Ethical Duties and Conflicts that Arise Under Natural Gas and Electricity Standards of Conduct

1. Ethical Duties and Conflicts that Arise Under Natural Gas and Electricity Standards of Conduct Shelley Corman Enron Gas Pipeline Group April 7, 2000

2. OVERVIEW • What are Standards of Conduct? • Key Standards of Conduct Concepts • Enforcement • Ethical Duties & Conflicts • Video Examples: You be the Judge

3. STANDARDS OF CONDUCT • Rules for arms-length dealings between regulated utilities (pipes & wires businesses) and their marketing affiliates (affiliates involved in selling commodities over those pipes & wires) • Enacted in conjunction with gas & electric restructuring • Key to meaningful open access; functional separation (alternative to divestiture)

4. STANDARDS OF CONDUCT • Wide range of enforcement tools for violations (e.g. divestiture, disgorgement, restrictions on merchant affiliates, piercing the corporate veil/single entity, refunds, fines and possible criminal investigation) • Do not replace DOJ/FTC authority under Federal antitrust laws or private actions for damages • Do not replace non-discrimination provisions of Natural Gas Act (NGA) or Federal Power Act (FPA)

5. KEY STANDARDS OF CONDUCT CONCEPTS • No Preference to affiliate • No Disclosure to affiliate of any information received from non-affiliated shippers • Contemporaneous Disclosure of transportation or transmission information available to affiliate • Independent Functioning of Operating Employees • Separate Books and Records • Reporting/Web Site Postings

6. FERC GAS RULES • FERC rule (Order 497) has been in effect more than 10 yrs. • Applies to an interstate pipeline (natural gas company) with an affiliate that sells natural gas and conducts transportation transactions on the pipeline. Considered an affiliate if 10% or more voting interest. • Standards are purposefully broad. • Civil penalties of $5,000 per day, per violation for knowing violations, potential criminal investigation, and restrictions on ongoing business. • Several high profile FERC enforcement actions.

7. FERC ELECTRIC RULES • Rules adopted in Order 889 in December 1997. • Applies to a public utility that owns, controls, or operates transmission in interstate commerce. • Applies to conduct between the utility’s transmission operation and wholesale merchant functions (within the same legal entity or affiliate). • Regulations are parallel to gas rules. • Practical difference is that gas pipelines are fully unbundled; electric utilities still allowed to sell bundled sales service (native load). • Under Federal Power Act violations are subject to $5,000 per day, per violation, potential criminal prosecution and additional restrictions on business/mergers. • Lots of complaints, little FERC enforcement to date.

8. STATE GAS & ELECTRIC RULES • State attorneys general have authority to prevent anticompetitive practices under state law • State agencies or legislatures have added specific standards of conduct rules to address expanding retail competition • Unique state issues • Use of names or logos • Joint advertising • Providing lists of retail suppliers • Sharing office space, elevators • Provider of last resort • Enron’s Model Code of Conduct

9. KN INTERSTATE GAS TRANSMISSION • Cycling of employees to marketing affiliate and back again means that employees were effectively shared in violation of Standard G. • Transferring an employee one time is permitted by its regulations, but multiple transfers are not permitted. • Existence of regional teams comprised of transportation employees and marketing affiliate personnel facilitates improper sharing of transportation data in violation of Standard F.

10. NGPL V. AMOCO COMPLAINT • Amoco filed complaint alleging marketing affiliate violations • Commission conducted audit and issued audit report • Order following audit concluded that Natural violated regulations concerning marketing affiliates, posting and capacity allocation. • Remedies included: • civil penalties $8.8 million ($4.4 suspended) • further organizational separation • specific capacity allocation provisions

11. NGPL V. AMOCO CASESpecific Violations Separation of Functions • Attended planning meetings together • Found certain planning employees to be “shared” operating employees Information Sharing • Shared computerized capacity model • Provided affiliate with capacity data upon request • Shared employee who receives data by definition, divulges to the marketing affiliate

12. Recent Kinder Morgan Consent Agreement • It is FERC Enforcement’s position that Kinder Morgan violated the NGA, NGPA and marketing affiliate rules by: • Sharing transportation and shipper information through reports and meetings on a routine basis • Having employees with dual roles • Failing to offer discounts to similarly situated shippers and failing to post discounts • Failing to keep separate books and records as a result of their payroll allocation system • Failing to maintain waiver log • Having affiliates provide transportation services for which they had no authority (balancing service, re-selling capacity) • Failing to have separate transportation and gathering

13. Remedies in Kinder MorganConsent Agreement • Kinder Morgan anticipated to sell all marketing affiliates • Must notify FERC if they acquire new companies • In any event, cannot enter new transactions with marketing affiliate • Civil Penalty of $5 M and customer refunds of $675K • Commission barred from bringing administrative, criminal or civil claims

14. Ethics Duties & Conflicts • Conflicts of Interest (TX. D.R 1.06) • Loyalty to a Client • Dealing with Joint Ventures • Organization as a Client (TX. D.R 1.12) • Must take remedial actions whenever a person commits a violation of law which might be imputed to the organization • 18 CFR Subpart U • Person appearing before FERC must conform to ethical standards (385.2101(c)) • FERC can disqualify a person engaged in unethical or unprofessional conduct (385.2102)

15. Contemporary Code of Conduct Issues • No Conduit Concept • Corporate employees deemed to be marketing affiliate employees (Global Functions) • Common computer systems and LANs • Employee transfers • Corporate task forces • Due Diligence Teams