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House-Senate Conferees Poised to Repeal Law Protecting Consumers, Investors from Enron-style Accounting and Market Manipulation

Sept. 18, 2002

House-Senate Conferees Poised to Repeal Law Protecting Consumers, Investors from Enron-style Accounting and Market Manipulation

Corporations Seeking Repeal Accused of Trading Scams in California

WASHINGTON, D.C. – Some of the major corporations pushing Congress to repeal the consumer-protection law known as the Public Utility Holding Company Act (PUHCA) are the same ones that are being investigated for gouging ratepayers and manipulating the California energy market through schemes involving sham energy trading and the withholding of electricity, according to a Public Citizen report released today.

House and Senate conferees, who are trying to reconcile differences in energy legislation passed by both chambers, are expected to begin taking up the electricity provisions of the competing bills as early as Thursday. While most public debate has centered on the massive subsidies to energy companies in the bill, the Senate bill also repeals PUHCA, an obscure, Depression-era law that is supposed to ensure that electric, natural gas and water utilities invest profits in providing reliable service rather than fueling the Enron-style acquisition of assets unrelated to their core energy business.

“Members of Congress declare themselves to be tough on corporate crime when the camera is rolling, but behind closed doors they are trying to make it even easier for rapacious energy companies to rip off the public and investors,” said Joan Claybrook, president of Public Citizen. “The energy giants that are being investigated for rigging the California energy market are the same ones that are lobbying behind the scenes to get rid of the Public Utility Holding Company Act. Rather than protecting ratepayers and shareholders, Congress is preparing to strip away any vestige of accountability and transparency there is left.”

The energy industry poured $44 million into lobbying Congress on PUHCA and other issues in 2001 alone, and has contributed more than $16 million to federal candidates since 1999, according to the report. This total includes lobbying by individual companies and their various anti-regulation trade associations, such as the Edison Electric Institute and the Coalition to Repeal PUHCA Now!.

Enacted in 1935, PUHCA has historically prohibited holding companies from investing ratepayers’ money in assets that will not directly contribute to low bills and reliable service, such as out-of-region power plants or non-electricity industries like water or telecommunications. However, the 1992 Energy Policy Act allowed holding companies to invest ratepayer money in foreign power projects. This permitted the development of offshore subsidiaries and sham transactions that eventually led to the downfall of sprawling corporate structures. The law has been further weakened by exemptions and lack of adequate enforcement by the Securities and Exchange Commission (SEC).

Abolishing PUHCA would largely remove government oversight from companies such as American Electric Power, Duke Energy, CMS Energy, Southern Company/ Mirant and Xcel. As some of the leading energy providers in today’s deregulated markets, these corporations claim they can be trusted in the absence of supervision. But it was exactly that – the lack of government supervision – that allowed Enron to build its far-flung empire, manipulate markets and use accounting gimmickry to conceal debt and inflate income. Had there been a regulated system to ensure corporate responsibility and transparent accounting practices, it is likely that California’s recent energy crisis and the accounting fraud that followed would have been impossible.

In the report, Public Citizen examines the record of five companies seeking PUHCA repeal: American Electric Power, Duke Energy, CMS Energy, Southern Company/ Mirant and Xcel – all of which are under investigation for fraudulent trading and/or accounting practices and accused by state and federal investigators of gouging billions of dollars from California consumers during the artificially created energy “crisis” of 2000 and 2001.

“The repeal of PUHCA would have devastating consequences for consumers and investors by leading to more Enron-style meltdowns, further industry consolidation and the creation of complex corporate structures that reduced transparency and accountability,” said Tyson Slocum, research director for Public Citizen’s Critical Mass Energy and Environment Program. “We need to demand that these energy companies be good corporate citizens, but it’s clear they will not do it without strict standards of accountability. Government oversight is an indispensable measure needed to maintain an affordable and reliable energy market. Congress should be strengthening PUHCA, not ditching it.”

Public Citizen’s report shows:

  • On Jan. 18, 2002, the U.S. Court of Appeals for the District of Columbia ruled that the SEC failed to prove that the June 15, 2000, merger of American Electric Power with Central & South West met the requirements of PUHCA and sent the case back to the SEC for further review. Specifically, the court told the SEC to revisit its conclusion that the merger met PUHCA requirements that utilities be “physically interconnected” and confined to a “single area or region.”
  • In June 2002, the SEC ordered Duke Energy to release information on its trading practices, and in July the energy trader admitted that it had misled investors and federal officials about its trading operations. In July, the Commodity Futures Trading Commission (CFTC) issued a subpoena to Duke, and the company has been under investigation by the Federal Energy Regulatory Commission (FERC) since May. In addition, Duke is under investigation by the Justice Department’s Houston office as part of a grand jury investigation into allegedly fraudulent trading practices. The federal grand jury subpoenaed Duke on July 12.
  • The SEC, CFTC, FERC and the Justice Department have all been formally investigating CMS Energy since May 2002, making CMS Energy the most investigated energy trader next to Enron. Shortly after the investigative offensive, long-time CMS Energy Chairman and CEO William McCormick resigned. That was followed by the firing of the company’s auditor, Arthur Andersen. At the time of the accounting firm’s dismissal, Arthur Andersen noted that its approval of the company’s books could no longer be relied upon, which should not come as a surprise since 71 percent of the $5.6 million CMS Energy paid Arthur Anderson was for non-audit consulting services.

Click here to view the full report online. Click here to view a copy of Claybrook’s letter to congressional confereees.