Consumer Group Asks PUC to Cease Paying Henry Duque’s Legal Defense in Action to Remove Him From Office

In addition to investing in Nextel, a PUC regulated entity, Duque has been found to have invested in other companies that could be affected by PUC decisions. Given this new evidence, in a letter sent yesterday to PUC President Loretta Lynch, the Foundation for Taxpayer and Consumer Rights (FTCR) called upon the PUC to cease its expenditure of taxpayer monies for payment of Commissioner Henry Duque’s legal fees in an action to remove him from office for violating state conflict of interest laws. According to recently filed economic interest statements, Mr. Duque invested in several telecommunications companies with substantial financial ties to PUC-regulated entities and a trust that receives all of its income from the sale of natural gas to energy companies, including Duke Energy.

“Mr. Duque has repeatedly invested in companies which could be financially affected by decisions that he makes as a PUC Commissioner — a classic conflict of interest situation,” stated Pamela Pressley, FTCR staff attorney. “Taxpayers should not be forced to foot the legal bill to defend his investment practices that are clearly outside the scope of his duties as a public official.”

Duque’s reported 2000/2001 investments which raise potential conflicts include:

San Juan Basin Royalty Trust–a trust which collects its royalty from gas interests in the San Juan Basin operated by Burlington Resources Oil & Gas Company which contracted on Nov. 10, 1999 to sell Duke Energy and Marketing all of the natural gas subject to the royalty.

Telewest Communications–a company based in the UK that provides cable TV, residential and business phone service, and Internet access. Two PUC-regulated companies, AT&T and MediaOne have held substantial financial stakes in Telewest during 2000.

Loral Space & Communications–a satellite communications company with a “global” telephone service division known as Globalstar that began providing wireless telephone communication services throughout the U.S., including to California consumers, as of February of 2000. As a wireless carrier serving California consumers, Globalstar should be subject to PUC regulation.

Additionally, Mr. Duque invested in several other telecommunication businesses during 2000 that have financial ties to PUC-regulated telecommunications carriers, including:

NTL–the UK’s #1 cable TV operator which also provides residential telephone service and internet access which in 1999 sold its consumer division that provides cable TV, telephone and Internet services to Cable & Wireless, plc., which has a U.S. subsidiary, Cable & Wireless USA, Inc., subject to PUC regulation.

Paradyne–a leader in Digital Subscriber Line (DSL) systems which allows high speed data services over the same local access line that provides basic telephone services. AT&T, GTE, Sprint, and WorldCom all use Paradyne’s technology.

Vertel Corp.–a leading provider of “middleware” for the telecommunications market that manages broadband, wireless, and internet networks and the embedded software. Customers include AT&T, Motorola, and Nokia.

With authorization from the Attorney General, FTCR filed a lawsuit against Mr. Duque in January on behalf of the People of the State of California alleging that Mr. Duque violated section 303(a) of the Public Utilities Code. That law prohibits PUC commissioners from having a financial interest in the utilities they regulate. Mr. Duque purchased stock in Nextel Communications, a wireless communications company, in 1999 and held it over a year. In court papers filed in response to FTCR’s complaint, Mr. Duque contends that Nextel is not subject to regulation by the PUC. FTCR estimates that Mr. Duque made a gross profit of $65-70,000 from his Nextel stock trades.

In a letter dated December 19, 2000 from the PUC signed by its Executive Director, Wesley Franklin, payment of Mr. Duque’s legal fees was denied on the grounds that “investment in the Nextel stock was undertaken for personal gain and that it was therefore outside the scope of [his] employment.” In a subsequent letter dated December 22,2000 signed by PUC President Loretta Lynch, the PUC authorized payment of Mr. Duque’s legal defense from the time FTCR’s lawsuit was filed in court. Gov. Code §995, et seq., only requires the payment of a public official’s legal fees for lawsuits arising from actions taken within the official’s scope of employment.

Letter to PUC President Loretta Lynch follows.

By Facsimile Transmission and U.S. Mail

April 11, 2001

The Honorable Loretta Lynch

President

Public Utilities Commission

505 Van Ness Ave.

San Francisco, CA 94102

RE: Financial Investments of Commissioner Henry Duque

Dear President Lynch:

As you know, the Attorney General of California has authorized the Foundation for Taxpayer and Consumer Rights (FTCR) to file suit on behalf of the People of California to remove Commissioner Henry Duque from office on the ground that he violated Public Utilities Code § 303(a) by owning Nextel stock from May 1999 to August 2000.

By letter dated December 22, 2000, (copy attached), the Commission authorized the use of public monies to finance Mr. Duque’s legal defense from the date of filing of the above-mentioned action in court. In its letter, the Commission reserved the right to cease payment of Mr. Duque’s legal fees in the event that “there is a substantial change in the facts on which [its] authorization was based.”

I am writing on behalf of FTCR to urge that the PUC reconsider its decision to fund Commissioner Duque’s legal defense on the grounds that there has been a “substantial change in the facts.” Our review of Mr. Duque’s 2000/2001 Statement of Economic Interests, filed on March 1, 2001, suggests that several of Mr. Duque’s financial holdings during the year 2000 may constitute further serious conflicts of interest:

Mr. Duque, while serving as Commissioner, invested in a trust that received its main proceeds from the sale of natural gas to Duke Energy which, as you are know, sells electricity to California. Notwithstanding the Legislature’s flawed attempt to deregulate power generators in 1996, Duke is a public utility as defined by the California Constitution, subject to the regulatory powers of the PUC. (see Cal. Constit. art. 12, §§ 3 and 6.) The PUC further has the authority, pursuant to the Federal Power Act, to examine Duke Energy’s books, accounts, memoranda, contracts, and records. (16 U.S.C.A. § 824.)

According to his Statement of Economic Interests, from April 7, 2000 to September 20, 2000, Mr. Duque held units in the San Juan Basin Royalty Trust which are traded on the New York Stock Exchange (NYSE: SJT). The Trust collects its royalty from gas interests in the San Juan Basin operated by Burlington Resources Oil & Gas Company. According to a 3/27/01 Los Angeles Times article, p. A5, eighty percent of the nation’s methane gas comes from the San Juan Basin. The operating company of the trust contracted on Nov. 10, 1999 to sell Duke Energy and Marketing all of the natural gas subject to the royalty. By investing in a trust that gets all of its income from the sale of natural gas, Mr. Duque placed himself in a position of conflict because he would be in an official position to vote on policies that might favor maintaining higher wholesale energy prices.

Mr. Duque owned stock in a telecommunications company in which PUC-regulated telecommunication carriers also held significant financial interests. From April 6, 2000 to September 25, 2000, Mr. Duque owned stock in Telewest Communications, a company based in the UK that provides cable TV, residential and business phone service, and Internet access. Telewest was a joint venture of U.S. West and TCI, both of which are registered PUC telecommunications carriers. In March of 1999, AT&T, also a PUC-regulated carrier acquired TCI. It appears that an AT&T subsidiary, Liberty Media, acquired by AT&T along with TCI, held a 25% interest in Telewest until sometime in 2000 when it sold its shares to UnitedGlobalCom. When U.S. West split in 1998, Media One, a PUC-regulated entity acquired U.S. West’s shares in Telewest. Media One owned a 23% interest in Telewest during the time that Mr. Duque held Telewest stock. Media One was acquired by AT&T in July 2000 and at that time, Media One’s interest in Telewest was acquired by Microsoft. This interest in Telewest raises a potential conflict by putting Mr. Duque in a position in which he would be making decisions that affect PUC-regulated entities that have a substantial financial stake in the same companies in which he has invested.

Mr. Duque owned stock in a communications company with a wireless telephone division that may be subject to regulation by the PUC. According to his Statement of Economic Interests, from September 14, 1999 to June 16, 2000, Mr. Duque owned stock in Loral Space & Communications–a satellite communications company with a “global” telephone service division known as Globalstar that began providing wireless telephone communication services throughout the U.S., including to California consumers, as of February of 2000. As a wireless carrier serving California, Globalstar should be subject to PUC regulation. Mr. Duque’s investment in Loral raises a conflict of interest in that he is in an official position to influence policies that affect all wireless carriers operating in California, including Globalstar, which in turn could affect the financial standing of Loral, the company in which he owns stock.

Mr. Duque invested in other telecommunication businesses with financial ties to PUC-regulated telecommunications carriers, including the following:

NTL–the UK’s #1 cable TV operator which also provides residential telephone service and internet access. In 1999, NTL acquired Cable & Wireless Communications Consumer Co., the consumer cable telephone, Internet and television operations of Cable & Wireless Communications, plc. (a 53% owned subsidiary of Cable & Wireless, plc.) Cable & Wireless USA, Inc., a wholly owned subsidiary of Cable & Wireless, plc, is currently subject to regulation by the PUC. Mr. Duque’s Statement of Economic Interest lists his ownership of NTL stock from a date unknown until September 20, 2000.

Paradyne–a leader in Digital Subscriber Line (DSL) systems which allows high speed data services over the same local access line that provides basic telephone services. AT&T, GTE, Sprint, and WorldCom all use Paradyne’s technology. According to Mr. Duque’s statement of interest, he acquired Paradyne stock on August 8, 2000 and continued to hold it at least through the end of 2000.

Vertel Corp.–a leading provider of “middleware” for the telecommunications market that manages broadband, wireless, and internet networks and the embedded software. Customers include AT&T, Motorola, and Nokia. Mr. Duque’s interest statement lists Vertel with an acquisition date of January 21, 2000 and no disposal date through the end of 2000.

As stated in an official opinion of the Attorney General explaining the application of Public Utilities Code §303:

The Commission is entitled to the absolute, undivided, uncompromised allegiance of all of its officers and employees without personal financial interests influencing Commission decisions, whether the influence is from the employee’s own personal interest or that of a coworker. Section 303 is a broad, objective proscription that is violated when the Commission officer or employee places himself or herself in a financial conflict of interest position.

80 Op.Atty.Gen. 27, 35 (1997) (emphasis added).

It is clear from Mr. Duque’s reported investments that he has repeatedly placed himself in a position in which his personal financial interests could influence his decisions as a PUC commissioner. During his tenure, he has been financially interested in several telecommunications companies (which are either directly subject to regulation by the PUC or have been held in part by companies that are subject to PUC jurisdiction) and a trust that earns its primary income from the sale of natural gas. In each case, by virtue of his authority as a PUC commissioner, Mr. Duque is in a position to influence or affect the value of his holdings through his actions–a classic conflict of interest situation.

In light of Mr. Duque’s questionable investment practices, we request that the Commission take the following actions:

Cease paying Mr. Duque’s legal fees in the pending quo warranto action in light of changed circumstances.

As you are no doubt aware, the PUC is not legally required to pay Mr. Duque’s legal defense. In denying an earlier request by Mr. Duque for payment, the PUC concluded that his “investment in the Nextel stock was undertaken for personal gain and that it was therefore outside the scope of [his] employment.” (copy of letter from PUC signed by Wesley M. Franklin to Mr. Duque dated December 19, 2000 attached.) Gov. Code § 995, et. seq. only requires state agencies to fund the legal defense of their employees for acts performed within the scope of their employment. The PUC should not be committing limited public resources to defend Mr. Duque for investing in a company regulated by the PUC for his personal gain–an act clearly outside the scope of his public duties. The taxpaying public should not be forced to defend a public official who has financially benefited from his holdings in companies affected by PUC decisions.

Declare all Commission votes or other official actions taken by Mr. Duque null and void since the date of his purchase of Nextel stock on May 12, 1999.

The Attorney General’s opinion dated November 29, 2000 granting FTCR leave to bring the quo warranto action against Mr. Duque stated:

The Constitution requires that as a qualification for holding office as a Commission member, the member must not hold a financial interest in any corporation subject to regulation by the Commission’It would therefore appear that the defendant’s office became vacant immediately upon his acquisition of the 700 shares of stock in Nextel on May 12,1999. The fact that the defendant subsequently disposed of the prohibited interest is immaterial and did not operate to restore him to the vacated office. (Emphasis added.)

In this regard, all Commission votes or other official actions taken by Mr. Duque since May 12, 1999, the date he acquired the Nextel stock, should be declared void. Further, he should not be allowed to take any action on any matters currently pending or that may come before the PUC until such time as the current quo warranto action is finally adjudicated.

We ask that you take prompt action in this matter and respond to this letter within ten days of its receipt. I can be reached at (310) 392-0522, ext. 307. Thank you for your consideration of the issues raised herein.

Sincerely,

Pamela Pressley