MANY OF THE COMPANIES HIRED TO OVERSEE $10-BILLION DEAL THAT WILL ALLOW STATE TO BUY ELECTRICITY ALSO HAVE DONE BUSINESS WITH UTILITIES
Los Angeles Times
More than half of the 26 financial firms hired to oversee California\\\’s record $ 10-billion bond issue to buy electricity reported business ties to utilities and energy companies, including many of those at the center of the state\\\’s power crisis.
The companies disclosed the relationships when they applied to state Treasurer Phil Angelides for participation in the lucrative bond deal. Angelides said he does not believe the ties pose any actual conflicts of interest.
Instead, he said, the disclosures reflect the reality of an electricity bond issue–that the only people with any real know-how in the highly technical undertaking are already in the business.
\”They have relationships all over the place. We wanted to know because we wanted to be fully informed,\” Angelides said. \”The reality is, we need people who have financial strength, depth and breadth, and the fact is that any company that has that has numerous relationships.\”
The danger in those relationships would be if a firm advising energy companies at the same time it is helping California draw up the bonds used its position to somehow benefit its other clients. Angelides said the relationships were not \”germane\” to that particular concern, and representatives of some of the Wall Street firms said investment banking companies are specifically structured to avoid even an appearance of such problems.
Angelides said he asked the companies applying to be part of the bond deal to spell out their business dealings with energy companies because he wanted to ensure that they were publicly aired beforehand. If at any time a company is found to have a conflict of interest, \”they\\\’re outta there,\” he said.
J.P. Morgan Securities, the firm chosen to serve as senior manager on the bond issue, said in its application that it did not believe it had any conflicts from other business deals.
But the company, which will take the lead on an initial bond offering estimated at up to $ 5 billion, listed numerous recent and ongoing business relationships it had with private utilities and energy companies that had earned it tens of millions in fees. The work ranged from mergers and acquisition assistance for Southern California Edison and Pacific Gas & Electric to debt underwriting for Texas power providers Reliant Energy and Enron Corp.
Alan Markow, J.P. Morgan\’s western vice president of marketing, said the firm\’s other work with utilities and energy companies gives it the expertise needed to provide sound advice to California.
\”That\’s a very real issue: How do you figure out if you are putting together a good deal?\” Markow said. \”You need someone with a background in utility finances.\”
Markow said that like all large investment banking firms, the company has numerous corporate firewalls intended to insulate information from its many clients and prevent conflicts of interest.
\”That was vetted by the state, they have to take a look at that the business relationships and see if it passes judgment, and in their view, it does,\” Markow said. \”We have different operations, and they are separate. We believe we have protected ourselves well against conflicts of interest.\”
As a result of a new state law, California has entered into the business of buying the power that the state\\\’s three largest investor-owned utilities need to serve their customers but can no longer afford to buy on the expensive open market. To help finance the purchases, the state will issue bonds that will be repaid by utility ratepayers as part of their monthly bills.
California officials eventually hope to stabilize the prices paid for that power–about a third of what utilities need–by entering into long-term contracts with electricity generators and suppliers. But for now, the state is paying top dollar, burning through taxpayer money at a rate of more than $ 1 billion a month to keep the lights on.
The offering, estimated at $ 10 billion but potentially even larger, will be the biggest municipal bond issue in U.S. history. The bonds will be used to repay the state\’s coffers for the cost of purchasing electricity over the past several months, and also to fund future power buys.
Fourteen of the financial service companies that will be charged with structuring and selling the bond already report doing at least some work for energy companies and utilities.
Nonetheless, Angelides said, that work does not represent a conflict of interest because the firms were only being asked to help the state with bonds, not assist in a transaction that would directly benefit energy companies or utilities. The private utilities, however, do benefit from the state\\\’s purchases of electricity, which ease the financial burden on the debt-strapped companies.
\”If this was buying an asset from PG&E or Southern California Edison\” with bond financing, \”absolutely, there would be a direct conflict,\” Angelides said. \”If we were restructuring the debt of the utilities, which as you know I am opposed to, yes, there would be a direct conflict.\”
California is, in fact, considering issuing bonds to buy utility assets and allowing the power companies to issue corporate bonds to restructure their billion-dollar debts as part of a broad rescue plan endorsed by Gov. Gray Davis. Both bonds would be repaid out of ratepayers\’ bills.
Though the firms\’ compensation has yet to be worked out, and Angelides has said it is likely to be lower than the usual rate for municipal bond work, it is clear the firms still stand to make millions of dollars because of the bond issue\’s unprecedented size.
\\\”Part of the story here is that no one is going to pay a price but consumers\” as a result of the energy crisis, said Harry Snyder of Consumers Union, \”and a lot of people that made money are going to continue to make money.\”
Lehman Brothers, one of the five firms chosen to draw up the bonds as co-senior managers, disclosed that it had been an advisor to energy giant Dynegy Inc. last year on its $ 7.5-billion merger with Illinova Corp. The merger was completed this month.
Lehman Brothers was also serving as an advisor to another major energy supplier, AES Corp., on its pending $ 3-billion acquisition of Ipalco Enterprises, an utility whose primary holding is Indianapolis Power & Light. And Lehman Brothers had served as an advisor to PG&E Corp., the parent company of the California utility, on its $ 840-million sale of Texas Natural Gas last year to El Paso Energy.
Morgan Stanley Dean Witter, one of the firms chosen to help market and sell the bonds, listed hundreds of business relationships over the past five years with utilities and energy companies. Most involved debt and equity offerings for public power agencies, but also listed was merger and acquisition work for AES Corp. in 1997, and Duke Energy, a North Carolina-based energy company that owns four California power plants, in 1999.
Harvey Rosenfield of the Foundation for Taxpayer and Consumer Rights in Santa Monica said he was troubled by the business dealings of the bond advisors. But Rosenfield expressed confidence in Angelides to protect the public and agreed that he probably had no recourse but to hire Wall Street companies with potential business conflicts.
\”I think it\\\’s problematic,\” Rosenfield said. \”Angelides is acutely sensitive of the need to protect the state. But there is a question: Are these companies going to do the best for California, or is this just a gravy train to enrich them and their rich energy clients?
\”I have a lot of confidence in the treasurer to make sure that does not happen,\” he added. \”I don\’t know there is much of a choice, unfortunately.\”
Ties to Power Companies
Fourteen of the 26 firms chosen to make up the financing team for California\’s $ 10-billion power-buying bond disclosed business relationships with utilities or energy companies in filings with the state treasurer\’s office.
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COMPANY: Bank of America
BUSINESS RELATIONSHIP: Southern California Edison, San Diego Gas & Electric, Pacific Gas & Electric, numerous power producers
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COMPANY: Bear Stearns
BUSINESS RELATIONSHIP:Southern California Edison, Enron Corp.
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COMPANY: Blaylock & Partners
BUSINESS RELATIONSHIP:AES Corp., Mirant Corp., Duke Energy
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COMPANY: CIBC World Markets
BUSINESS RELATIONSHIP: Dynegy Inc., Enron Corp., AES Eastern Energy, Duke Energy
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COMPANY: eBondTrade
BUSINESS RELATIONSHIP: None
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COMPANY: E.J. De La Rosa & Co.
BUSINESS RELATIONSHIP:None
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COMPANY: First Albany Corp.
BUSINESS RELATIONSHIP:None
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COMPANY: Great Pacific Securities
BUSINESS RELATIONSHIP:None
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COMPANY: J.P. Morgan Securities
BUSINESS RELATIONSHIP: Southern California Edison, Pacific Gas & Electric, SEMPRA, Duke Energy, Reliant Energy, Enron Corp., AES Corp., Mirant Corp.
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COMPANY: Jackson Securities
BUSINESS RELATIONSHIP:Southern Power
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COMPANY: Lehman Brothers
BUSINESS RELATIONSHIP: Southern California Edison, Pacific Gas & Electric, San Diego Gas & Electric, Dynegy Inc., Enron Corp., AES Corp., Edison Mission Energy, PG&E Corp., Williams Co
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COMPANY: Merrill Lynch
BUSINESS RELATIONSHIP: AES Corp., Duke Energy, Dynegy Inc., Enron Corp., Reliant Energy Inc.
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COMPANY: Mischler Financial Group
BUSINESS RELATIONSHIP: None
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COMPANY:Morgan Stanley Dean Witter
BUSINESS RELATIONSHIP: AES Corp., Calpine, Duke Energy, Dynegy Corp., Edison International, Enron Corp., Edison Mission Energy, Sempra Energy
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COMPANY: Pacific American Securities
BUSINESS RELATIONSHIP: None
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COMPANY: PaineWebber
BUSINESS RELATIONSHIP: American Electric Power, AES Corp., Duke Energy, Dynegy Inc., Edison International, Enron International, Green Mountain Power, Mirant, Pacific Gas & Electric, Reliant, Sempra Energy
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COMPANY:Prager, McCarthy & Sealy
BUSINESS RELATIONSHIP:None
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COMPANY: Quick & Reilly
BUSINESS RELATIONSHIP: Sempra Energy, Southern California Edison
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COMPANY: Ramirez & Co.
BUSINESS RELATIONSHIP: None
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COMPANY:Redwood Securities
BUSINESS RELATIONSHIP: Southern California Edison, Pacific Gas & Electric
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COMPANY: Salomon Smith Barney
BUSINESS RELATIONSHIP: Southern California Edison, San Diego Gas & Electric, numerous unregulated energy companies and generators
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COMPANY: Siebert Brandford Shank & Co.
BUSINESS RELATIONSHIP: None
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COMPANY: Sutro & Co.
BUSINESS RELATIONSHIP: Overton (Nev.) Power District
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COMPANY: Sutter Securities
BUSINESS RELATIONSHIP: None
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COMPANY: Chapman Co.
BUSINESS RELATIONSHIP: None
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COMPANY: U.S. Bancorp Piper Jaffray
BUSINESS RELATIONSHIP: None
Source: State treasurer\’s office
