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Wrongful Merger? From NSP to Xcel - Course Syllabus

Preliminary – 5/27/04

Teacher: Bob Carney Jr. -- bcarney@bobcarneyjournal.com

Description:

In 1999 NSP announced it planned to merge with New Century Energy of Colorado to form what has become Xcel Energy. We will study the history of this merger, from the perspective of the instructor, who was working on a project at NSP when the merger was announced, and who resigned when he concluded pressure was being put on management to report in support of a “target” dollar amount for anticipated merger savings. We will examine the merger process, and some of the results to date, considering a range of issues in three categories: a) business issues, b) how various people were affected by this merger, and c) legal issues. We will consider whether our current regulatory system has performed adequately in representing the public interest, and we will consider forming a public interest group with the purpose of monitoring Xcel on behalf of the public.

Materials:

An information packet, to be prepared weekly by the instructor, consisting of an average of about 30 pages a week (some weeks 40, some weeks 15). This will be the functional equivalent of the course text book. A copy will be provided to each student.

A set of PowerPoint slides, to be prepared weekly and used as lecture presentation aids.

Note: all course materials will be the copyrighted property of the instructor.

Week

Topics

Business Theme

People Theme

Legal Theme

Business and management issues.

How various “stakeholders” are affected.

Issues and proceedures of interest to students of law.

1

Course overview

An overview of topics and themes we will cover in this course.

The role and importance of regulation and public interest groups in business.

NSP (and NCC) top management: why and how would this merger benefit them?

History of Federal and State regulation of electric utilities.

2

Pre-merger NSP, merger announced, merger environment, initial projected merger benefits.

We will briefly examine the history of a previous, failed attempt to form a new company to be called “Primergy” from a merger of NSP and Wisconsin Electric. We will examine what steps NSP appeared to take to ensure the merger that resulted in Xcel would be approved. We will examine the business environment at the time, including Enron and the dot.com stock market bubble, and the strategic business reasons that led many to think the merger would succeed. We will examine the reasons for NSP's pre-merger engagement of Deloitte-Touche, and the apparent purpose of the analysis in the context of “regulatory review”.

The business environment – how it shapes business strategy.

Citizens: how and why regulation and public interest advocacy groups are supposed to benefit people. Does regulation work? Are public interest groups effective?

What is the legal standard in Minnesota for approval of a merger of electric utilities?

3

The DT analysis; events leading Bob Carney Jr. to resign; reporting issues to the SEC; the Minnesota merger regulatory review process.

We will briefly examine the DT analysis, showing how they arrived at anticipated merger savings of about $1.1 billion. We will also examine what DT didn't consider, and the issue of whether large public accounting firms should both audit and consult. We will review Bob Carney's role as an example of what NSP's management was being asked to do regarding analysis of merger benefits, including a review of the e-mails that led to his resignation. We will examine the process of reporting potential wrongdoing to the SEC, including why this is important, and why the SEC may, or may not, act on such reports. We will examine newspaper reporting of the merger process, up to and beyond the vote by shareholders of both companies approving the merger, with attention to why institutional holders of NSP stock were advised to vote against the merger. We will survey the Minnesota regulatory process up to the preparation of the Administrative Law Judge's report and findings regarding the merger.

Corporate cultures, networking, and corporate cults. How and why businesses attempt to shape the behavoir of people at work. How and where does management learn to do this?

Whistleblowers and not-whistleblowers. When top management puts pressure on people to do things that are questionable or illegal, how does this affect both whistleblowers, and people who go along so they can feed their famlies?

The Minnesota Regulatory process for Public Utilities; evidence; burden of proof.

4

Bob Carney Jr's comments to the ALJ, and the ALJ report.

The day before the last day to submit evidence, Bob Carney Jr. met with the Administrative Law Judge Steve Mihalchick, who presided over Minnesota's Administrative Hearings prior to preparing his report and findings for the Minnesota Public Utilities Commission (PUC). We will review Bob Carney Jr's analysis of economic impact issues, submitted to Judge Mihalchick, including his recommendation that the merger should not be completed until the Minnesota Legislature had an opportunity to hold public hearings, and to review the merger thoroughly. We will also review NSP's response, and Judge Mihalchick's report recommending the PUC approve the merger, with the stipulations and conditions that emerged from the ALJ hearings.

Should we “all work together?” Minesota's regulatory approval of NSP's merger depended in part on a series of agreements between groups with different interests. How do corporations attempt to “preempt” groups that may oppose them?

NSP employees and stockholders. Based on this week's material, and the previous week's material, we will ask if employees and stockholders had enough information to make informed decisions about the merger, and to participate in Minnesota's regulatory process?

Examination of the “no net harm” standard.

5

Political blow-up: The Minnesota Senate refuses to confirm Jesse Ventura's appointment of Steve Minn; Bob Carney Jr's, “Exceptions” document commenting on the ALJ report.

The ALJ report recommened the merger be approved, but merger-related problems did quickly surface at the Minnesota Legislature. Using Carney's “Exceptions” document as a basis, we will study how and why the Minnesota State Senate refused to confirm the Ventura administration's Steve Minn, who had been appointed to head both the Department of Public Service (with the responsibility to represent the public interest in the merger proceedings), and the Department of Commerce. Minn had been ordered by Ventura to consolidate both departments. One issue that may have contributed to Minn's rejection was that Minn had asked NSP's Chairman, Jim Howard, to put in a good word for him with Roger Moe, majority leader of the State Senate, while the NSP merger was pending.

Conflicts of interest: Why it is important to avoid them. What consequences might follow when conflicts are not avoided? What problems might a society have when consequences are too infrequent, ineffective, and too late?

Legislators and Government Administrators: what happens when trust breaks down?

Lobbying.

6

Part A: Additional evidence added to the record up to the PUC hearing

Although the ALJ's record was closed, substantial new evidence was received and ultimately accepted and considered by the PUC before their hearing and ruling. We will examine the process of written comments, and written responses in public proceedings. Specifically, we will review the response of both NSP and the Minnesota Department of Commerce to Carney's “Exceptions” document. We will focus on the NSP Pension Fund, and how, in the long run, NSP employees may have lost about $750 million in value as a result of merging the pension funds. We will also examine Carney's April 12, 2000 meeting with NSP attorney Scott Wilensky, and Ms. Marya White of the DOC, and how this meeting resulted both in NSP agreeing to drop objections to admitting additional evidence, and to cooperation in making the evidence record more complete by the time of the PUC's hearing to consider and decide on the merger.

Working with and responding to issues and questions from: reporters, critics, and interest groups. How did NSP respond during the merger process? How does Xcel respond today?

NSP Employees. What happened to the pension money?

Legal and ethical duties of a regulated utility to: a) the public, b) parties to a proceeding, c) the press (and media).

7

Part B: Additional evidence added to the record up to PUC hearing; a focus on NRG as a driving factor behind the merger

As the PUC merger hearing approached, NSP prepared for an Initial Public Offering (IPO) of a “tracking stock” for it's NRG subsidiary. NRG was an Independent Power Producer – a company that specialized in owning only power plants, and selling electricity to utilities. At the time of the merger, this business was booming – more recently, these companies have hit hard times, partly due to Enron. Although NRG recently went into and emerged from bankruptcy, at the time of the merger it's market value accounted for a major portion of the total value of NSP. Because the merger resulted in transferring half of the value of NRG to Xcel, based on information at the time this was a second piece of evidence that the proposed merger was weighted heavily against the interest of NSP shareholders and employees, and against Minnesota's public interest. We will study in detail additional evidence presented by Carney to the PUC that demonstrated the high market value of NRG. Carney's analysis was proven to be correct by the subsequent IPO and the rise in the value of NRG stock, both of which were projected by Carney for the PUC, using NSP's own data.

Initial Public Offerings, of both new companies and spin-offs of subsidiaries of existing companies.

NSP Stockholders (including employees) – How did the merger affect them? Specifically, why didn't the PUC give more consideration to Carney's evidence showing reasonable valuations of NSP stock with and without merger approval, and indicating that NSP stockholders would be better served if the PUC reviewed the merger further?

Legal and ethical duties to disclose: did NSP disclose it's plans regarding the NRG IPO in a timely way in the context of the proposed merger, to: a) stakeholders, and b) Minnesota regulators?

8

The PUC Hearing, merger approved; the PUC's order.

We will review who was told about the merger problems and issues prior to the PUC hearing, the proceedings at the PUC meeting, and the order that finalized terms of approval for the merger. Although we will note differences from the initial ALJ report to the PUC's conditions for approving the merger, it is apparent these improvements didn't come anywhere close to a full remedy for the harm the merger would cause for Minnesota. Carney provided his “Exceptions” document to every member of the Minnesota Legislature (all 202, in both the House and Senate). Carney provided a briefing book of major documents, to Senator John Marty (the DFL candidate for Governor in 1994), who met with him twice. Carney provided the same briefing book to reporters at both the Star Tribune and the Pioneer Press, and met with a Pioneer Press reporter prior to the PUC hearing. Senator Marty wrote a letter to the PUC raising concerns about the merger. Following the PUC meeting, neither paper contacted Carney, and neither paper appeared to proceed to investigate any of the issues Carney raised before and during the PUC hearing. Field trip (subject to change, assuming arrangements can be made): We will go to the PUC offices, and the Minnesota Legislature, we will attempt to conduct the week's class session at one or the other of these locations.

How and why businesses try to control what Legislatures do. Specifically, how campaign finance give businesses power and leverage.

Focus: Senator John Marty (DFL Roseville, 1994 DFL candidate for Governor). Senator Marty met with Carney, and wrote a letter opposing the merger? Why might he have been reluctant to try to do more? We will invite Senator Marty, PUC Commissioners and staff, and others, to speak to us.

Campaign finance.

9

Post-merger results: NRG bankruptcy, power outage reporting problems, downsizing, outsourcing, lower stock price, big bonuses for the people at the top.

We will survey post-merger results for several aspects of the merger, including: a) performance of the stock price, b) employment impact c) equipment and maintenance impact, d) power outage reporting impact, e) impact on the company's ability to influence and shape public policy, and f) benefits going to top management resulting from the merger. We will examine the apparent breakdown in trust between Minnesota Attorney General Mike Hatch and top management at Xcel.

Corporate governance and conflicts of interest between top management and stakeholders.

NSP Employees. How have they been affected by downsizing, outsourcing, and management changes? Is the work environment more difficult and challenging?

The role of the State Attorney General; what happens when trust breaks down between State officials and managers of a major regulated corporation?

10

Post-merger focus; why didn't the media report on these problems and issues?

As noted, both the Star Tribune and the Pioneer Press had Carney's briefing book before the PUC hearing, and this was after the “political blowup” at the Minnesota State Senate. Yet neither paper saw fit to contact Carney after the meeting, or, apparently, to investigate further the problems identified by Carney. We will examine the history of the Star Tribune's coverage of the merger. We will consider both why Carney's activity may have had relatively little “hard news” significance, and (a more intrigueing question) why it didn't prompt investigative reporting at either paper. We will consider conflicts of interest between news reporting and the business side of the news business, and possible ways in which news report may change in the future to remedy these problems.

The newspaper business – where do they get their money? Does this influence their news coverage?

Newspaper reporters and editors. What have been their past and current issues, successes, and frustrations as they cover, and don't cover, this story? How might the definition of journalism, and the role of journalist be changing?

Could there be, such a thing as “Journalism Malpractice?” What legal and ethical obligations do journalists and media corporations have to: a) people they quote, and b) people who are encouraged to trust and rely on them.

11

Wrap-up: Review, summary, and conclusions.

What went wrong? What's been accomplished so far? Should we form a public interest group? We will weigh the potential benefits, count the cost, and consider the pitfalls. If forming a public interest group looks like a reasonable course of action, and if enough people are in favor of doing it, we will proceed.

Aaaaggghhhh! No,ooo,ooo,ooo! I'm meltinnnnng! Do corporations exist --- or are they just some kind of mass hypnosis, or brainwashing?

How and why we can and should work to build a better society for everyone.

Forming a public interest group.

Copyright © 2004, Robert S. Carney, Jr., Mpls, MN, all rights reserved.