Energy executives making fortunes in California
Saturday, May 5, 2001
Executives at the largest energy companies selling power into California saw their compensation rise an average of 253 percent last year, with one top executive collecting more than $100 million.
Call it a classic case of supply and demand: Where a commodity is scarce, money follows. Nowhere was this more evident than inside California's dysfunctional electricity market.
Corporate profits for energy traders and marketers nearly tripled due in large part to the California electricity crisis, and chief executives were rewarded with compensation packages that rose as much as 600 percent, according to disclosures filed with the Securities and Exchange Commission.
Energy companies say the pay packages were well-deserved and reflect the returns enjoyed by shareholders.
But consumers and ratepayer groups argue that the million-dollar salaries handed executives in Houston, Arlington and Atlanta are excessive especially in the wake of charges that companies manipulated California's power markets.
No energy executive made more last year than Kenneth L. Lay, chairman of Houston-based Enron Corp. Lay collected $141.6 million in salary, bonuses and stock, a 184 percent increase over 1999.
Enron, the nation's largest wholesale energy marketer, sells both natural gas and electricity in California. Enron also paid CEO Jeffrey K. Skilling $72.6 million and Enron Wholesale chief Mark A. Frevert $35.8 million.
"If you could spray dye on dollars and trace them through, you would see pipelines out of Houston carrying energy and pipelines coming back carrying dollars," said Graef Crystal, a former executive pay consultant to Fortune 500 companies who now writes and lectures on executive compensation.
"It's an involuntary transfer of wealth from the California consumers to Ken Lay and his cohorts. There's nothing illegal about it. But it doesn't make the people of California feel very good."
An Orange County Register review of recently filed SEC documents also found: Peter Cartwright, chief executive of power generator Calpine Corp., of San Jose, earned $23.9 million, up from $3.3 million in 1999.
Dennis Bakke, chief executive of Virginia-based AES Corp., which owns plants in Huntington Beach and Long Beach, earned $12.8 million, up from $1.98 million.
Keith E. Bailey, chief executive of electricity marketer Williams Cos., of Tulsa, earned $7.05 million, up from $1.58 million.
Lay and Skilling declined through a spokesman to be interviewed, as did executives at AES and Williams.
But Enron spokeswoman Karen Denne said their pay reflects their performance in 2000 and previous years. "To be honest I don't know what the point is in looking at power executives' compensation," Denne said. "Companies like Enron have been working to put solutions on the table, to help California with its energy problems."
Free-market advocates defend the energy salaries.
"It's pure malarkey that that's too much. That's what incentive pay is for," said William M. Cockrum, a finance professor at the UCLA Anderson School. "From the shareholders point of view, they want the stock to go up. That's why they invested."
Not everyone agrees.
"Outrageous. Absolutely outrageous," said Everett Bassin, 71, a retired aerospace worker from Buena Park.
"Does (Lay) really need $140 million to live for a year?" asked Bob Dodson, 68, of Yorba Linda, who lives with his wife on a Social Security income of $1,100 a month.
Dodson said his electricity bill rose by $30 a month this winter and his gas bill by $100.
"These guys are plain, unadulterated, greedy jerks," Dodson said. Regulators too have raised questions about the energy company profits.
A California Independent System Operator study said "market power" exercised by Enron and other suppliers resulted in unfair profits that contributed $6.87 billion to the cost of wholesale power last year. The Federal Energy Regulatory Commission has ordered Enron, Williams and other top suppliers to prove their prices were "just and reasonable" or refund more than $100 million.
Market power is seen when firms that control a substantial supply of a commodity withhold it or use other tactics to drive up the price. Enron and the other companies named in the study have denied such tactics. But Williams Cos. agreed Tuesday to repay $8 million to settle federal charges that it shut down two generating units so it could charge higher market prices at other power plants. Williams denies any wrongdoing. In total, California paid $28 billion for electricity last year, four times the 1999 costs. Earnings statements show profits at many energy wholesalers tripled in 2000.
Experts say the pay handed to these energy executives last year is higher than most other major corporations are paying. But most other corporations didn't see profits triple last year.
For instance, Ford CEO Jac Nasser, whose company owns the Irvine-based Lincoln and Jaguar brands, collected $12.4 million last year, up 13 percent. But Ford's 2000 earnings declined by half in 2000.
Boeing CEO Phil Condit, whose Space Division is headquartered in Seal Beach, collected $20 million, up 342 percent. Boeing's 2000 earnings were down 8.5 percent.
"From what I can see they are paying themselves very well, although I wouldn't say it's excessive," Crystal said of the energy companies.
But Crystal made an exception for Lay, whom he classed with a group of executives, including Disney's Michael Eisner and Citigroup's Sanford Weill, who have earned $100 million a year, even if their companies have performed poorly.
Last year Eisner was paid $73 million by Disney, up 44 percent, although earnings fell 30 percent. Citigroup, the New York financial conglomerate, paid Weill $223 million, up 142 percent. The company's earnings rose 20 percent.
Enron's earnings were not particularly strong last year. Profits were up only 10 percent. The company attributed that to a series of write-offs, including a $300 million loss at an Argentine water company. Excluding those one-time charges, profits were up 32 percent, Enron said, and its stock nearly doubled in value.
Most of the energy companies examined by The Register did better, reporting profits, on average, up 187 percent.
Now look at the numbers reported by California's two largest utilities, who are trapped between the high costs of wholesale energy and a Public Utilities Commission cap on charges to ratepayers: Edison International, parent of Southern California Edison, reported a loss of $1.9 billion. Edison cut pay for CEO John Bryson nearly 50 percent, to $1.62 million.
PG&E, the Northern California utility, reported a loss of $3.4 billion last year and more than halved the pay of CEO Robert D. Glynn Jr., to $944,000. "A lot of money's been made by these (energy traders), but I wouldn't want to suggest that there is something inherently bad about doing that,"said Ted Craver, Edison's chief financial officer. "They have a role to play. If the companies do well, and their executive compensation is based on stock options, it stands to reason the executives will do well."
The Federal Energy Regulatory Commission is investigating allegations of overcharging, and last week put price caps in place for California power generators. But experts say that will have little effect on the profits of firms like Williams and Enron, whose primary role is as traders.
"I think profits will continue to grow for the next year or two, as long as markets are volatile. That's when traders do well," said Brian Youngberg, a senior utility analyst for Edward Jones.
"It certainly looks like 2001 will be another record year for energy company prices," agreed Paul Fremont, who follows energy stocks for Jeffries & Company.
Free market supporters like UCLA's Cockrum and Enron's Lay say it would be wrong to blame either energy companies or deregulation for California's high energy prices. "What has happened in California over the past four years is not deregulation. It is misguided regulation," Lay wrote in an opinion piece in the San Francisco Chronicle in March.
"If done right, deregulation means choice and competition. Deregulation means lower prices. Deregulation means innovation. California has the opportunity now to get it right."
Those comments infuriated consumer advocates.
"It's just devastating," said Doug Heller, of the Foundation for Taxpayer and Consumer Rights.
"It highlights the absurdity of deregulation in terms of the balance of power between the consumer and the corporation. It's one thing to be successful in America. It's another thing to pillage the consumers in California, and then have the gall to come back and tell us we need to let them in for more."
10 WHO MADE MILLIONS DURING CALIFORNIA'S DEREGULATION: Pay for top executives at many independent power companies increased last year. Here's a list of the top-paid energy executives with business interests in California.
ENRON: Kenneth L. Lay, 58, Chairman, Enron Corp., Houston, TX 2000 compensation: $141.6 million, up 184 percent.
Jeffrey K. Skilling, 46, CEO, Enron Corp. 2000 compensation $72.6 million, up 44 percent.
Mark A. Frevert, CEO Enron Wholesale 2000 compensation: $35.8 million, up 289 percent.
CALIFORNIA CONNECTION: Enron sold natural gas and electric power in California last year.
According to a study by the California Independent System Operator, Enron earned excess profits of $28 million by exercising market power.
EL PASO ENERGY GROUP: William A. Wise, chairman, and CEO, El Paso Energy Group, Houston, TX 2000 compensation: $18 million, down 62 percent
CALIFORNIA CONNECTIONS: El Paso has the largest gas transmission pipeline serving Southern California, and was accused during a state Senate hearing April 19 of exercising monopoly power last year that drove Southern California gas prices 12 times higher than prices in Texas.
CALPINE: Peter Cartwright, 71, CEO, president and chairman, Calpine Corp., San Jose, CA. 2000 Compensation: $23.9 million, up 624 percent.
Ann B. Curtis, 50, CFO and executive vice president, Calpine Corp. 2000 Compensation: $6.85 million, up 247 percent.
Robert D. Kelly, 43, President, Calpine Finance Co. 2000 compensation: $7.12 million, up 118 percent.
CALIFORNIA CONNECTION: Calpine owns 2 percent of California's generation capacity, including PG&E's former geothermal plants in Sonoma and Lake counties, and is lobbying to build a new plant in San Jose.
AES: Dennis W. Bakke, 55, CEO and President, AES Corp., Arlington, VA 2000 compensation: $12.8 million, up 546 percent.
Barry J. Sharp, 41, CFO and executive vice president, AES Corp. 2000 compensation: $8.13 million, up 670 percent.
CALIFORNIA CONNECTIONS: AES owns plants in Huntington Beach and Long Beach and currently controls 7 percent of the state's generation capacity.
AES paid a record $17 million fine last year for overpolluting from its coastal plants.
WILLIAMS COS: Keith E. Bailey, 58, chairman, president and CEO, The Williams Cos. Inc., Tulsa OK 2000 compensation: $7.05 million, up 346 percent.
CALIFORNIA CONNECTIONS: Williams piped natural gas to California and then converted it into electric power through long-term contracts with AES. The FERC has ordered Williams to justify or refund $37.6 million in alleged overcharges in 2000 and 2001.
Williams has agreed to refund $8 million.
SOURCES: SEC filings, Register interviews, California Independent System Operator, Federal Energy Regulatory Commission orders. Compensation includes salary, bonuses, stock and value of shares acquired on exercise.
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