by Terry Hogan


By Terry Hogan

I was sitting at my desk at home, looking at the blank screen of my notebook computer. I was waiting for inspiration for a "Backtracking" article. Instead, my little vibratory friend, VAR, appeared. Now for those of you who have missed the previous series of articles on Enron, a note of explanation is needed. VAR is a small, gnome-like creature that generally inhabits electrical wires. As I understand it, he normally vibrates at about 60 cycles per second, beating the wires with a small hammer. This action helps excite electrons to flow on transmission wires, creating what we know as electricity. Because of VAR’s particular habitat and vocation, he proclaims to be "well connected" to the power industry and all the power plays.

But back to the story. VAR, sitting on my "Delete" key, began his litany on the continuing deterioration of the economic health of the electric utility system. He talked and I typed, being careful not to get too near the "Delete" key. Thus, these comments are those observations "from a VAR" (I still like that phrase) and are his, not mine.

VAR observed that Dynegy, the parent company of Illinois Power and the firm that was going to take the advantage from the demise of Enron, now looks like Enron, itself. Dynegy chairman Chuck Watson resigned as the swirl of trading investigations began concerning Dynegy’s alleged reliance on "round-trip" or "wash trading". VAR explained that this was the simple exchanging equal megawatts at equal prices for the alleged purpose of inflating the number of trades. Given the recent corporate misbehavior or misstatements on earnings, tolerance for such activities is decreasing in the stock market. In fact, one of the trade press magazines for the electric power industry has a front-page article entitled "’Round-trip’ trading leads to one-way exit for execs". Dynegy is the leadoff poster child for the article. The article reports "Dynegy denies that Watson’s resignation is directly related to the ongoing trading investigation, but the timing is certainly suspicious, according to analysts and investors."*

The VAR, when irritated with what he sees to be his dim-witted student (me) or with the power industry CEOs, changes color from his basic electric blue (what else?) to a red-hue with occasional sparking that raises problems with my computer screen. The VAR asked me if I was familiar with the Dynegy logo. He said it is the capitalized name "DYNEGY" with a little human made of triangles and a square for the head, running away from the "DYNEGY" name. The VAR, philosophical, suggested that the little human represents shareholders’, customers’, and employees’ response to Dynegy’s recent performance. Perhaps the square head is a reflection of DYNEGY’s perception of those folks, the VAR noted with an ironic grin at his dull student.

Perhaps, the VAR suggested in his impish way, since the Dynegy stock has plummeted to a point at which it is nearly a "dime stock", it should rename itself as "Dimegy." I asked the VAR if he didn’t feel guilty about making poor humor about a situation where tens of thousands of employees and investors are suffering economically due to Dynegy’s actions? The VAR said, "Of course not. Humor is nothing more than tragedy viewed from a distance and I certainly distanced myself from Dynegy’s stock", he said. I observed that the stock had been trading at over $50 per share a year ago and recently was less than $1. The VAR responded "So… what about Enron, AES, and CMS Energy to name a few?" The VAR asked rhetorically, "Did someone in the Board Room misunderstand what was meant by ‘deregulation’?" I knew he didn’t want an answer. He continued, "There are a lot of folks who should feel guilty about what’s going on, and maybe a few might even be so named by a group of their peers, but not me. I’m just a VAR with my ear to the wires, listening to the hum."

At times, I feel like the VAR is confronting me, goading me to defend the industry. If I am the industry’s defender, it is truly in bad shape. But I know better than to defend the industry. I know too much because the VAR tells me things. He is well-connected to the grid, and the wires hum with stories about cancelled construction projects, about delayed or cancelled scheduled maintenance, about the dangers of grid reliability as the utilities neglect the need for new transmission lines. The VAR whispers to me. The VAR shouts to me. He tells me that California was only the canary in the cage that died from lethal gas in the coalmine. The VAR says that while Washington is staring at the dead canary in the cage, the coal mine is about to tumble down. Different cause, but same effect, the VAR mutters.

"So what is causing the collapse of the coal mine?" the dim-witted student asked the VAR. The VAR replied that the Standard & Poor’s has lowered Dynegy’s long-term corporate credit rating to junk status. This was done despite cutbacks in capital expenditures and cost savings, including a reduction in dividend payout. The VAR also observed that "the hum on the wires" is that Dynegy is looking to sell Illinois Power, but apparently Dynegy is declining to make public comments about the rumor. The VAR stated that Dynegy had attempted to sell Illinois Power a few months ago, but the possible buyers walked away from the deal. According to the VAR, the speculation on the wires is that MidAmerican Energy Company, Ameren Corporation, and Cinergy were the most likely window-shoppers for Illinois Power. The VAR observed that poor old Illinois Power may be marketed, and if so, it will likely be in the "scratch and dent" room and not on the showroom floor. VAR said "It’s Shocking" and grinned about his electrifying humor.

So, I asked the VAR, "Didn’t the Management of Dynegy warn employees and shareholders of the declining performance and increasing risk of Dynegy stock?" The VAR chuckled, and moved to the keyboard and began jumping from one key to another, having the effect of logging me on to the Internet. I was soon looking at a May 28, 2002 news article. The headlines proclaimed "Watson Resigns as Dynegy Chairman, CEO" and "Watson Blames Enron for Stock’s Low Performance". Daniel Dienstbier, the newly named interim Dynegy Chief Executive Officer is quoted as saying:

"I believe that we can move quickly and successfully to address the issues Dynegy is now confronting… We are committed to taking the actions necessary to demonstrate to our investors, lenders and trading partners the underlying strengths of this company and its full potential."

The VAR clicked on the "Home" key and looked at me. The VAR said, "I guess he was right, this is July and they have quickly and successfully demonstrated the value of the company."

The VAR began to fade away. Like a famous children’s story cat, his grin is always the last to disappear. In its fading moment, the mouth said "Say a quiet prayer when you flip the light switch on."

*Electric Light & Power. 2002.