July 2010 Archives

The New Petro-Villain

The BP oil disaster in the Gulf of Mexico is 100 days old, and now another company is competing for the spotlight as a major petro-villain.

The upstart is Enbridge Energy Partners L.P. — a U.S.-based subsidiary of the Canadian pipeline giant Enbridge Inc. — which is responsible for the recent accident in Michigan that has filled the Kalamazoo River with some 800,000 gallons of oil and shown that crude does not need to be offshore to cause serious environmental damage. The incident occurred only months after the company was warned that it was not properly monitoring corrosion.

Enbridge is no stranger to controversy, both because of its own performance problems, including a series of earlier spills, and its role in facilitating the distribution of oil produced in environmentally destructive situations such as the Alberta tar sands. This dubious track record is worth a closer look.

In January 2001 a seam failure on a pipeline near Enbridge’s Hardisty Terminal in Alberta spilled more than 1 million gallons of oil.
In July 2002 a 34-inch-diameter pipeline owned by Enbridge Energy Partners ruptured in northern Minnesota, contaminating five acres of wetland with about 250,000 gallons of crude oil.
In January 2003 about 189,000 gallons of crude oil spilled into the Nemadji River from the Enbridge Energy Terminal in Superior, Wisconsin. Fortunately, the river was frozen at the time, so damage was limited.
In 2004 the federal Pipeline and Hazardous Materials Safety Administration (PHMSA) proposed a fine of $11,500 against Enbridge Energy for safety violations found during inspections of pipelines in Illinois, Indiana and Michigan. The penalty was later reduced to $5,000. In a parallel case involving Enbridge Pipelines operations in Minnesota, an initial penalty of $30,000 was revised to $25,000.
In January 2007 an Enbridge pipeline in Wisconsin spilled more than 50,000 gallons of crude oil onto a farmer’s field in Clark County. The following month another Enbridge spill in Wisconsin released 176,000 gallons of crude in Rusk County.
In November 2007 two workers were killed in an explosion that occurred at an Enbridge pipeline in Clearbrook, Minnesota. The PHMSA proposed a fine of $2.4 million for safety violations connected to the incident, but the case has not been resolved.
In 2008 the Wisconsin Department of Natural Resources charged Enbridge Energy with more than 100 environmental violations relating to the construction of a 320-mile pipeline across much of the state. The agency said that Enbridge workers illegally cleared and disrupted wooded wetlands and were responsible for other actions that resulted in discharging sediment into waterways. In January 2009 the company settled the charges by agreeing to pay $1.1 million in penalties.
In 2009 the PHMSA fined Enbridge Pipelines LLC-North Dakota $105,000 for a 2007 accident that released more than 9,000 gallons of crude oil.
In March 2010 the PHMSA proposed a fine of $28,800 against Enbridge Pipelines LLC for safety violations in Oklahoma; the case is not yet resolved.

Apart from its safety record, Enbridge is targeted by environmentalists for its role in transporting crude oil from the controversial tar sand operations of northeastern Alberta, which are regarded as one of the largest contributors to global warming as well as a major source of air and water pollution and forest destruction. Enbridge’s predecessor companies had some involvement in the tar sands as early as the 1970s. That role expanded greatly in the late 1990s, when Enbridge completed construction of an $800 million expansion of its pipeline system to bring tar sands oil to Eastern Canada and the U.S. Midwest. The pipeline initially served Suncor Energy, a spinoff of U.S.-based Sunoco that is now Canada’s largest petroleum company.

In recent years Enbridge has spent billions of dollars to expand its oil pipeline capacity, much of it dedicated to the tar sands industry. Enbridge is set to provide another boon to the tar sands producers with the opening later this year of its Alberta Clipper pipeline, which will carry more of the dirty crude to Superior, Wisconsin. It is also proceeding with its Northern Gateway Project, which involves the construction of parallel pipelines from the tar sands region to the western shore of British Columbia. Enbridge is partnering with PetroChina on that project.

Enbridge is also headed for more controversy in light of its announcement in March 2010 that it would develop a natural gas pipeline serving areas of Pennsylvania and nearby states where Marcellus Shale drilling is taking place. Those drilling activities have been the subject of numerous reports of drinking water contamination.

Like BP, Enbridge depicts itself as a strong proponent of corporate social responsibility. Also like BP, Enbridge illustrates how those noble sentiments are meaningless in the face of repeated acts of negligence and recklessness.

The Right Way to Cut Federal Spending

Resembling a scene from Alfred Hitchcock’s The Birds, deficit hawks are taking over Washington. They held up an extension of unemployment benefits and are poised to attack Social Security, Medicare and other supposedly out-of-control forms of federal spending. At a time when government outlays, at least those of the safety net variety, should be expanding to address the ongoing economic crisis, Republicans and many Democrats alike have bought into the dubious idea that now is a time for fiscal austerity.

Apart from the battle over entitlements, there is more sensible effort under way to cut spending that benefits those who need it the least: large corporations. One welcome side effect of the Gulf of Mexico oil disaster is that increased attention is being paid to the ways that federal policies reward the likes of BP, Exxon Mobil, Chevron, Shell and ConocoPhillips. On the Fourth of July, the New York Times devoted part of its front page to a story on this largesse, writing: “oil production is among the most heavily subsidized businesses, with tax breaks at virtually every stage of the exploration and extraction process.”

According to a detailed analysis prepared by the Texas Comptroller of Public Accounts in 2008, total federal subsidies to the oil and gas industry in 2006 were about $3.5 billion. The Times article puts the current cost at about $4 billion. A recent Citizens for Tax Justice report points out that these tax breaks do little to benefit the public and serve mainly to fatten profits and enrich investors.

Efforts to eliminate these subsidies—including one pursued last month by Vermont Sen. Bernie Sanders—have generally come to naught, given the petroleum industry’s formidable influence in Congress. One of the more persistent initiatives is Green Scissors, a 15-year-old project that targets subsidies not only to the energy sector but also to agribusiness, mining and highways — challenging them on environmental as well as fiscal grounds. The Green Scissors 2010 report – just issued by Friends of the Earth, Taxpayers for Common Sense, Environment America and Public Citizen – tallies more than $31 billion in oil and gas subsidies that could be cut over the next five years. The total Green Scissors hit-list amounts to more than $200 billion for that period, with much of the remainder coming from subsidies to other energy sectors such as coal, nuclear and biofuels.

Attacking these costly and harmful subsidies is a noble endeavor, but it may be more effective not to take on the entire energy industry at once. Another significant feature of the Gulf of Mexico disaster is the breakdown of corporate solidarity. BP’s major rivals have taken pains to distance themselves from the British company, implicitly depicting it as a renegade on safety matters. Four of them just formed a rapid-response force to deal with future spills without involving BP in the planning.

In this context, it might make sense to focus on making certain companies, beginning with BP, ineligible for all or part of the federal energy subsidy banquet. Until now, the tax breaks and other benefits have been treated as entitlements, there for the taking by any company involved in certain activities.

Why not modify the Internal Revenue Code so that the subsidies are not available to companies with a poor safety or environmental record, especially those like BP that have paid criminal fines for violations in those areas? The federal government has an Excluded Parties List (albeit underused) for contractors that have been barred from doing business with Uncle Sam. Shouldn’t there be a similar list for subsidy recipients?

Even better would be the creation of good-behavior criteria for receiving those subsidies in the first place. If corporations were required to have a record free of significant violations of regulations relating to the environment, occupational safety and health, employment practices, antitrust, etc., then there would probably be a lot fewer recipients and it might be easier to do away with these giveaways once and for all.

Shaming the Corporate Cheapskates

Buried among the many features of the financial reform bill passed by Congress is a provision that could get you a raise. For this to happen, however, you have to work for a large company that is uncomfortable with having it made public how little it pays its workers.

Section 953 of the Dodd-Frank bill deals with disclosures relating to executive compensation, not only at banks but at all publicly traded companies. One of the ways it seeks to rein in out-of-control CEO pay is by requiring firms to reveal how the amount paid to the head of the company compares to that received by the typical employee. The theory is that having this information made public would give pause to grasping CEOs and soft-touch board compensation committees.

The total compensation of chief executives (along with that of the four other highest paid executives) is already disclosed through the annual proxy statements companies have to file with the Securities and Exchange Commission (which makes them public through the EDGAR online system, where the documents are designated as DEF 14A). Yet there have been no requirements relating to the disclosure of how much is paid to the CEO’s underlings.

Section 953 fills this gap by instructing companies to include in their future proxies the median of the annual total compensation paid to all employees apart from the CEO. They also have to calculate the ratio of that median to the CEO’s total bounty.

Those ratios will be fascinating to see, but just as interesting will be the figures on non-CEO pay themselves. For the first time, we will be able to make direct comparisons of the broad compensation practices of different companies within given industries or across sectors. Getting official data from the companies themselves will be an improvement on the selective information that now gets posted on websites such as Glass Door.

There will be limitations, of course. Congress should have required the disclosure of data specifically on hourly workers rather than lumping them in with higher-paid professionals and executives. It would also be preferable to have separate numbers on domestic and foreign employees. And it is likely that companies will exclude low-paid temps and (often misclassified) independent contractors in making their calculations.

Yet this information could still be put to good use. Having clear, company-specific data could help stimulate a much-needed movement to address the problem of wage stagnation in the United States. The reality of that stagnation is quite evident from overall labor market data collected by the U.S. Bureau of Labor Statistics, but it would be much more effective to point the finger at individual companies with low medians and seek to shame them for failing to provide adequate compensation to their workers.

The ability of employers to keep wages low stems from two classic sources: low unionization and high unemployment. We know all too well the story of how anti-union animus on the part of employers has pushed the percentage of private sector workers with collective bargaining protections to historic postwar lows. To the extent they are able, unions target individual companies such as Wal-Mart, T-Mobile and (until it was finally organized) Smithfield Foods for denying their workers the right to representation.

Unions and other advocacy groups also criticize specific companies that engage in mass layoffs, especially when they seem to be undertaken mainly to impress Wall Street.

Yet we rarely hear criticisms of particular companies for failing to hire new workers when conditions seem to warrant it. The “economy” is assumed to be to blame for the high levels of joblessness afflicting us, not deliberate decisions by corporations to keep their payrolls artificially lean. Recently, the U.S. Chamber of Commerce made the absurd argument that overregulation is responsible for the anemic hiring situation. The Obama Administration responded by saying that weak consumer demand is the cause. Absent is the idea that corporations are failing in their responsibilities.

The unwillingness to chastise corporations is all the more bewildering in the face of growing evidence that business is hoarding cash instead of investing in job-creating ways. A front-page story in the Washington Post headlined COMPANIES PILE UP CASH BUT REMAIN HESITANT TO ADD JOBS notes that U.S. nonfinancial companies, buoyed by rising profits, are now sitting on $1.8 trillion in liquid reserves.

Why is there not more of an outcry about this behavior? Here’s an idea: pick companies with the most egregious combinations of rising profits and falling payrolls and press them to justify their boycott of U.S. workers. Once the new disclosure requirement kicks in, they could also be pushed to explain their low compensation levels. Business needs a strong reminder that it also exists to provide opportunities for people to earn a living.

Barbarians on the Big Board

The barbarians have finally become full-fledged members of the business establishment. The buyout firm Kohlberg Kravis Roberts & Co., which for three decades has targeted publicly traded corporations, is about to start trading on the New York Stock Exchange. The one-time master of taking companies private is now taking itself public.

Seeing KKR featured on the business pages sparks flashbacks to the 1980s, when the firm was at the center of the largest transformation of corporate America since the days of the robber barons. Yet KKR is of interest not only for historical reasons. Its financial maneuvers harmed the American economy in ways that are still being felt today.

Fortune once called KKR founder Jerome Kohlberg Jr. “the spiritual father of the entire LBO industry,” LBO being short for leveraged buyouts – the process of buying control of a company using its own borrowing capacity. Frequently working with top executives who wanted to share in the windfall, KKR took over companies with the intention of restructuring them and later taking them public again at a fat profit. Workers were usually the ones who paid the price, through layoffs or intensified work.

Led by Henry Kravis and George Roberts (Kohlberg was pushed out), KKR used a series of such buyouts to became the country’s second largest conglomerate (after General Electric), with control of corporate trophies such as Beatrice, Safeway Stores and Owens-Illinois. A Business Week cover story dubbed Kravis “King Henry,” while Fortune dubbed him and his partner “Masters of the Buyout Game.”

The greed and reckless speculation of LBOs reached its apotheosis in 1988 in the battle for RJR Nabisco. KKR emerged victorious from the free-for-all and carried out what was then a record $25 billion takeover of the tobacco and food giant. The excesses of all involved inspired Time magazine to write that the process had “crossed an invisible line that separates reasonable conduct from anarchy.” Bryan Burrough and John Helyar titled their 1990 book about the takeover Barbarians at the Gate.

After the RJR Nabisco deal, the appetite for major LBOs waned, in large part because of the collapse of the market for the junk bonds that made most of those deals possible — a collapse hastened by the demise of Drexel Burnham Lambert amid an insider trading scandal. KKR survived, though its stature was considerably diminished. Its reputation took a big hit in 1991, when Sarah Bartlett’s book on the firm, The Money Machine, accused KKR of gouging its own investors, including public pension funds.

KKR held on during the deal drought of the 1990s and finally got its reward in the mid-2000s, when buyouts started to enjoy a resurgence. This time around, KKR and the other LBO firms, now operating under the sanitized rubric of private equity, avoided much of the risk of the dealmaking of the 1980s and shamelessly milked bought-out firms with bloated management fees. As a 2006 Wall Street Journal headline put it, “In Today’s Buyouts, Payday for Firms is Never Far Away.”

The Great Recession has put a crimp in the private equity game, but KKR could not resist one more big deal: itself. For the past three years it has struggled to go public in a convoluted process involving an offshore affiliate based in Guernsey. Now it finally seems to be succeeding, but this is hardly a cause for celebration.

KKR’s initial offering serves mainly as a reminder of how much the firm has done to bring about our current economic ills. KKR helped popularize the idea that wealth could be created out of thin air rather than real productive activity. Its buyouts were part of the inspiration for securitization and other machinations that precipitated the near meltdown of the financial system in 2008. Given that the interest paid on LBO debt was deductible on company tax returns, KKR’s buyouts also pioneered the dubious practice of having the federal government effectively subsidize wheeling and dealing, paving the way to the Big Bailout of Wall Street.

All those deals made Henry Kravis and George Roberts very rich, but they have left the country much poorer.

Refusing the Poisoned Apple

Strikes are rare these days (outside China), so the walkout by a group of some 300 workers at a Mott’s juice and applesauce plant in upstate New York takes on added significance: All the more so because the plant’s parent company has gone through a string of ownership changes involving a notorious corporate raider and a major transnational company whose machinations paved the way for the pressure on the Mott’s workers to reduce their standard of living.

The current dispute began earlier this year when contract renewal talks broke down between Mott’s and Local 220 of the Retail, Wholesale and Department Store Union, an affiliate of the United Food and Commercial Workers. According to the union, management refused to bargain in good faith and threatened to cut wages if its final offer was not accepted. The workers did not back down, the company made good on its threat, and a strike was called in May.

“Mott’s told us we were simply making too much,” said Local 220 President Mike Leberth. Most of the workers earn $19.92 an hour — a decent but hardly a princely rate.

The company’s move to cut labor costs was not born of necessity. Mott’s — the country’s number one brand for apple juice and applesauce — is owned by Dr. Pepper Snapple Group (DPS), one of the dominant companies in the U.S. non-alcoholic beverage market. Last year DPS reported profits of $555 million on sales of $5.5 billion. The company does not provide financial results for individual brands, but the segment of which Mott’s is a part (Packaged Beverages) enjoyed an increase in operating profit of more than 18 percent over the year before.

It is difficult to avoid the conclusion that the inclination of DPS management to squeeze workers comes out of its history of wheeling and dealing. The Dr. Pepper part of the company, which originated in the 1880s, went through a leveraged buyout in the 1980s and was then merged with another buyout victim, the Seven-Up Company, in 1988. Seven years later, the combined firm was acquired by British beverage and candy giant Cadbury Schweppes. In 2000 Cadbury purchased Snapple from Triarc Companies, the investment vehicle of corporate raider Nelson Peltz, and combined it with Dr. Pepper and Seven-Up. In 2007 Cadbury (now part of Kraft Foods) decided to exit from the American beverage business and spun off DPS the following year through a public offering.

The spinoff was instigated by Peltz, who had become one of Cadbury’s largest shareholders. Peltz then turned his sights on DPS. After accumulating a stake of more than 7 percent in the company through his Trian group, he began to pressure management to sell off its bottling operations.

Peltz appears to have given up on that effort (he has sold off about three quarters of his shares), but he must still be keeping DPS executives on edge. Peltz — a member of the Forbes 400 — has a history of squeezing corporations, to the detriment not only of management but also workers. One of his most notable “successes” was condiment maker Heinz, which Peltz pressured to close some 15 factories and eliminate thousands of jobs worldwide. In 2007 Britain’s Birmingham Post published an article on Peltz headlined “Billionaire Hated by Unions.”

Apart from the lingering effects of Peltz’s maneuvers, DPS may be facing some price pressure exerted by Wal-Mart, which, according to the DPS 10-K annual filing, is the company’s single largest customer, accounting for 13 percent of its sales.

All of this is not to take the management of DPS off the hook. DPS chief executive Larry Young apparently did not think there was anything wrong when he (presumably) authorized the management of Mott’s to seek wage and benefit reduction at around the same time that the company’s proxy statement was reporting that he received total compensation of $6.5 million last year.

DPS has also not been completely diligent about environmental matters. In 2005 one of its units in California paid the EPA more than $1 million in criminal and civil penalties for industrial stormwater and wastewater violations at two bottling plants. And this year, tests of children’s juice boxes done by Florida’s St. Petersburg Times found that Mott’s samples had arsenic concentrations above the “level of concern” set by the U.S. Food and Drug Administration and were the highest among those brands tested.

More than anything else, the situation at Mott’s illustrates that Corporate America no longer has any interest in permitting workers to be decently paid. Whereas certain companies once took pride in providing higher wages and better working conditions, that is now seen as a stigma — even when a firm is thriving. Whether to please Wall Street, Wal-Mart or the likes of Nelson Peltz, Mott’s and DPS are trying to force their employees to eat the poisoned apple of reduced living standards. It is encouraging that the members of Local 220, unlike Snow White, are not being lulled into oblivion.