CalPERS to Vet Energy Investments


The California Public Employees' Retirement System's $544-million investment in power industry stocks will come under scrutiny Monday when the fund's influential investment committee meets to review the holdings.

CalPERS has sizable investments in AES Corp., Dynegy Inc., Duke Energy Co., Enron Corp., NRG Energy Inc. and Reliant Energy Inc., unregulated electricity and natural gas providers whose stocks have fallen between 17% and 42% in value since the beginning of the year as various state and federal agencies investigate alleged price gouging in California.

"There is the danger that [the companies] have killed the goose that laid the golden egg," said Michael Flaherman, chairman of CalPERS' investment committee. Flaherman, a Bay Area Rapid Transit District economist, is one of the 13 members of the CalPERS board, which also serves as the fund's investment committee.

With assets totaling $151.8 billion, including nearly $60 billion invested in U.S. stocks, CalPERS is the nation's largest public pension fund. Its investment committee is unlikely to take any action Monday, but CalPERS' scrutiny of companies and industries often serves as an important bellwether for other large public investment funds.

"Corporate behavior that leads to investigations and enough public anger where people are talking about referendums and re-regulation has to be of concern to shareholders," said state Treasurer Phil Angelides, also a CalPERS board member.

CalPERS' energy holdings amount to less than 1% of its stock investments. The once red-hot stocks are under pressure amid the ongoing government probes and investors' fears that a political solution to the state's energy crisis could hinder future growth rates.

CalPERS historically has been sensitive to how political controversy puts certain investments at risk. In October, the CalPERS Fund to Scrutinize board voted 7 to 5 to divest about $525 million in tobacco stocks, saying an "unprecedented amount" of litigation and regulation made owning those stocks a bad investment.

Angelides, who backed the tobacco stock divestiture, requested Monday's meeting, saying it is in keeping with CalPERS' activism on corporate issues. Angelides also is on the board of the $105-billion California State Teachers Retirement System. He is chairman of CalSTRS' corporate governance committee, which will review its energy holdings July 11.

Flaherman said he is concerned that the eagerness by managers of the energy companies to collect high profits will push the industry back into regulation, a development he said would hurt the long-term value of CalPERS' investments in the industry.

"I think there may a real conflict between the shorter-term interests of management of these companies and our long-term interest as a large shareholder," Flaherman said.

Angelides said issues that deserve scrutiny at these companies range from the level of independence exercised by their board members to the pay packages of corporate executives.

The top executives and directors at many of the large power companies that California officials accuse of profiteering from the energy crisis have collected tens and even hundreds of millions of dollars through stock sales over the last 18 months.

One of the biggest recipients is Enron Chairman Kenneth L. Lay, who netted $123 million in option transactions last year, according to a filing with the Securities and Exchange Commission. That was nearly three times his gains the previous year and nearly 10 times what he made in 1998.

CalPERS owns 2.6 million shares of Enron that were worth $137.6 million at the end of May.

Angelides said it will be up to the CalPERS board to decide whether it wants to take any action. In the past, the fund has used its clout to influence the makeup of corporate boards.

"Perhaps most importantly, we can have direct and frank discussions with the management of these corporations," Angelides said.

Yet even if they were to work in concert, it's not clear what influence the state's big public retirement funds can exert on energy companies. Together, CalPERS and the teacher's fund own about 1% of Enron--a large block of stock. But their combined holdings are dwarfed by the largest holder--Janus Capital, which owns nearly 7% as of March 1, according to SEC filings. More than a dozen funds and investment houses hold at least 1% of Enron's shares.

The same holds true for Duke Energy, of which the state retirement funds combined control comes to just under 1%. Money manager State Street Corp., by comparison, has a 8% stake.

Moreover, no one at this point has suggested that CalPERS divest itself of energy company stocks as it has tobacco stocks. Because of its size and the effect its investment might can have on an individual stock, CalPERS relies on a passive investment strategy in which it attempts to replicate the Wilshire 1,500 index of stocks, absent tobacco companies.

Nonetheless, it makes sense for CalPERS to take a look at its energy holdings now, said Andre Meade, a power industry analyst with Commerzbank Securities in New York.

The threat of federal price caps, lawsuits and the probes into these companies' business practices present risks that investors need to consider, Meade said.

"The energy sector has changed dramatically over the last few years and has a much different risk factor compared to the old, regulated utilities," Meade said.

Though Meade believes that issues confronting California and the West were created by a combination of high natural gas prices and a shortage of hydroelectric power generators, he said CalPERS board members' concerns that the industry would be re-regulated are valid.

"They are smart to look into that," Meade said.


CalPERS' Energy Stake

Here's a look at CalPERS' holdings of power industry stocks, ranked by the value of the shares in the fund as of May 29.


Value of holdings on May 29 Stock (millions) Enron $137.6 Duke Energy 112.4 AES 80.8 Calpine 49.0 Reliant Energy 48.4 Southern 40.1 Dynegy 28.7 Sempra Energy 23.9 Edison International 11.8 PG&E; 10.1


Source: CalPERS

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