Power kingpins rake in millions in stock deals

Capital gains enriched 76 insiders, records show

Wednesday, June 13, 2001


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As California's energy problems spiraled out of control over the past year, 76 top power-comÅpany officials reaped a staggering $298.34 million in capital gains on stock deals, a Chronicle review of public records shows.

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 and businesses."

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 trading include:

-- 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 well were:

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 and 19.

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 million.

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.


E-mail Scott Winokur at swinokur@sfchronicle.com and Christian Berthelsen at cberthelsen@sfchronicle.com.

This article appeared on page A - 1 of the San Francisco Chronicle

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