No one pushed harder for deregulation, and no
one had more to conceal, than this pillar of the new economy.
by William Bradley
The American Prospect magazine, January 2002
The spectacular fall of the house of Enron would have been
a huge news story were it not for the terror war. Just a few months
ago, Enron Corp. ranked number seven on the Fortune 500. But in
little more than 15 months, it managed to lose over 99 percent
of its equity. As the nation's biggest electricity marketer in
the late 1990s, the company led the way for the energy industry-taking
advantage of deregulated markets, boldly forging ahead into new
ventures around the globe, and impressing uncounted business commentators
with its "innovation" and "brand-new thinking."
Enron's vaunted CEO, Kenneth L. Lay, emerged as one of the principal
backers of, and advisers to, George W. Bush.
"Enron was the next big thing," says V. John White,
executive director of the Center for Energy Efficiency and Renewable
Technologies. "Like the dot-coms, it lived and died on that."
But unlike dot-com companies that rose up and flamed out with
little fanfare, Enron cut an enormous swath through the real economy.
At its peak, this was a $70-billion company that helped to bring
gas and electricity to people around the world. After it filed
for bankruptcy on December ~, more than 4,000 employees in Houston
were out of a job. At least $30 billion in company debt now must
be dealt with, according to bankruptcy filings.
This is a stunning reversal for an energy company that began
in 1985 with the merger of two pipeline concerns. Those were the
days when deregulation in the financial industries was beginning
to lead to dizzying failures-such as the collapse of junk-bond
impresario Michael Milken's investment banking firm, Drexel Burnham
Lambert. But the gradual deregulation of the natural-gas industry
was just under way. Under Lay's leadership, Enron became a leading
natural-gas company. It pushed aggressively for deregulation-first
of natural gas and then, in the 1990s, of the electricity industry.
By 1997, Lay and his new partner, Jeffrey K. Skilling, who
had been a management consultant at McKinsey and Company, decided
to transform Enron into a new kind of powerhouse-one that would
take full advantage of the freewheeling opportunities in energy.
Skilling decided that the heart of the business would not be in
assets-power plants and pipelines-but in trading long-term energy
contracts. In other words, the game was to match up sellers that
had excess power with buyers that needed power. This was a radical
innovation in the energy industry.
As Skilling and Lay got more creative, Enron's involvement
in relatively straightforward long-term contracts evolved into
new arrangements involving complex and exotic financial deals.
Lay claimed throughout that it was all a matter of creating efficient
markets. "Technology is changing," he noted repeatedly,
"and there's a lot more value in flexibility and optionality.
Just about in every industry, you can make them a lot more efficient
when you have more optionality."
What exactly this gauzy talk about "optionality"
meant wasn't all that clear to many listeners or, as it turned
out, to Lay himself. But like Milken in the 1980s, Lay seemed
to be a man very much of the moment, in possession of special
knowledge not available to mortals.
One of Skilling's beliefs was that Enron could win big by
branching out into the commodities business. In the hope that
the company could create an international, privatized water market,
just as it helped spur a global movement to privatize energy,
Enron's leaders in 1998 set up a subsidiary called Azurix. It
started off with a major water concession in England but soon
ran afoul of British regulators who cut the firm's rates-a sign
that without deregulated markets, Enron's style was significantly
cramped. Azurix's expansion into Brazil also worked out badly
due to local politics. Enron hid the mounting debts in an off-the-balance-sheet
partnership. That turned out to be a technique that was all too
common and that led to the kind of debt load that became unsustainable
when investors lost confidence in Enron's numbers.
Enron also jumped feet first into the broadband business with
massive investments-and losses-in fiber optics (just like another
reeling high-concept concern: Global Crossing, run by former Milken
associate Gary Winnick). Enron spent $1.2 billion to build a fiber-optic
network, but the ballyhooed broadband business, which attracted
huge amounts of capital as the latest "next big thing,"
failed to take off. Too many investors were chasing too few interested
consumers, creating too much capacity. Beyond broadband, Lay and
Skilling had their eyes on the broadcast spectrum-the airwaves
over which entertainment and other communications are transmitted-a
publicly regulated and sometimes publicly owned commodity. But
some of that spectrum goes unused for stretches of time. A spot
market is likely to emerge for the unused spectrum, just as it
did for satellite time access. A company that wants to play in
this new market can't afford to be on the bad side of Democrats
in a divided federal government. But Enron's broadcast bazaar
was not to be, for the company was already running afoul of federal
regulators. As news of an investigation by the Securities and
Exchange Commission got out, Enron's stock began to drop.
All the while, Lay's influence was being felt in the political
world-chiefly, through the Bush administration's moves to save
electricity deregulation. Lay was instrumental in getting right-wing
ideologue Curtis Hebert replaced as head of the Federal Energy
Regulatory Commission (FERC) with a Texas friend of his and of
President Bush: Pat Wood, former chairman of the Texas Public
Utility Commission. Hebert-who refused to scrutinize even the
most egregious price gouging- had become a lightning rod for California
Governor Gray Davis and other critics of California's misfired
experiment in deregulation. Wood proved to be just the ticket.
His moderate posture helped to reassure states that were losing
confidence in deregulation.
Last May, Lay convened a meeting of mostly conservative Los
Angeles notables in a bid to preserve deregulation in California
and quash a nascent public-power movement. Among those in attendance
were Arnold Schwarzenegger, former L.A. Mayor Richard Riordan
(now the Republican front-runner for governor), and, yes, Riordan's
old business buddy, Mike Milken. Lay made the case for deregulation
and predicted that prices for electricity would begin to fall
from their skyrocketing levels.
And, as it happens, prices started to go down about that time.
The FERC was still balking at reining in runaway gouging. Big
rate hikes had not yet gone into effect, and California's new
conservation programs were mostly in the planning stage. Plainly,
Enron and others in the energy business had an interest in cooling
the price gouging: first, to save deregulation, and second, to
expand into new business areas.
Deregulation, in fact, is proceeding not just in the United
States but around the globe. U.S. investment in foreign utilities-which,
following the lead of Thatcherite Britain, have been privatized
not only across Europe but through virtually all of Latin America
and much of Asia and Africa-quadrupled in the last half of the
As U.S. power companies globalize, they confront a dizzying
array of options with varying degrees of risk and reward. Although
Enron and the other new-wave energy firms act with a great deal
of bravado, when you strip away the facade of big money, fast
computers, and snazzy Italian suits, this is all very new to them.
After all, the energy business has historically been essentially
a resource-extraction business: Drill holes in the ground, find
oil and gas (or not), line up buyers, sell, repeat. Since energy
is something that people actually need, jacking up prices leads
to a negative reaction, especially in countries in which free
markets are not venerated. Enron's pattern was to think short-term
and to go for the money while it could.
Enron's failing operations in Dabhol, India, are an example
of how things can go sour. Enron made a s3-billion power plant
investment in India-that country's largest foreign investment
and the world's biggest natural-gas-fired project. But it was
all thrown into disarray when the Maharashtra state government
canceled the power-purchase agreement in May, complaining that
Enron was overcharging. While a panel of international arbitrators
tried to work things out, with Indian politicians demanding contract
renegotiation, Lay created an international incident with comments
in August to The Financial Times in which he appeared to threaten
to use his influence with the White House to bring U.S. sanctions
against India. | The newspaper quoted Lay as saying that U.S.
law "could prevent the U.S. government from providing any
aid or assistance or other things to India." In a subsequent
letter to Indian Prime Minister Atal Behari Vajpayee, Lay denied
asking any American official to impose sanctions against the nation's
most important ally in Southwest Asia.
But by August, Lay and Enron had bigger problems. Skilling
stunned Wall Street analysts by abruptly quitting the company,
and Enron stock-once trading at $90 a share-was dropping fast,
eventually bottoming out at 26 cents.
Financial analysts say that the end of Enron is going to make
it harder in the short-term for the entire energy industry to
raise capital. The days of easy access to funding and low interest
rates are over for the industry, at least for now. Energy developers
will have to prove the profitability of every project, in contrast
to the days when Enron's breezy bafflegab satisfied the auditors
and regulators who were supposedly minding the store.
Meanwhile, the political questions are just beginning. Enron's
'success" supposedly proved that the free market leads to
efficiency and prosperity. What, then, does its failure tell us?
WILLIAM BRADLEY, a California-based writer on politics and
energy, has served as a senior adviser in Democratic presidential
and gubernatorial campaigns.