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Weak link in power chain

DAVID OLIVE

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 history.

Getting by, rather than the pursuit of excellence, seems to have been the vision for this Ohio-based electric-utility conglomerate.

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 edifying sight.

"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 equipment. Indict!'"

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 said.

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 separate accidents.

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 lines.

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 Air Act.

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 years.

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 albatross.

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 industry.

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 and cover.

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 impressive feat."

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."

Additional articles by David Olive


 
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