"Energy crisis" quotes for the day: (1) Comparing California's blackouts to a Third World afffliction, consultant Peter Fox-Penner of the Brattle Group said: "There is no parallel to this episode in the history of the developed world." (2) Sen. Diane Feinstein speaking to the Senate Energfy and Natural Resources Committee on January 31, 2001: "When spot power at 3 a.m. in the morning is [FIFTY THOUSAND PERCENT] higher than it would be normally, that to me ... is price gouging." (From news article "Senate Powerless on Power" by Carolyn Lochhead, San Francisco Chronicle, February 1, 2001.) PG&E Execs Cashed In Before Crisis Pair made $118,000 selling stock options "It's more malicious than just insider trading. They traded California's economy and the welfare of its citizens for their own personal gain." by David Lazarus San Francisco Chronicle, February 1, 2001 Two senior PG&E executives pocketed more than $118,000 by cashing in stock options last August, just weeks before the company's shares tanked on news that the utility was racking up billions of dollars in debt, The Chronicle has learned. The stock profits are the first suggestion that PG&E officials may have benefited from their inside knowledge of the company's precarious financial condition before the full scope of the crisis was made public. The transactions came to light just a day after an independent audit of PG&E's books criticized the utility's top executives for being "slow to respond" to the company's financial woes, failing to implement cost-cutting measures until year-end. It is also significant --and potentially illegal-- that senior PG&E executives were enriching themselves the same month that the utility's parent company, PG&E Corp., retained outside bankruptcy attorneys to advise on the possibility of financial ruin. Ron Low, a PG&E spokesman, said it would be "inaccurate and wrong" to suggest a correlation between the exercising of the stock options and the subsequent downturn in PG&E's share price. According to financial records, Gordon Smith, PG&E's chief executive officer, exercised 7,500 options on Aug. 11 at an average $24.38 per share. He sold off the shares the same day at $28.53, earning $31,140 in profit. Richard Clarke, a board member of PG&E Corp. and former CEO of the utility, exercised 25,000 options on Aug. 24 at an average $24.75 a share. He immediately sold the shares at $28.25, earning $87,512. "The fact that they were unloading shares at the same time they hired bankruptcy counsel is indefensible," said Steve Sidener, an attorney who specializes in insider-trading cases at the San Francisco law firm of Gold Bennett Cera & Sidener. "You can't trade on the basis of inside information," he said. "If they already knew that bankruptcy counsel was being hired, they can't sell shares based on that information." Helane Morrison, district administrator for the San Francisco office of the U.S. Securities and Exchange Commission, said investigators would have to determine whether the hiring of bankruptcy attorneys can be considered "material" to any insider trading. "People are not permitted to trade on material inside information if they have a duty to keep that information confidential," she said. It is not clear whether the options were exercised before or after the bankruptcy lawyers were brought in. PG&E officials refused to specify the exact date yesterday, saying only that the New York firm of Weil, Gotshal & Manges was retained in August 2000. If the bankruptcy lawyers were hired before Aug. 11, it could be argued that Smith and Clarke were acting on inside information when they exercised their options and sold off the resulting shares. They also could be accused of insider trading even if they knew in advance that PG&E planned to hire outside bankruptcy counsel, lawyers said. Sidener said a flood of lawsuits from institutional and individual shareholders would be a certainty if it could be shown that senior company executives were cashing in on privileged information. "I know of a number of financial firms that are very angry," he said. A stock option is the right to purchase shares at a fixed price in the future. As long as PG&E's shares were trading at a higher level than the options' exercise price, the options remained profitable. But as soon as the share price fell below the exercise price, the options became worthless. PG&E's stock, after holding steady near $30 for much of the year, fell to $22.81 on Sept. 20 -- below the August exercise price of Smith's and Clarke's options. The company's shares subsequently went into a tailspin as bankruptcy fears sent investors fleeing for cover. PG&E's stock closed yesterday at $14.25. According to the company's financial filings, Smith and Clarke have relatively little exposure to current market swings. As of Dec. 31, Smith held 9,926 PG&E shares, while Clarke owned just 3,417. The vast majority of their holdings are in the form of stock options. As of April 1, 2000, Smith held 146,302 options that could be exercised, or that had "vested." Clarke held 125,000 options. The average price of their options, typically issued by the company over a number of years, is not known. However, because PG&E's share price currently is near 10-year lows, it is probable that many of the options are now worthless. Consumer activists were shocked yesterday to learn that senior PG&E executives were exercising stock options at a time when the utility was lurching toward potential bankruptcy. "It's outrageous," said Dan Jacobson, consumer program director for the California Public Interest Research Group in Sacramento. "If the officers of the company knew there were actions coming up and did not warn stockholders in advance, legal action should be taken." Michael Shames, executive director of the Utility Consumers' Action Network in San Diego, said the transactions are especially troublesome because PG&E plays such a vital role in serving the public interest. "It's more malicious than just insider trading," he said. "They traded California's economy and the welfare of its citizens for their own personal gain." An audit of PG&E's books, commissioned by the California Public Utilities Commission, revealed Tuesday night that $632 million was transferred to the parent company last year even as the utility was sinking into debt. The audit also found that PG&E executives did not act quickly enough to stabilize the utility's finances, "and did not develop a cash conservation program until December 2000" -- nearly half a year after losses began mounting. PG&E went into the red because of sky-high wholesale electricity costs, which it could not pass along to customers due to a rate freeze. The utility is now saddled with almost $7 billion in debt. As part of a bailout scheme, California plans to issue $10 billion in bonds to buy power for PG&E and Southern California Edison. In return, the state may receive stock options for the two utilities. Audit: PG&E "Slow to Act" But millions sent to parent firm as utility sank deeper in debt "A great portion of ratepayers' money was uploaded to the mothership, which by now has sailed off into the twilight ..." by David Lazarus San Francisco Chronicle, January 31, 2001 Pacific Gas and Electric Co. funneled money to its parent company last summer even as the utility was sinking deeper into debt, an audit of PG&E's books revealed last night. The independent audit, commissioned by the California Public Utilities Commission, suggests PG&E executives did not act quickly enough to stem the growing crisis. The auditors found that PG&E's managers failed to recognize the impact the utility's debt burden would have on securing bank loans, "and did not develop a cash conservation program until December 2000" -- nearly half a year after the losses began mounting. Moreover, the utility transferred $632 million to its parent company, PG&E Corp., "for common stock purchases and dividends" over the first nine months of the year, the auditors discovered. By summer, however, the utility already had started going into the red as wholesale electricity costs spiked sharply higher. PG&E has since requested help from California authorities to avert bankruptcy. "They can't just move money to the parent company and then go to the state and ask for cash," said Nettie Hoge, executive director of The Utility Reform Network in San Francisco. "If they hadn't transferred the wealth, they wouldn't need a bailout." PG&E officials declined to comment last night on the audit's findings. But the utility said in a statement that it disagrees with the auditors' conclusion that PG&E did not do enough to cut costs, and challenged an assertion that $117 million earned last year by the lucrative power-generating subsidiary of PG&E Corp. could have been used to help purchase electricity for consumers. "The report suggests that the use of affiliate earnings and greater cash conservation efforts could have made a difference," the statement said. "That is simply not the case." The statement went on to note that even if PG&E laid off 1,000 workers, fired "every management employee," broke existing contracts, froze union members' wages and applied the $117 million in generation earnings to power purchases, "the total savings would amount to less than one month's worth of power at current prices." While the utility's increasing debt remained a secret throughout last summer, The Chronicle learned in early September that PG&E's unrecovered expenses by then totaled about $2 billion. The utility subsequently estimated that it was losing about $1 million an hour as a result of runaway wholesale power costs, suggesting that PG&E executives knew by mid-summer that the utility was headed for a fiscal catastrophe. Nevertheless, according to the audit, millions of dollars were still being shipped from the utility to the corporate parent even as the red ink was gushing from PG&E's ledgers. By last September, the utility already was suggesting that customers' rates would have to be increased to cover its rising wholesale expenses. Today, PG&E is almost $7 billion in the hole and is seeking state assistance to keep it from bankruptcy. COMPANY DISTANCES ITSELF The utility's parent company, meanwhile, has distanced itself from its subsidiary's troubles and insisted that it cannot be held accountable for any rescue effort. "The audit shows the public for the first time that the holding company structure allowed the utility to take from one pocket and put in another," said Michael Shames, executive director of the Utility Consumers' Action Network in San Diego. "It probably wasn't illegal," he said, "but it doesn't pass the straight-face test." The audit of PG&E's books was conducted by the Barrington-Wellesley Group, an accounting firm that specializes in utilities. A similar study of Southern California Edison's finances, released Monday night, was performed by accounting giant KPMG. It backed up Edison's claims of looming impoverishment and contained no indications of misbehavior on the part of company officials. It is not yet clear what state regulators will do with both audits. Immediate action affecting rates is unlikely as lawmakers haggle over possible legislative solutions to California's energy woes. But the audits -- and especially the findings on PG&E -- may make it hard for lawmakers to be as generous as they once might have been in drafting terms of possible bailout schemes. Among the results of PG&E's audit: -- Some of the utility's assumptions regarding cash-flow projections were "not supported and are likely to result in overstated cash requirements." -- Forecasts of energy supply and demand, along with related revenue, submitted by PG&E to regulators did "not accurately portray near-term operating constraints and opportunities in responding to the current crisis." -- The utility provided its parent company with $4 billion from 1997 to 1999 in the form of dividends and stock repurchases. -- Cash moved only from the utility to the parent, never in reverse. 'SIGNIFICANT WEALTH' TURN's Hoge said the audit illustrates for regulators and lawmakers "that there is significant wealth in the parent company." This awareness, she said, may deter officials from allowing PG&E to fully recover its $7 billion in losses, leading instead to some sort of compromise solution. "A great portion of ratepayers' money was uploaded to the mothership, which has sailed off into the twilight," Hoge said. Legislators are now drafting a bill that would authorize the state to purchase electricity on behalf of PG&E and Edison, with the utilities in return offering warrants to purchase stock in their parent companies at fixed prices. Negotiations are under way over how much stock might be offered as part of such a plan. Those talks almost certainly will be influenced by the findings of the audits. "I think the Legislature is not going to be willing to accept the fact that these people would get off scot-free," said Sen. Dede Alpert, D-Coronado. "They are going to have to assume some of the responsibility of that debt. "That debt is too large for the state or the consumers of the state to pay when we know that there is money that has gone to the shareholders and the salaries and bonuses of the people running the companies," she said.
