Steve:
March 2001, informative expose re: Enron from SF Chronicle.
Enron's Chief Denies Role as Energy Villain
Critics regard Kenneth Lay as deregulation opportunist
David Lazarus, Chronicle Staff Writer Sunday, March 4, 2001
Houston -- Kenneth Lay is one of the energy "pirates" accused by California's governor of fleecing consumers. As chairman of Enron Corp., the world's largest energy trader, Lay is arguably the biggest, baddest buccaneer of them all.
But that's not how he wants to be seen. And he certainly doesn't like taking knocks from Gov. Gray Davis for having contributed to California's energy mess.
"It's very unfair," Lay said, his brown eyes taking on a puppy-dog quality. "He's trying to vilify us. But we didn't make the rules in California. We had nothing to do with creating the problem."
He gazed out from his plush, 50th-floor office. Houston's downtown skyscrapers jutted like sharp teeth against the overcast sky.
"Everyone played by the rules," Lay said. "Now our reputations are being maligned."
In a sense, he's right. The ultimate blame does rest with California policymakers for deregulating the state's electricity market in such a ham- fisted way that power giants like Enron cleaned up by exploiting loopholes in the system.
But Enron was no innocent bystander during the restructuring process.
"Enron and Ken Lay were one of the major players behind the push for deregulation in California," said Janee Briesemeister, senior policy analyst in the Austin office of Consumers Union. "A lot of what's happening in California was their idea."
Those familiar with the state's deregulation efforts said Enron was especially eager to ensure that a newly created Power Exchange, where wholesale power would be bought and sold, was separate from the Independent System Operator, which would oversee the electricity grid.
"This fragmented the wholesale market, making it harder to monitor," said John Rozsa, an aide to state Sen. Steve Peace, D-El Cajon, widely regarded as the godfather of California's bungled deregulation measures.
"Enron isn't in the business of making markets work," Rozsa said. "They're in the business of making a buck."
In an ironic twist, however, Enron now could play a pivotal role in helping the state remedy past errors and find its energy footing. The company has that much clout.
SEEKING LAY'S BLESSING
Thus, as the governor pushes ahead with a scheme to purchase the transmission lines of California's cash-strapped utilities, he didn't hesitate to call recently seeking Lay's personal blessing for the plan.
This must have been a sweet moment for the man who just weeks earlier had been castigated by Davis in the governor's State of the State speech.
"I told him we couldn't support it," Lay said, a hint of a smile playing across his lips. "It will lead to an even less efficient transmission grid and,
longer term, it could make things worse."
Why would Davis swallow his pride and court favor with Enron's big cheese? Simple: Davis will need the Bush administration's backing to make the power- line sale fly, and, many believe, there's no faster way to reach the new president than via the Houston office of his leading corporate patron.
Lay, 58, and his company have donated more than $500,000 to Bush's various political campaigns in recent years, and he placed Enron's private jet at Bush's disposal during the presidential race.
So great is Lay's influence with the president that some insist he is now serving effectively as shadow energy secretary, shaping U.S. energy policy as he sees fit.
"There's a long history of Enron pulling the levers of its political relationships to get what it wants," said Craig McDonald, director of Texans for Public Justice, a watchdog group. "What Ken Lay thinks energy policy should be isn't very different from what George Bush and Dick Cheney think it should be."
ANOTHER VIEWPOINT
Lay, of course, sees things differently. At the mere mention of his close rapport with the president, his eyes glazed over and he mechanically recited the words he has repeated numerous times in recent months.
"I have known the president and his family for many years," Lay said. "I've been a strong supporter of his. I believe in him and I believe in his policies. "
He insisted that reports of his having sway over Bush on energy matters are "grossly exaggerated."
Still, it is striking that Bush's quick decision after taking office to limit federal assistance in solving California's energy woes virtually mirrored Lay's own thoughts on the situation. So, too, with the administration's hands-off approach to resolving the crisis.
Whatever else, California's power woes have been very kind to Enron's bottom line. The company's revenues more than doubled to $101 billion last year.
They haven't hurt Lay, either. According to company records, his pay package more than tripled last year to $18.3 million.
Lay and other Enron officials steadfastly refuse to break out the company's California earnings from other worldwide business activities. But Lay conceded that Enron's profit from California energy deals last year was "not inconsequential."
"We benefit from the volatility," he said.
CAPTIVE MARKETPLACE
That's putting it mildly. It could be said that California's energy mess was tailor-made for Enron, which is almost uniquely positioned to prosper from a captive marketplace in which electricity and natural gas prices are simultaneously soaring skyward.
To understand why that is, one must look closely at Enron's complex business model. The company is much more than just a middleman in brokering energy deals.
Lay, with a doctorate in economics and a background as a federal energy regulator, set about completely reinventing Enron in 1985 after taking over what was then an unexceptional natural-gas pipeline operator.
As he saw it, the real action was not in distribution or generation of energy, but in transacting lightning-fast deals wherever electricity or gas is needed -- treating energy like a tradable commodity for the first time.
Enron is now the leader in this fast-growing field, and uses that advantage to consolidate its position as the market-maker of choice for energy buyers and sellers throughout the country.
It also exploits its size and trading sophistication to structure unusually creative deals. For example, if electricity prices are down but natural gas prices up, Enron might cut a deal to meet a utility's power needs in return for taking possession of the gas required to run the utility's plants.
Enron could then turn around and sell that gas elsewhere, using part of the proceeds to purchase low-priced electricity from another provider, which it ships back to the original utility.
"We do best in competitive markets," Lay said. "These are sustainable markets."
TRADING FRENZY
Enron's trading floors buzz all day long with frantic activity as mostly young, mostly male employees scan banks of flat-panel displays in search of the best deals. Rock music blares from speakers, giving the scene an almost frat-party atmosphere.
The company's trading volume skyrocketed last year with the advent of an Internet-based bidding system, which logged 548,000 trades valued at $336 billion, making Enron by far the world's single biggest e-commerce entity.
Kevin Presto, who oversees Enron's East Coast power trades, called up the California electricity market on his computer. With a few quick mouse clicks, he showed that Enron at that moment was buying power in the Golden State at $250 per megawatt hour and selling it at $275.
"Some days we're at $250, some days $300 and some days $500," Presto said over the steady thump-thump of the trading floor's rock 'n' roll soundtrack. "There's truly a problem out there."
This is a recurring theme among Enron officials: California's electricity market is broken and Enron would prefer it if things just settled down. As Lay himself put it, "The worst thing for us is a dysfunctional marketplace."
In reality, California's dysfunctional marketplace means Enron isn't just making piles of money, it's seeing profits both coming and going.
LOTS OF BUSINESS IN CALIFORNIA
The company's energy services division, which handles the complete energy needs of large institutions, counts among its clients the University of California and California State school systems, Oakland's Clorox Co., and even the San Francisco Giants and Pac Bell Park.
Enron purchases electricity on behalf of these clients from Pacific Gas and Electric Co., which by law must keep its rates frozen below current market values. At the same time, Enron sells power to PG&E at sky-high wholesale levels.
In other words, Enron is buying back its own electricity from PG&E for just a fraction of the price it charges the utility.
"These guys are the pariahs of the power system," said Nettie Hoge, executive director of The Utility Reform Network in San Francisco. "Why do we need middlemen? They don't do anything except mark up the cost."
To be fair, energy marketers such as Enron can help stabilize an efficient marketplace by promoting increased competition between buyers and sellers. This has proven the case in Pennsylvania, where Enron actively trades among about 200 market participants.
But in an inefficient market such as California, a company like Enron can easily exacerbate things by exploiting loopholes in the state's ill-conceived regulatory framework.
Sylvester Turner, a Houston lawmaker who serves as vice chairman of the state committee that oversees Texas utilities, said he can't blame Enron and other power companies for pursuing profits in California.
"California set up some bad rules, and these companies played by the rules California set up," he said. "At the end of the day, they will behave to enhance their bottom lines."
But as Texas proceeds toward deregulation of its own electricity market next year, Turner said he has learned from California's experience -- and is taking steps to prevent Texas' power giants from shaking down local consumers.
LESSONS FROM GOLDEN STATE
He has written a bill intended to give the Texas Public Utility Commission more authority in cracking down on market abuses. The power companies are fighting the legislation as hard as they can.
Not least among Turner's worries is that Texas will see what California officials believe happened in their state: A deliberate withholding of power by leading providers until surging demand had pushed prices higher.
"I have that concern," he said. "I don't necessarily take these companies at their word."
For his part, Lay insists that Enron has never deliberately manipulated electricity prices.
"I don't know of any of that," he said. "It's so easy to conjure up conspiracy theories."
As a sign of Enron's commitment to solving California's energy troubles, Lay said he supported Davis when the state began negotiating long-term power contracts on behalf of utilities.
So how many contracts has Enron signed?
Suddenly, the hurt, puppyish expression vanished from Lay's face, and a harder, more steely look glinted from his eyes.
"None," he said. "We won't be signing until we're certain about recovering our costs."
Consider this a shot across California's bow.
E-mail David Lazarus at dlazarus@sfchronicle.com. |
