure his energy advisers complied with the act, disclosures started pouring in - and revelations started pouring out. 
Jones, a Republican candidate for governor next year, says at least some of the contracts may be at risk. State Attorney General Bill Lockyer is reviewing the financial-disclosure statements of the DWR's energy consultants for conflicts of interest and potential prosecutions, said Lockyer spokesman Nathan Barankin. 
State law bars government employees from negotiating contracts with companies in which they have a financial interest. It also says those contracts may be invalidated if conflicts existed, but only if at least one of the parties to a contract requests it. Then a court must rule whether there was a conflict and if it was of a magnitude to warrant nullifying the contract. 
But the Davis administration's review of the contracts shows that none is imperiled, Maviglio said. 
"Our understanding is that they are solid - all of them," he said. "Everything is being reviewed, but at first glance they appear to be solid." 
Others question whether Davis can review the contracts impartially, since he hired the advisers who negotiated them, and he trumpeted them as a key solution that helped bring down power prices and kept the state blackout-free this summer. 
"Davis can't question the propriety of the contracts without questioning his own propriety," Navarro said. "Maviglio has to circle the wagons." 
Maviglio disclosed last week that he bought $12,000 worth of shares of San Jose-based generator Calpine Corp. in June. He sold it last week at a loss of about $1,200. 
As the debate goes on in Sacramento, investors on Wall Street seem keen only to learn more about the bond deal's structure and timing. The bond sale has been delayed from May until at least October, and could be delayed further because of opposition by the state's utilities to the way consumer rates would repay the bonds. 
Angelides, who believes the sale will take place by late October, bragged last week that most of the uncertainties that forced the state to postpone the bond deal had cleared up, thanks to conservation, the state's actions and some luck. 
"As a factual matter," Angelides said, "costs and prices are down, volatility is reduced through a combination of efforts - everything from contracts to federal controls to return to production to conservation efforts. 
"The importance of this for the financing program, and I want to stress this, is that the level of volatility in the marketplace and with respect to DWR costs has been dramatically reduced, which is important in terms of folks looking at the stability and certainty of the revenue flow going forward." 
But if contracts are nullified, some of that volatility could return. DWR would be forced to make more purchases on the unpredictable spot market. That could throw another wrench into the state's plans to recover its power-buying expenditures and return normalcy to the market. 
"Every time there is another layer of stench put on top of one of these contracts, there is more risk perceived in Wall Street, and more burden placed on taxpayers and ratepayers," Navarro said. 
State staffers and advisers posing conflict-of-interest questions 
A rundown of known conflicts of interest, actual and potential: 
Five consultants at the Department of Water Resources - William F. Mead, Richard Ferreira, Peggy Cheng, Herman Leung and Constantine Louie - were fired after their disclosure statements, filed under pressure six months late, showed they negotiated state power purchases with companies whose stock they owned. 
A sixth consultant who also had purchased stock, Elaine Griffin, resigned July 14 to take another job. 
The DWR's top attorney, Susan Weber, who had a role in advising the consultants, was reassigned to another state job unrelated to energy. She had no financial conflict. 
Gov. Gray Davis' spokesman, Steve Maviglio, bought 300 shares of Calpine Corp. in June at $40 a share. Under pressure, he sold it Thursday at $36 a share. Calpine, a San Jose-based power generator, received about $13 billion in electricity contracts with the state for the next 20 years. 
Two political consultants, Chris Lehane and Mark Fabiani, whose firm has done work for Southern California Edison, were hired by Davis and placed on the state payroll at $30,000 a month. Both left under pressure, including a lawsuit by a taxpayers group and complaints that the governor used state funds to finance political work. 
Senate leader John Burton, D-San Francisco, the author of energy-related legislation - including the creation of the state's Public Power Authority - has investments in El Paso Energy Co., which he acquired last July, and Exxon Mobil Corp., Haliburton Co. and Meeker Investments. He also bought and sold between $10,000 and $100,000 worth of Williams Co. stock last fall. 
The governor's top Wall Street adviser for energy is Joseph Fichera, head of Saber Partners LLC. Fichera and his company have a $275,000-a-month state contract that provides a bonus of up to $14.6 million if the state purchases Southern California Edison's grid. Fichera has not provided a financial-disclosure statement, saying the government's rules do not require it. He has said he has no energy holdings that conflict with California's power-purchasing program. 
Ron Nichols of Navigant Consulting Inc., hired in January by DWR, bought between $10,000 and $100,000 of General Electric Co. and Enron Corp. stock in April. 
Vikram Budhraja, a former Edison executive, has a $6.2 million contract to negotiate long-term energy contracts for the state. He bought and sold Edison and Dynegy stock during January, when he was hired. The Securities and Exchange Commission is reviewing his transactions, his lawyer said. 
William Keese, the chairman of the California Energy Commission, which licenses power plants, has purchased and sold energy stocks during his tenure on the commission. The stocks were in managed portfolios, not subject to his control. Keese has asked the Fair Political Practices Commission to investigate. 
Bruce G. Willison, a member of the state's Electricity Oversight Board, owns about $600,000 in Enron stock. 
Disclosing conflicts can be a convoluted process 
Public officials at every level of state and local government must reveal personal financial information. 
Elected officials, judges and high-ranking appointed officials must make the most comprehensive disclosures. 
This includes interests in real property, investments, sources of personal income and outside employment, including directorships and consulting contracts. The reports are filed annually at the headquarters of the state's Fair Political Practices Commission. 
For other officials, such as the employees of state and local governments, it is up to each agency to set disclosure requirements, following the policy set by the FPPC. These reports are filed with the individual agency. 
Not every person on the public payroll, however, is required to disclose personal financial information. At the Department of Water Resources, for example, consultants who were hired to perform duties that are "limited in scope" are exempt. 
A conflict of interest occurs when a public official uses his or her position to make decisions that result in personal financial gain. 
Assets and income that could be affected by an official's actions must be disclosed and, in many cases, divested. 
Officials cannot negotiate contracts with companies in which they have a financial interest. If this happens, the contracts could be subject to nullifcation. 
The state attorney general or local prosecutors determine whether a conflict has occurred, and whether a criminal prosecution is necessary. The FPPC can investigate, but not prosecute, and can impose civil fines of up to $2,000 per violation.