Among the big winners were 19 officials at Enron Corp. of Houston, which is
headed by Kenneth Lay, an unofficial energy adviser to the Bush administration.
Enron insiders netted $127.33 million, according to the analysis, which
reviewed records of securities transactions between May 2000, when the state's
energy crisis began, and the end of April 2001. Lay, the company chairman, got
more than a fifth of his firm's total capital gain, $27.19 million.
As defined by federal law, an insider is an officer or director of a
publicly held company or a person or entity that owns at least 10 percent of a
particular class of its shares. Insider trades are not illegal.
Loretta Lynch, chairwoman of the state Public Utilities Commission, said
she deplored the personal windfalls found in The Chronicle analysis because
she believed the profits behind them "come on the backs of California families
She said the analysis made it clear that officials had been handsomely
rewarded "for executing a strategy that allows them to game our rules," a
reference to state regulators' contention that power companies engage in
illegal market manipulation. The companies deny the allegation.
Besides Enron, firms whose executives and directors profited from insider
-- The AES Corp. of Arlington, Va., where 23 insiders netted $88.17 million
between June 2000 and April 2001;
-- The Calpine Corp. of San Jose, where four insiders netted $46.39 million
between May 2000 and early March 2001;
-- Dynegy Inc., of Houston, where 13 insiders netted $21.38 million between
May 2000 and April 2001.
Other companies in the California energy market with insiders who fared
The Duke Energy Corp. of Charlotte, N.C., where nine netted $7.81 million
between May 2000 and February 2001; The Williams Companies Inc., of Tulsa,
Okla., where six netted $5.36 million between mid-June 2000 and March 2001;
and Reliant Energy Inc., of Houston, whose president, Joe Bob Perkins, and
chief financial officer, Mary Ricciardello, netted $1.9 million on April 5, 18
In all, The Chronicle analysis focused on executives and directors of power
companies selling more than 40 percent of the electricity consumed in
California. The insiders averaged $4 million each in capital gains.
"This puts a human face on the extent to which Californians have been
robbed," said San Diego consumer activist Michael Shames. "We have the makings
of a new breed of megawatt mogul becoming wealthy at California's expense."
Nettie Hoge, who heads The Utility Reform Network, a San Francisco-based
watchdog group, said she was "astounded" by what she considered the lack of
"shame, circumspection and conscience."
"Put this against homeless who say energy costs put them over the edge and
we have a very stark picture," Hoge said.
The insider trades were documented by the Securities and Exchange
Commission and posted electronically by private financial information
gatherers. All involved the exercise of options allowing the companies'
officers and directors to buy stock in their own firms at huge discounts,
pennies per share in some cases. If an option is exercised but the shares
acquired through it are not sold, the gain commonly is considered to be an
unrealized "paper gain." The $298.34 million collected by the insiders
includes both paper gains and actual cash gains, which are collectively
considered capital gains.
Gary Ackerman, head of the Menlo Park-based Western Power Trading Forum,
whose membership includes the companies in The Chronicle analysis, staunchly
defended the insider activity, noting that the energy firms make money in
other ways than selling electricity in California.
In any case, Ackerman said, the insider activity was "allowable" under law,
and nothing about it was "wrong or immoral."
However, Ackerman acknowledged, the numbers could be an embarrassment.
"I'm sure they wouldn't want it out, nor would anybody at this time, when
people are so upset and so angry about the way things are going in California,
" Ackerman said.
Calpine spokesman Bill Highlander said the industry and its leaders had
nothing to defend.
"It's all public information. The purpose of American business is to make
money," Highlander said. "For those companies that take risk and are
successful, the people who run it and work for it should share in that success.
I don't think you'd find it different in any other industry."
Aaron Thomas, a spokesman for AES, said there was "no connection" between
his company's record in California and its executives' decisions to exercise
their stock options.
Terry Francisco, a spokesman for Duke, said company policy prohibited him
from discussing the exercise of options by specific individuals. But he said
such insider trades would be smart moves for executives whose overall
compensation is tied closely to the company's stock price -- particularly when
that price has appreciated 50 percent in a single year, as Duke's has.
Enron spokesmen did not return calls.
The one exception among the eight power companies in The Chronicle analysis
was the Mirant Corp. of Atlanta, which has a major presence in the Bay Area.
Ten Mirant insiders lost nearly $14,000 in transactions on March 28 and on the
last two trading days in April, the 27th and 30th.
SOARING ENERGY PRICES
At the same time the energy companies' officers and directors were
exercising options, the prices their companies charged California utilities
soared, bankrupting the giant Pacific Gas and Electric Co., threatening to
sink Southern California Edison and prompting state regulators to lift a
longtime cap on electric rates paid by consumers.
The price of a megawatt hour of electricity -- enough to power 1,000 homes
simultaneously for an hour -- rose 289 percent in 2000 over 1999 in
California's markets where power is purchased a day-ahead or an hour-ahead. It
went from an average of $28.34 to $110.51. In December alone, average prices
rose twelvefold, from $31.88 to $425.59.
Prices in the real-time spot market run by the California Independent
System Operator were much higher. Duke has acknowledged charging nearly $3,900
per megawatt hour for power sold earlier this year, and Reliant Energy charges
reached $1,900 at one point.
The ISO on June 8 increased to half a dozen the number of power companies
it has formally accused of market manipulation in a complaint before the
Federal Energy Regulatory Commission. The ISO estimates that the six firms --
all those in The Chronicle analysis except Calpine and Enron -- overcharged
the state $6.7 billion.
While the companies decline to say how much of their success is
attributable to California, a review of their data shows that they have moved
far afield from their home states to unregulated markets, such as California's.
As they have done this, their fortunes have improved -- in some cases over a
period of time coinciding with the steady deepening of the state's crisis.
NEARLY $10 MILLION IN 6 DAYS
The Chronicle analysis showed that windfalls were widespread:
-- Between Feb. 22 and 27, Peter Cartwright, Calpine's chief executive
officer, exercised his right to buy 215,000 shares at prices ranging from
seven cents to $1.07 per share, for a total outlay of $179,800. During exactly
the same period, Cartwright sold 215,000 shares at prices ranging from $42.34
to $46.40. The sales brought Cartwright $9.64 million -- a gain of $9.46
A week later, Cartwright netted $2.36 million on a two-day turnaround,
cashing in on options that had cost him seven cents each.
He had been similarly active in late 2000, turning three deals in September,
November and December on options priced at seven cents and 13 cents. Net
capital gain: $9.76 million.
Cartwright wasn't the only Calpine insider to do well. Others include chief
financial officer Ann B. Curtis and directors Susan Schwab and George
Stathakis. In 10 transactions between November and March, Curtis, Schwab and
Stathakis exercised more than 200,000 options at prices ranging from seven
cents to $2.57 each. Net capital gain: $15.06 million.
-- AES co-founder and chairman of the board Roger W. Sant, a former federal
energy official, exercised his option rights on 693,396 shares on Oct. 26 and
Nov. 30, at $1.62 per option, for a total outlay of $1,121,568. On Nov. 30,
AES stock closed at $51.875 per share on the New York Stock Exchange. Sant's
capital gain by the end of business on that date was $34.85 million.
AES senior vice president Roger Naill and vice president Paul Stinson have
been active insiders, too. Naill exercised 92,700 options between Aug. 3 and
Aug. 8 at $1.62 per option. He sold the identical number of shares during the
same period for prices ranging from $51.94 to $56.50. Naill's net realized
capital gain: $4.8 million.
Eight days after Naill's last trade, Stinson exercised 36,800 options for
$5.13 each. He sold 36,800 shares the same day at $55.88, for a total of $2.06
million. Net realized capital gain: $1.8 million.
-- Louis Dorey, president of Dynegy's Energy Marketing and Origination unit,
bought 26,000 options and sold 26,000 shares between April 18 and 24, for a
net capital gain of $1.2 million. Robert Doty Jr., senior vice president and
chief financial officer of Dynegy, exercised 68,715 options on Oct. 4 and sold
40,000 shares the same day. Net gain: $1.94 million.
-- Keith E. Bailey, chairman, president and chief executive officer of
Williams, exercised 150,030 options on June 28 of last year, for a total
outlay of $3.53 million. The same number of shares were worth $6 million at
the close of trading that day.
-- In separate transactions on Nov. 1-3, Richard Priory and Richard Osborne
of Duke Energy, the company's chief executive and chief financial officers,
netted $1 million each. On Feb. 21, Duke's group president of energy services,
Harvey Padewer netted $2.98 million exercising nearly 300,000 options and then
selling an identical amount of stock.
This article appeared on page A - 1 of the San Francisco Chronicle