Two Elk Saga Part 3: “Pennies on the dollar”

“He got these assets for pennies on the dollar.” — former Baltimore Gas & Electric executive on Mike Ruffatto California power plant purchases.

[M]ike Ruffatto’s dealings in the energy industry go back to his days as a young lawyer in Arizona.

During his 1970s stint with the prominent Phoenix law firm, Snell & Wilmer, he worked in the business practice area. One of the firm’s biggest clients was the Arizona Public Service Company, the largest utility in Arizona.

After working briefly for another Phoenix law firm — Powers, Ehrenreich & Kurn — Ruffatto took a job with a private crude oil and petroleum product trading firm, Crysen Corp., which was headquartered in Santa Ana, California. Ruffatto and his young family — he married Phoenix grade school teacher Joan Burrows Smith in 1978 — moved there in 1982.

At Crysen, Ruffatto, describing his role as “problem solving,” concentrated on complicated crude oil transactions.

In 1985 he left that company to form a joint venture, Tri-Gen Resources, with Edgington Oil Company of Long Beach, California, which two years before had been bought by Saudi arms dealer and erstwhile billionaire, Adnan Khashoggi. A high-flying member of the international jet set, reputed to be the world’s richest man, Khashoggi was implicated in the Iran-Contra arms deals and the Lockheed bribery scandals.

Strapped for cash to maintain his breathtakingly lavish lifestyle, Khashoggi used his main asset, Edgington Oil, “as a virtual private bank account,” according to the Los Angeles Times, draining some $89 million“to pay the crew of his $70-million yacht, the 60 servants at his estate” in Spain, and to buy nearly $3 million in jet fuel for his airfleet. He installed his brother, Essam, as his man at Edgington, and forced the company to buy a helicopter to bring Essam to the office from his home in Santa Barbara. Essam appeared once or twice at the office; Adnan, never. Ruffatto told WyoFile that he never met Adnan Khashoggi.

Ruffatto developed the Tri-Gen joint venture into a significant gas trading business with offices in Orange, California, and Denver. As Khashoggi’s empire collapsed and was dismantled in bankruptcy proceedings, Edgington was sold in 1988 to John Castellucci, and the company’s oil-storage unit was sold to Atlantic Richfield. Also in 1988, Ruffatto bought out Edgington’s share of the Tri-Gen joint venture and immediately sold 51 percent of the company to North Canadian Oils, Ltd., the Calgary energy arm of Canadian business tycoons Peter and Edward Bronfman. The Bronfmans were looking for an outlet for Alberta natural gas and they asked Ruffatto to run their California shop.

But in January 1990 the Bronfman brothers discharged Ruffatto, triggering a minority stock buy-out provision under his employment agreement. In his resignation announcement with an energy trade magazine, Ruffatto said that “in three short years” since he formed Tri-Gen, the company had reached $75 million in sales and had $20 million in assets.

The Bronfmans disagreed with the amount Ruffatto demanded for his 49 percent share of the company, and the parties went into arbitration, reaching a settlement in late 1990 that made Ruffatto, who had been in the energy business a little over a decade, a millionaire many times over.

After moving to Colorado with his family — wife Joan and their two children — Ruffatto began to look for a way to invest the fortune he had made in the Tri-Gen buy out.

In late 1992 he found it.

By carefully following the affairs of two financially troubled companies, Ultrasystems Inc., a defense contractor and energy company in Irvine, California, and Hadson Corp., an Oklahoma energy company, Ruffatto saw his opportunity in Oklahoma City bankruptcy court.

In 1987 Hadson and Ultrasystems had merged, with Hadson as the surviving entity. Among other holdings, Hadson inherited four small California power plants — two state-of–the-art coal-fired plants and two alternative energy wood-burning plants — that Ultrasystems was building with its partner, Baltimore Gas & Electric Company (now Constellation), at a cost of $315 million in Bakersfield, Fresno and Rocklin.

In 1988, Hadson entered into a limited partnership agreement with Chrysler Capital Corp., a Greenwich, Connecticut, financial services company, for Chrysler to invest $45 million in the four plants for a minority percentage of the ownership. Another investment firm, Pitney Bowes Credit, also bought into the plants, leaving Hadson with an interest of about 6 percent.

Ruffatto, who from his days with Crysen Corp. had shown an interest in cogeneration and alternative power sources, had been carefully tracking the progress of the four Ultrasystems-Hadson power plants. Badly overextended and deeply in debt, Hadson Corp. in 1992 filed for reorganization under bankruptcy in Oklahoma City federal court.

Ruffatto then made his move. It was by all accounts a brilliant business maneuver.

According to federal bankruptcy records, Ruffatto paid only $1.7 million for Hadson’s 6 percent share of the plants. He then moved quickly to buy out Chrysler Capital and Pitney Bowes, both of which, in his words, “wanted to exit this area of business” and were ready to make favorable deals for their shares.

When the dust settled, the only son of working-class Californians, first in his family to attend college, owned a 50 percent share of four brand-new, modern, electric power plants that had cost over $300 million to build. According to federal bankruptcy records and former utility executives familiar with the deal, his total outlay for this spectacular deal was between $10 million and $15 million.

“He got these assets for pennies on the dollar,” recalled one admiring former executive with then co-owner Baltimore Gas & Electric (Constellation Energy). “He then refinanced them and took out a whole bunch of cash — north of $50 million.”

In addition, said the former executive, who agreed to talk for this article on the condition that he not be named, Ruffatto then brokered a deal through the California Public Utilities Commission and Pacific Gas & Electric, which had contracted for the power, to pay him several million dollars a year not to operate two of the plants, the wood-fired plants in Fresno and Rocklin.

“It was one of those weird things where he bought an operating asset, leveraged it, and then got the utility to pay him for curtailing,” the executive recalled. “It is kind of strange, but some of these old power purchasing agreements were not a great deal for the rate payer, so if you go to the PUC and you say ‘If you will pay me X millions of dollars I will remove the units from service and you go out and replace that power and it becomes a better deal for the rate payers.’”

That was the case in the early part of the 1990s when — like farmers paid not to grow crops — Mike Ruffatto was paid not to operate two of his newly acquired power plants. For what was already a great deal, it was icing on the cake.

In late 1992 Ruffatto used the money he made in the North Canadian Oils arbitration settlement, the money he leveraged from the purchase of the four California power plants out of bankruptcy court, and the money he was receiving for idling his two plants, to create his new Denver-based company, North American Power Group Ltd.

And it is no wonder that, given all his recent business victories, Ruffatto was brimming with confidence. He and his wife had bought an enormous new home and stable in the most exclusive neighborhood of suburban Denver’s Cherry Hills Village. They had a huge motor yacht moored in San Diego Harbor, and they were negotiating to buy a bay-front home with its own pier in Corona del Mar. (After his wife died in 2007, Ruffatto sold the waterfront house to Los Angeles Angels owner Arte Moreno for $12.1 million, about what Ruffatto had paid for his half of the four California power plants.)

Already a success by most measures, he was now ready to turn it into something bigger in the Rocky Mountain region, where he saw potential for small, aggressive, privately held energy companies like his new venture, North American Power Group.

As he told the Colorado Public Utilities Commission in testimony in 2000:

The energy industry has been restructuring itself over the past 25 years that I have been associated with it; first in crude oil, later in natural gas and finally with electricity. Regulated utilities have found that in many instances new entrants and smaller companies are able to provide products and services at lower costs than if the utilities did it themselves.

In 1995, North American Power Group began bidding on Public Service Company of Colorado power projects, hoping to establish a business relationship with the state’s largest utility.

In 1998, NAPG was short-listed on a contract to build two new gas-powered turbines for Public Service (commonly referred to as PSCO) in Aurora, near Denver International Airport. But when North American failed to win the final contract, instead of swallowing the bad news and moving on, Ruffatto decided to make a public fight of it. In a rare investigative hearing before the Public Utilities Commission, he accused PSCO of rigging the bids to favor companies with which it already had a relationship.

The upstart, NAPG, was taking on the state’s largest and most powerful utility in a public forum, a move that could be seen as bold. One independent power executive, Nick Muller, called it “bearding the lion.” Yet, even if he won the battle, Ruffatto risked alienating his biggest potential customer.

“Mike lost out and felt that he shouldn’t have lost,” recalled Muller, who was then director of the Colorado Independent Power Producers Association, which included NAPG as one of its members. “Mike is a strong-minded guy and I think he felt that with his successes in California — he made some pretty good money on some plants out there — that he wasn’t going to get pushed around. And that was kind of his attitude.”

The fight before the PUC was, at least in terms of the normal regulatory process, an especially nasty, public affair.

In words of Administrative Law Judge Arthur G. Staliwe, who oversaw the process, Ruffatto felt that NAPG had been “ambushed” by the utility when it ordered changes in the original proposal.

PSCO, for its part, reported that “NAPG lacked the necessary land use permit, gas turbine procurement contract, and financing with which to carry out the modified bid proposal.”

Testimony from PSCO, particularly that of two executives, David L. Eaves and Karen T. Hyde —  both of whom would later rise to high positions in the utility — was very critical of NAPG and its business practices.

Eaves said NAPG “misrepresented the status of its permitting, failed to supply the turbines it previously represented, withheld pertinent information misleading Public Service until problems were later discovered, and then ultimately refused to supply the power on time.”

Ruffatto testified that he was deeply offended by the PSCO accusations.

“Public Service has made many uncomplimentary remarks about NAPG’s ability to deliver the projects,” Ruffatto said. “My purpose in providing testimony in this docket is not to disparage Public Service. However, the record needs to be set straight, and I intend to do so.” He then went on to say that NAPG had never misrepresented anything in its dealings with the utility and had been honorable and forthcoming in all regards.

Asked her overall impression of Ruffatto’s testimony in the case, Hyde said, “Truthfully, it upset me. Overall, it presented a series of incomplete representations and skewed facts that painted a picture that was very much unlike what I recall.”

The PUC ruled against Ruffatto and NAPG.

Eaves currently serves as PSCO president and CEO. Hyde is regional vice president for rates and regulatory affairs for Xcel Energy Inc., parent company of Public Service Company.

Despite the setback, Ruffatto and NAPG continued to bid on projects for PSCO contracts. In 2006, Ruffatto even went so far as to issue a press release announcing a $1.2-billion power plant and transmission project tailored for the PSCO parent company, Xcel Energy, in Wyoming. Whether he intended it or not, the release gave the impression that the Xcel plant was practically a done deal.

“We are excited by the opportunity to serve Colorado’s growing energy needs with electricity generated from clean coal technologies in Wyoming’s Powder River Basin,” Ruffatto said in the PR Newswire release.

But that ambitious proposal, like others, was almost immediately rejected by Xcel, which issued a press release stating that the company planned to focus power development in Colorado. In fact, Ruffatto and his company have never won a contract from Xcel or PSCO, the biggest utility in their home state.

“I feel that Mike probably shot himself in the foot earlier by being so shrill in the battle before the PUC,” said Muller. “But that’s just what old timers like me were thinking at the time. It was just a matter of judgment.”

But some of the charges leveled at NAPG before the Colorado PUC — that the company consistently missed deadlines, that it was under-financed, that it skewed facts and misrepresented negotiations, that it failed to obtain the necessary permitting — were the same ones that would haunt Ruffatto and his company for the next 15 years in Wyoming in the Two Elk project, and which would lead to the suspension of the $10 million in stimulus grants he received from the U.S. Department of Energy.

Coming next in WyoFile’s Two Elk Saga:
Part 4: “Like I Was Purchased?”

— Rone Tempest was a longtime national and foreign correspondent for the Los Angeles Times. One of the co-founders of WyoFile, he served as its editor from 2008 to 2011. His first story on the Two Elk power plant project appeared in February, 2008. Tempest lives in Lander.

Sources & Acknowledgements

EDITOR’S NOTE: This Two Elk series, supported by grants from the Fund for Investigative Journalism and WyoFile founder Christopher Findlater, is an extensive case study of one troubled project; its audacious Colorado-based promoter, and the state and federal officials who kept the project alive despite numerous warning signs that it was a scheme beyond saving. Stories in “The Two Elk Saga” will  appear on Tuesdays and Thursdays until the series concludes on Tuesday, June 10.

SUPPORT: If you find this report valuable, please consider making a donation to WyoFile so that we can continue to bring you in-depth, uncompromising journalism in Wyoming. Your donations are what make a series like the Two Elk Saga possible.

REPUBLISH THIS STORY: WyoFile encourages all news outlets to republish its original content for free, while strictly insisting that proper credit is given to the author and to WyoFile. Please include a link to WyoFile.com for all online republications. Click here for details on how to republish WyoFile stories. WyoFile cannot authorize reuse of some photos, so please contact the owner of the image directly for permissions.