|Aug. 26, 2003. 08:13 AM|
Weak link in power chain
up to 10 stocks with Stocklist, thestar.com's
free tracking tool.
Some men are born mediocre, some men achieve
mediocrity, and some men have mediocrity thrust upon them.
With Major Major, it had been all three.
— Joseph Heller, Catch-22
And so it has been with First-Energy Corp., prime
suspect in the biggest power blackout in North American
Getting by, rather than the pursuit of excellence,
seems to have been the vision for this Ohio-based
If you're looking for a microcosm of the many failings
in what passes for "corporate governance" in today's business
world, FirstEnergy's not a bad place to start.
I'll concede economist William Watson's point that the
populist rush to condemn a perceived malefactor is not an
"In the public's mind," Watson wrote last week in the
National Post, "the story of the Great Grid-Rock of 2003 is
set: `Ohio company. Dodgy finances. Poor safety record. Faulty
I'll also concede that at least some regulators and
consumer groups in FirstEnergy's territory of Ohio,
Pennsylvania and New Jersey say its 4.3 million customers have
been served no better or worse than the industry average.
And I agree it's silly to blame just one actor for the
intolerable fragility of a 378,000-kilometre continental grid.
Ralph DiNicola, communications director at FirstEnergy,
said it's plain ridiculous to think his firm alone could
deprive 50 million people of power.
"It would be the equivalent of you plugging in a hair
dryer and shutting down the entire city of Cleveland," he
So let's look at what's not in dispute.
Even before the blackout came along, FirstEnergy was a
rat's nest of shoddy day-to-day management, slothful plant
maintenance, environmental and workplace-safety violations,
dubious financial reporting, abuse of minority shareholders,
excessive executive compensation, heavy-handed government
lobbying greased by copious political donations and a failed
merger strategy that crippled First-Energy's balance sheet
while distracting top management from the basic business.
Early last year, FirstEnergy was forced to shut down a
nuclear-power plant near Toledo whose state of deterioration,
experts said, put it on the brink of becoming the worst
nuclear-power incident since Three Mile Island in 1979.
Investigators have since determined that employees at
the Davis-Besse nuke felt intimidated after their repeated
warnings about safety were ignored by management.
Just prior to the shutdown, FirstEnergy had reassured
the U.S. Nuclear Regulatory Commission that Davis-Besse was
safe. Yikes. The plant is still closed, more than a year and a
half after it was shut down and after a staggering $450
million (all figures U.S.) spent by First-Energy on repairs
and the purchase of replacement power.
Last December, a U.S. federal grand jury indicted
FirstEnergy on charges of wilfully violating workplace-safety
regulations, causing the death by electrocution of two men in
For the past two years, New Jersey residents in a
FirstEnergy territory have complained of a tingling feeling
from the ground and in swimming pools — traced by
investigators to deteriorating and improperly grounded power
Mayors in northern Ohio have complained the rate of
First-Energy power failures so far this year is double last
year's pace, forcing some cities to buy diesel-power
generators for municipal buildings.
On the most recent July 4 holiday weekend, a wonky
FirstEnergy system in New Jersey knocked out power for
thousands of vacationers, some of whom were stranded on
amusement park Ferris wheels. In one Cleveland suburb served
by First-Energy, residents have grown accustomed this summer
to losing power for seven-hour stretches.
Early this month, a U.S. federal judge ruled that
FirstEnergy violated provisions of the federal Clean Air Act
by failing to install modern smog controls when it rebuilt a
coal-fired power plant suspected of contributing to acid rain.
This was four years after FirstEnergy was sued by the U.S.
Environmental Protection Agency for violations of the Clean
Also this month, FirstEnergy's new auditor, replacing
the lamented Arthur Andersen of Enron Corp. fame, forced the
company to restate inflated profit figures going back three
FirstEnergy has stood its ground on CEO Peter Burg's
pay, which jumped 20 per cent last year despite a 14 per cent
drop in profits. The firm said it will not claw back any
portion of Burg's pay, even though it is tied in part to
reported profits that have since been restated.
And for the seventh time since 1999, FirstEnergy this
year rejected the will of a majority of its shareholders who
voted for reforms in the firm's corporate governance.
Shareholder ire at blue-chip companies is rarely
sufficient to muster even a 10 per cent vote in favour of
resolutions opposed by management. But by margins of as much
as 65 per cent, FirstEnergy investors have demanded the
removal of so-called "poison pills" to block takeovers and
staggered election of directors — two devices by which
FirstEnergy's entrenched directors cling to their jobs. No
dice, said FirstEnergy, which simply noted that shareholder
resolutions are non-binding.
FirstEnergy's difficulties in adequately financing an
overhaul of its assets is traced back to its ill-fated
acquisition campaign that began in the late 1990s. In its 1997
merger with Centerior Energy Corp. to create FirstEnergy, the
former Ohio Edison Co. took on Centerior's Davis-Besse
And FirstEnergy's subsequent $4.4-billion purchase of
GPU Inc., owner of the disaster-stricken Three Mile Island
nuclear reactor and saddled with $7.4 billion in borrowings,
boosted FirstEnergy's debt and preferred share obligations to
a barely manageable $13.2 billion.
Deregulation played a role in that get-big-fast
strategy. Like its peers, FirstEnergy was in a rush to exploit
the newly liberalized regime in electricity pricing.
The trio of former Ohio Edison top executives who
devised the multiple-merger strategy, and have overseen the
varied problems since, remain firmly in control of America's
Number 4 investor-owned power company.
They and a political action committee set up by
FirstEnergy have donated almost $2 million in the past two
federal election cycles, mostly to Republicans. And the
company has spent another $2.2 million to lobby federal
politicians last year alone.
Company president Anthony Alexander is a "Pioneer," one
of the elite donors to have raised $100,000 or more for U.S.
President George W. Bush's 2000 election campaign. Burg, for
his part, co-hosted a GOP fundraiser earlier this year in
Akron, First-Energy's hometown, where the guest speaker was
former administration energy czar Dick Cheney.
After lobbying by FirstEnergy and other utilities, Bush
reneged on a campaign promise to set caps on carbon dioxide
emissions by power plants. The president now is poised to
reject long-standing calls by his own energy regulators to
exert more direct control over the operating procedures of
U.S. utilities — a proposal also fiercely resisted by the
Investors have taken a haircut on FirstEnergy stock,
which has lost about one-third of its value in the past two
months. Some money managers actually hope the stock will
plunge further — their best hope of getting management turfed.
That was the state of play on Aug. 14.
In the two hours before the northeast blackout that
day, a FirstEnergy power plant went offline and several of its
high-voltage lines failed. FirstEnergy has acknowledged that
an alarm system to warn control-room personnel of the faulty
power lines was not functioning at the time.
FirstEnergy waited for two days, until power had been
restored to most of the blacked-out regions, to publicly
disclose the abrupt shutdown of one of its power plants.
The company's executives have yet to appear in public.
A PR firm hastily recruited to perform damage control has
advised Burg & Co. not to be accountable at this time,
fearing they will be subjected to a 60 Minutes-style
confrontation. This would appear to be another case of
misspent funds, given that nothing in FirstEnergy's culture
suggests the top management needed any paid prodding to duck
Some of the earliest finger-pointing at the Ohio firm
came not from Washington, but Wall Street.
CreditSights, a bond analysis firm that has sought
management changes at FirstEnergy for some time, rushed out a
report that said, "Having come less than an inch from
potential radiation leakage from Davis-Besse, they've now
succeeded in blacking out eastern North America, a much more
DiNicola of FirstEnergy says problems elsewhere in the
Midwest grid, or perhaps another grid altogether, are possibly
to blame. "It is too soon to say that we were at fault," he
says. "We don't think it's possible."
It is indeed too early to be conclusive. But the
FirstEnergy story does recall the Henry David Thoreau maxim:
"Some circumstantial evidence is very strong, as when you find
a trout in the milk."
articles by David