A bogus conflict-of-interest claim

By Robert J. Michaels

August 10, 2001

California's new power contracts remind me of the car salesman who asked his sales manager for advice when a friend or relative wants a deal. "Easy," said the manager. "Those are the ones you can really roll because they're never going to shop anywhere else."

By now it looks like the long-term contracts negotiated earlier this year by our friends in the governor's office carry prices worse than those available in the market. Gov. Gray Davis puts the average cost at $80 a megawatt-hour, and the state controller, a Democrat with her own interests, sets it at $120. An industry intelligence sheet says that today, I can lock in peak-hour Southern California power deliveries for $55 in 2002 and $45 in 2003.

Nobody really knows whether the contracts will offer better deals in distant years, or whether they caused a drop in market prices. There's no easy way to escape from the contracts, but the Republican secretary of state has come up with an old approach: Label the contracts a "conflict of interest" because some state negotiators owned stock in the companies they were dealing with.

As Yogi Berra should have said, let's run the numbers. Assume an unprincipled consultant negotiates (under the governor's supervision) with a major player like San Jose power producer Calpine. He owns $10,000 of Calpine stock (an amount that has justified firings).

By superhuman and secretive effort, he gives Calpine a $100 million windfall. After corporate taxes, shareholders get $60 million. Calpine sells at $36.67, so our negotiator holds 273 of the company's 298.7 million outstanding shares. As owner of less than a millionth of the company, his share of the profit is $54.83. State and federal taxes take 40 percent, leaving a princely $32.90.

Nobody works this hard and risks his reputation for an amount that buys seven Happy Meals. He won't be allowed to work for Calpine for a few years, and the company probably does not want anyone "so dishonest."

Why care? Media folk usually say that despite the trifling dollar amounts, conflict of interest is an issue of visibility and symbolism. This is odd coming from an industry that profits by rendering the stories visible and symbolic. Ultimately, the media's payoff comes from those of us who willingly read their stories about such egregious sins as a negotiator's $33 profit.

Finding a conflict of interest gives each of us an excuse not to exert ourselves in understanding complex issues. The fascination with conflict of interest crosses party lines, gratifying the enemies of Gray Davis and Dick Cheney alike. Republicans can avoid the exercise of evaluating the governor's electrical policies now that they know the contracts were negotiated by crooks. Democrats can avoid learning about President Bush's environmental policies since they already know who funds his campaigns. All of us have seen headlines about research findings, skipped the article and determined its correctness by checking who funded the work.

Seldom has a "conflict of interest" been so easy to debunk. It's clear the state's negotiators don't know much about buying power, so why would anyone think they were smart at picking stocks?

Since Jan. 1, Calpine stock is down 16 percent. I'm looking for the negotiators who sold it short.

Michaels is professor of economics at California State University, Fullerton. He has served as consultant to power producers and marketers.