Public Policy Push

By the early 1990s, a competitive retail electricity commodity market was an idea waiting to happen. In 1982, Irwin Stelzer (later Ken Lay’s top consultant for Enron) stirred the hornet’s nest with an essay in Regulation magazine—“Electric Utilities—Next Stop for Deregulators?” FERC, the Department of Energy, and Virginia Electric & Power, Stelzer reported, were each studying alternatives to the industry’s vertically integrated monopoly structure. He attributed this development to deregulation elsewhere (airlines, trucking, railroads, telecommunications), as well as to the recognized problem of utility overinvestment under the (mal)incentive of rate-base regulation.

Stelzer’s logic led to a simple but foreign idea to “give distributors and their customers an opportunity to buy power from the cheapest sources.” Power generation, after all, would be populated by many sellers, not the “natural monopoly” of one distribution provider (the company owning the wires).

In 1986, the head of the Illinois Commerce Commission, Philip O’Connor, proposed “requiring nondiscriminatory wheeling of power between individual consumers and producers to eliminate unjustifiable regional differences in price, thereby creating a national energy market.” Utility generation could be deregulated and spun off to independents, O’Connor and two coauthors posited. Spot prices and futures prices could develop, and utility services—none greater than transmission—could be unbundled for separate pricing.

Enron started from scratch with its vision of retailing electricity. But the opportunity was set up by its Washington office, which sponsored a provision in the Energy Policy Act of 1992 to require utilities to provide nondiscriminatory access to the transactions of outside parties doing wholesale business (sale-for-resale). Mandatory open access for in-state distribution (referred to as retail wheeling) was expressly not required in the federal law. Enron could not dare ask for that—yet.

So, Enron had won the fight for interstate mandatory open access.¹¹ But at the state level, the integrated electric companies possessed much more clout with utility commissions and lawmakers. “Retail wheeling is bad policy,” stated David Owens, whose Edison Electric Institute (EEI) favored “incremental competition.” Debate and delay (“going slow”) gave the utilities more time to recover their uneconomic (“stranded”) costs from captive consumers, which they could not have done if cheaper power were wheeled in (short of a special surcharge in transmission rates). Only a few electrics favored retail competition—trusting the political process to provide stranded-cost recovery during the transition. One such company was Cinergy, headed by Enron-ex Jim Rogers.

What about the captives behind the monopolists? Consumers were not up in arms, much less organized, to champion retail access to gas or to electricity. Households and commercial users were accustomed to their rates and, short of a price spike, valued the personal time and energy that would be spent in switching. (Utilities proactively engaged in public relations for this inertia.) And wasn’t commission regulation a substitute for competition, capping rates in the public interest, at least in theory? Still, with retail access in play, the utilities’ contributions to Political Action Committees (PACs) tripled in 1995–96 from what it had been in 1994, and they got busier in almost every relevant political jurisdiction. Enron was in for a fight.

Environmentalists were not supportive of a changeover that promised to lower rates and increase consumption, which was the opposite of Amory Lovins’s conservationist vision, called negawatts, and which was also opposite to utilities’ demand-side management (DSM) programs. A Lay favorite otherwise, Christopher Flavin of the Worldwatch Institute called retail wheeling “a nightmare” because it would bring a low-rate ethic to power generators and to consumers, discouraging renewables. Environmentalists would go on to criticize Enron by name, favoring a total-energy-outsourcing approach (“offering energy-efficient light bulbs, water-heater insulation blankets, and tips on reducing energy use”) in place of a commodity price war. Such a strategy would, in fact, fall short for Enron, as discussed later in this chapter.

Bootlegger Enron needed a Baptist, a public interest group touting its legislative and regulatory agenda as more than self-interested. “This is about money,” stated Don Jordan of Houston Industries (later Reliant, now NRG), the franchised electric utility serving Enron’s home. To him, as well as the utility establishment (except for Ken Harrison of Portland General Electric, as discussed below), retail wheeling was a zero-sum game between the utility and the interlopers, without meaningful gains in economic efficiency.

There certainly could be net efficiency gains for consumers from a competitive industry restructuring, whether or not the captives were assigned a (transmission) rate surcharge to cover the utility’s stranded costs. And that case for reform was put into play by the most progressive state utility commission in the nation.

A California Proposal. In response to a deep recession in his state, Governor Pete Wilson instructed the California Public Utilities Commission (CPUC) to address electricity rates, which were substantially above the national average. In April 1994, the CPUC proposed a regulatory restructuring that included “direct access” (retail wheeling) in a way Jeff Skilling and Ken Lay could have proposed but had scarcely lobbied for.

In response, Enron began a full-court press on both the lobbying and business fronts in its quest to become the nation’s foremost provider of electricity (and gas) to households—and to double the size and profitability of the company in five years (Enron 2000). Spurred by Enron, a group of libertarian-leaning think tanks and advocacy groups sided with partial deregulation (of the commodity) and retail competition enabled by a new government intervention: mandated open access (MOA) for the distribution of gas and electricity to final users.¹²

“California’s investor-owned utilities currently charge some of the highest prices in the country,” the CPUC declared in its historic proposal. “This distressing fact prompts us to explore reasonable alternatives to the current framework.” The Order Instituting Rulemaking and Order Instituting Investigation continued: “Our express objective is to establish a new framework” in place of the “traditional cost-of-service regulatory model governing vertically integrated, natural monopolies,” which would do “a considerably better job of exerting downward pressure on the prices California’s residential and business consumers must pay for investor-owned electric services.”

California’s average rate of 10.3 cents/kWh was 50 percent above the national norm—and twice that of Oregon to the north. The proposal was to phase in access to a different customer class every two years, taking eight years in all, with residentials finally eligible for direct access on the first day of 2002. No disallowance for stranded costs was proposed, and no rate reduction, consumer savings, or economy-wide benefit was forecast. The benefit of direct commodity competition spoke for itself.

The CPUC questioned its own integrated resource-planning approach, admitting that “attempts to predict, plan, or mandate a single electric future for California means more of the same—central planning and micro-management.” A competitive, consumer-friendly regulatory regime was sought. Writing from Washington on all the commotion, John Jennrich titled his Natural Gas Week Perspectives column, “Creeping Capitalism Slithers Out of California.”

The “Blue Book” proposal was a shot heard ‘round the country. Stock prices fell by double digits for many electric utilities as investors contemplated whether the vulnerable could recoup their stranded costs, estimated at $150 billion nationally and $30 billion in California alone.¹³ EEI assessed its members several million dollars to lobby against the maverick reformers, industrial users (organized as Electricity Consumers Resource Council, or ELCON), and Enron.

“What is taking place in California is analogous to what occurred over the last 10 years in the natural gas industry when the Federal Energy Regulatory Commission mandated open access on all interstate pipelines,” Jeff Skilling explained to Enron employees in the wake of the CPUC proposal. Better yet, there would be a “broader impact” with electricity reaching residentials, in contrast to natural gas. With California being a trendsetter for other states, this “end step,” Skilling noted, “will create a market three times the size of the one for natural gas.”

The historic proposal was not deregulation, depoliticization, and cold water for the franchised monopolists. It was a rearrangement of regulation, what one economist called “regulator-imposed alterations in the structure of the industry,” under which special interests were still dominant. Utilities wanted full recovery of stranded costs, and environmental groups wanted rate recovery and surcharges for their pet supply- or demand-side programs.

Sure enough, the CPUC’s proposal would become more politicized as it made its way into legislation, finally passing as the something-for-everyone Electric Utility Industry Restructuring Act (AB 1890) and signed into law by Governor Wilson in September 1996.

The final legislative and administrative product would be anything but a clean retail-access regime, much less true deregulation, under which providers negotiated with consumers for commodities and services. There would be implementation delays and a half-slave/half-free regime that would result in a full-blown electricity crisis in California several years later. Enron would be central to that story, and not in a good way.¹⁴

Enron developed a public-interest rationale for retail electricity competition in-house and through external studies. One approach estimated the savings from other deregulated or restructured industries; another formally modeled the price reductions in an industry where average (monopoly) costs were above the marginal (competitive) costs.

“Since deregulation began in 1984, there have been $83.7 billion in cumulative cost decreases for the natural gas industry,” Skilling noted, “[compared] to $65.3 billion in electric cost increases for the same period.”¹⁵ Looking ahead, California alone stood to gain nearly $9 billion per year in lower electricity rates, he estimated, “enough money to pay down current debt, to double and triple the number of police officers and teachers in the state’s largest cities, and still leave about $1 billion for discretionary purposes.” In CPUC hearings, Jeff Skilling supported the Blue Book proposal as “on the right track” and a model “for the rest of the country.”¹⁶

Arguing the Case. The potential consumer saving from retail competition was large, according to two Enron-backed studies. In May 1996, economists from Clemson University estimated that full electricity access would reduce rates by 13 percent near term and 43 percent long term, thanks to cheap new capacity and expanding consumption. These estimates repriced the utility’s uneconomic generation to market; stranded-cost recovery was dismissed as “an issue of fairness, not economic efficiency.” Such recovery (allowed or not) was outside of variable rates (but in a demand charge).

A press release from Citizens for a Sound Economy (CSE), the study’s sponsor, put the annual near-term savings in dollars for maximum political impact. The numbers were $216 for households, $2,176 for commercial establishments, and $36,000 for large industrials.

In early 1997, another Enron-organized study, authored by Robert Crandall of the center-left Brookings Institution and Jerry Ellig of the free-market Center for Market Processes (now Mercatus Center) at George Mason University, estimated the consumer savings from other deregulated or restructured “network” industries to find double-digit savings, each growing over time. Airlines, natural gas, railroads, telecommunications, trucking—the analogy was made for electricity.

The utilities attracted less interest from think tanks for their agenda. But they found voice in legal scholar and economist J. Gregory Sidak, holder of a chair at the American Enterprise Institute (AEI), a respected old-line, center-right Washington think tank. In articles, books, and testimony, Sidak (along with economist William Baumol) advocated full stranded-cost recovery as a matter of precedent and law (the regulatory contract). The cost recovery that critics on both ends of the political spectrum called a “bailout” reduced most of the consumer savings from retail competition. Sidak frontally challenged the CSE study on these grounds.

“I was surprised and extremely disappointed to see the American Enterprise Institute as being represented as a supporter of the lobby in opposition to a recent study by Citizens for a Sound Economy,” one board member and donor wrote to AEI president Christopher DeMuth in mid-1996. “Please advise me if AEI’s long-held, pro-competition beliefs have changed or been compromised.”

In a lengthy response, DeMuth assured Ken Lay that AEI was not in the business of taking institutional positions, and full stranded-cost recovery was a legitimate position for debate. In fact, Enron would come to support stranded-cost recovery so long as the utility was out of the sales function, although this concession certainly reduced the consumer cost savings calculated in the CSE study.

Two new lobby groups in 1996 backed by utilities made a case for slow reform. The Alliance for Competitive Electricity and the Competition Policy Institute argued against federalization of electricity policy. Maximum flexibility, not one-size-fits-all, would best ensure reliability against blackouts or brownouts. Small consumers should be protected in any transition, given that “big dogs eat first” (referring to commercial and industrial users). Just-started natural gas pilot programs should be studied. And most of all, stranded costs should be fully recovered, not written off as a loss (as 25 percent of pipelines’ take-or-pay costs had been under FERC regulation).

Federal Action. Enron needed a home run: federal legislation for near-term, date-certain MOA for each investor-owned utility. A few wording changes and new sentences amending Section 211 of the Federal Power Act of 1935 would do the work that otherwise would have to be done, expensively and slowly, state by state.

In early 1996, proposed legislation sponsored by J. Bennett Johnston (D-LA) mandated retail MOA by 2010, while allowing full cost recovery of stranded costs. The EEI bill was followed six months later by the so-called Enron Bill. The Electric Consumers’ Power to Choose Act of 1996, introduced by Dan Schaefer (R-CO), set a date of December 15, 2000, a distant date intended to spur the states into action and set the stage for more serious debate in 1997.

“I must admit I’m a skeptic about major federal intervention on this,” stated Slade Gorton (R-WA), a member of the Senate Energy and Natural Resources Committee. Federalization violated state rights, something to which conservatives were otherwise partial. But the bigger reason for Gorton was rate equalization in an opened market, under which his state’s low-rate power (from hydropower, in particular) would be bid up by high-rate California.

Many more bills would be introduced in the next years, most with date-certain requirements and some with mandates (quotas) for renewable-energy generation (like the Schaefer bill). The Clinton administration’s Comprehensive Electricity Competition Plan of 1998 specified a year-2003 opening, full-cost recovery, and a renewables mandate.

Federal MOA for retail would not succeed. That left much to do for Enron’s dozens of lobbyists at an expense north of $10 million per year.

The great electricity debate was between the status quo and a new regulatory regime, not true deregulation. “Even the most ardent free-marketers don’t suggest a complete pull-out by the government,” stated an editorial in the Wall Street Journal. But there was one holdout. Although Enron persuaded several free-market think tanks to front the effort and perform studies aligned with MOA (at the time, the job of the present author), the libertarian Cato Institute demurred.

“Mandated access is a bad idea in part because it is a violation of property rights,” stated Cato chairman William Niskanen, a noted economist and former acting head of Ronald Reagan’s Council of Economic Advisors. “It isn’t genuine deregulation.” The PhD economist called for an end to rate regulation and legal monopoly, in order to allow distributed generation and new rights-of-way to compete against the franchised utility. Such bypass would avoid stranded-cost recovery too.

Niskanen’s interest in the issue was prompted by Cato’s director of natural resource studies, Jerry Taylor, who tenaciously fought against MOA by writing and commissioning studies and by participating in policy and lobby forums. He was the free-market skunk at the restructuring party who, over time, neutralized the free-market community by splitting it more toward total deregulation.

In March 1996, Ken Lay, Richard Kinder, and Ed Segner announced Enron’s push for “a changed regulatory and legislative environment.” Assignments followed. “Our success in effecting this change will depend on many individuals throughout ECT and corporate staff, and Terry Thorn will now lead this effort by devoting 100 percent of his time to these very important activities.” The senior vice president for public policy reported to Jeff Skilling, leaving federal and state government relations to Segner, Enron’s chief of staff.¹⁷ Steve Kean and Kathleen Magruder, both lawyers, would cover California and other states opening markets to retail competition. And Enron’s Washington office, led by Joe Hillings and Cynthia Sandherr, were on the job under Thorn’s Houston direction.

Enron’s pitch was straightforward: Rivalry in place of monopoly—customer choice—lowered rates and improved efficiencies. “This is not an Enron issue but a consumer issue,” stated Skilling. “This is not an issue of states’ rights,” he added elsewhere. “It is an issue of individual rights.” And on big dogs eat first? “Big dogs have already eaten…. The market needs to be open for the people [residentials] who can’t negotiate a deal in a dark room with cigar smoke.”

“Cheaper electricity means economic growth and job creation,” Lay intoned. “For example, a 1 cent/kWh decline in average consumer electricity prices would put an additional $452 per year into the pockets of an American family of four to save, invest, or spend in our economy.”

Jeff Skilling regularly presented his case for electricity restructuring. His standard speech produced this quotation on the alleged impracticality of FERC Order No. 436 and the competition it would bring to the natural gas industry. “Given its capital-intensive nature, oligopolistic producing sector, monopolistic and vertically integrated transmission sector, and the exclusive nature of franchises,” the American Public Gas Association had stated in 1985, “the industry is a textbook example of an industry that does not lend itself to the discipline of the free market.” The point? A decade later, go-slow electric utilities were making the same argument against the practicality of retail wheeling.

Poolco Threat. As a product that could not be economically stored, electricity had to be consumed the moment it was produced. This engineering fact required centralized dispatch, coordinating all sources of supply with all demand on the grid. As such, come the restructuring debate, technical economists proposed a system wherein one price would be periodically determined from an aggregate bid process, akin to pricing on the New York Stock Exchange. The generated market-clearing price (occurring every 90 minutes, say) would allow participants to lock in prices via financial contracts (“contracts for differences”). Harvard economist William Hogan tirelessly presented the Poolco model to state and federal authorities for implementation, drawing inspiration from the United Kingdom’s pool. Voluntary transactions between generators, marketers, and end users outside the pool were to be prohibited.

The alternative to Poolco was bilateral contracting, also called direct access, whereby each deal had its own terms, including price, although the electricity would still be centrally dispatched. Enron wanted the higher margins produced by separately negotiated contracts, just as it received for natural gas. Thus, Hogan’s model was a policy risk for Enron within a retail-wheeling regime.

After six days of hearings from 140 parties on its Blue Book proposal, the CPUC in May 1995 ruled in favor of Poolco, described as “virtual direct access through a voluntary wholesale pool with retail competition through physical, bilateral contracts.” Commissioner Jesse Knight issued a minority opinion, rejecting “a single, mandatory Poolco structure” in favor of “competing networks of commercial arrangements and institutions, with those bringing the greatest value to market participants winning the competition.”

Ken Lay disparaged Poolco as a “threat” to customer choice and an “invented market where regulators force all transactions to be centrally dispatched from one regional pool.” As a glorified wholesale market where many voluntary transactions were illegal, Lay warned about Poolco becoming the “next regulatory tar baby.”

“The free market model, in contrast,” Lay explained, “allows unilateral and multilateral contracting according to the market’s infinite variety, while retaining central grid control for physical distribution to ensure system integrity.” Regarding the grid, not one but rather multiple grid operators and control areas would promote, in the words of Ken Rice, “innovation, experimentation, and competitive adopting of the ‘best transmission practice’ (particularly if combined with incentives).”

And so, it came to pass that independent marketers and end users favored bilateral transactions, whereas utilities (burdened with uneconomic generation), environmental groups, and FERC welcomed one big market.

Economist Robert Michaels, who in another context was critical of the long-term, fixed-priced contracts that Enron was selling to monopolists, was a key expert against retail centralization. “Poolco is an attempt to do something no government has ever managed to do right—invent a market and force everybody into it to make trades according to rules imposed from above.” Elsewhere, Michaels branded the design as “the monopolist’s new clothes,” suggesting that the utilities’ interest in such centralization was to retain “continued retail monopoly with a more elaborate dispatch system.”

Branding Enron

Enron was going to the individual home at full scale. The potential market was millions of gas and electricity customers, versus the hundreds of wholesale accounts long served by ECT and ten-thousand-plus commercial accounts arising from Enron’s purchase of Access Energy in 1992.¹⁸

Enron 2000 was predicated on mass retailing to the hitherto captive customers of franchised utilities, a $200 billion market. Under traditional public-utility regulation, ratepayers bought a bundled product (the commodity plus its transportation). Under state-level MOA, Enron and other independents would provide the commodity—the gas and/or the electricity—leaving the utilities to provide the transmission, the so-called last mile of pipe or wire.

Enron’s goal, as stated in the 1996 annual report, was to “become the largest retailer of electricity and natural gas in the country.” Enron’s plan to acquire 10 percent of this market, if not more, required a public relations effort far greater than the company’s name change (in 1986) and the branding of natural gas as green (in 1989–90). The new challenge was to make Enron, and Ken Lay himself, recognizable at dinner tables.

Edmund P. Segner III, executive vice president and chief of staff, was tasked with expanding Public Affairs, which resulted in the March 1996 hiring of Elizabeth (Beth) Tilney to the new position of senior vice president of marketing, communications, and administration. Five months later, Enron announced its branding campaign with its first-ever daylong media conference.

“Enron Hires an Ad Agency for Campaign: Company Prepares for Move into Retail,” a Houston Chronicle headline read. Ogilvy & Mather had been retained, a new logo was in the works, and an advertising buy of $30–$50 million was rumored. (Tilney, in fact, had worked at Ogilvy before becoming an executive recruiter for Russell Reynolds, from which she was hired by Enron.¹⁹)

Step-outs in natural gas and electricity branding by other companies had already started. A natural gas marketing alliance between PanEnergy Corp. and Mobil Corp. was using Mobil’s Pegasus logo. UtiliCorp’s EnergyOne used direct mail and targeted ads to tout its “one-stop store for the customer,” which began with the energy commodity but went to appliance repair, security systems, and carbon monoxide detection. NGC (later Dynegy), Southern Company, and Entergy, among others, were experimenting with name recognition.

Enron’s branding was different. Eyebrows were raised because Ken Lay and Jeff Skilling’s effort was in anticipation of a national market. Few retail MOA pilots were under way. California alone had a statewide plan, but that opening was phased, political, and, in terms of profitably for the new independents, highly uncertain.

Yet Enron exuded optimism. The pioneers of natural gas were just going downstream to retail and sideways to electricity. Economies of scope today; economies of scale tomorrow. Enron’s leadership in renewable energy, furthermore, would counter the utilities’ green pricing programs intended to forestall retail competition.²⁰

The media was Enron friendly. Why should Enron, Fortune’s “most innovative” company, not get the benefit of the doubt? Enron could be “extraordinarily successful,” one marketing expert stated. “In a market where there is no national brand, being the first one out is going to be important,” another source told Natural Gas Week. “It is always harder to play catch-up.” And in the august New York Times, Allen Myerson favorably described a company on its way to an annual ad buy of $200 million to create, in Ken Lay’s words, “an AT&T for the electricity business.”

But Enron’s “Big Enchilada” depended on the political will of states to implement MOA—and getting those rules just right to overcome entrenched utilities. Enron’s marketing, in fact, was intended to raise the political will. If regulators and voters knew and liked Enron, as well as Ken Lay, Mr. Enron, the incumbency advantage of utilities could be overcome. The aforementioned Times article by Myerson was clear on this.

There was a residual benefit too. “People saying ‘Enron is getting out in front’,” noted a marketing professor, “certainly doesn’t hurt a stock.” And ENE needed a tailwind. A yearlong dip in Enron’s stock price (the company’s underlying problems remained) had made Enron a potential takeover target in 1997.

The year of the brand at Enron was 1997. On January 4, a new logo, designed by the iconic Paul Rand, was ceremoniously unveiled for Enron employees. Rand’s angled E, called the “Big E” by Beth Tilney, came with the trademarked tag line: Natural gas. Electricity. Endless possibilities.²¹ The work, actually, had been done by Conquest, a sister company to Ogilvy & Mather, because of the latter’s account with Shell.

There was one surprise, reminiscent of the aborted effort to rename HNG/InterNorth as Enteron. When photocopied or faxed, the tilted E (with its three prongs in red, yellow, and blue) had a color missing (it turned white). The middle color was the problem. The easy solution (and the obvious one, in retrospect) was substituting green for yellow.

This mistake required a redo of marketing materials, from banners to brochures to letterhead, at a six-figure cost. But with that problem solved, advertising was purchased, and none more celebrated than 30-second airings in selected cities as part of Super Bowl XXXI, on January 26, 1997.

It was now time to, in the words of Ed Segner, “enhance the company’s image the world over.” An Internet Home Page was created to link Enron with customers, investors, and other constituencies. In Houston—company headquarters, the fourth-largest city in America, and the energy capital of the world—every employee was summoned to represent Enron “with integrity and respect for others in mind … in all of our activities.”

New banners adorned the lobby at 1400 Smith Street. “The Wisdom of Open Markets” and “Being a Laboratory of Innovation” were among the “What We Believe” posters. Catch phrases included “At Enron, we’re up to the challenge … down to the very last detail” and “they’re not only talking energy, they’re talking Enron.” Words and phrases had never been so important at Enron, which was saying a lot.

Ed Segner had hired Beth Tilney to lead Enron’s branding effort, and Tilney, in turn, approached Cindy Olson to take over Community Affairs, whose activities would be “a critical component in building Enron’s brand.” This department had been under Nancy McNeil in Ken Lay’s office, but McNeil was leaving the company alongside her soon-to-be husband, Rich Kinder.

Cindy Olson (no relation to John Olson, the financial analyst) had just signed a three-year agreement to reconfigure the noncommercial (“back office”) side of ECT’s wholesale trading operation in order to prepare for retailing, with as many as six million customers envisioned. Olson was detail-oriented, creative, and personable enough to take on a task encompassing gas accounting, contract administration, financial accounting, and risk management. Annual cost reductions in the $20–$30 million range were promised from “all processes, systems, and headcount being reworked.” It was an important job, to say the least.

Olson was not sure about the new opportunity. ECT was a core profit maker; this outreach work was mostly fluff, she thought. But a visit with Ken Lay sold her. “He wanted to have community relations basically re-engineered,” she remembered. That meant leveraging Enron’s charitable giving in new ways to maximize goodwill and publicity. And it meant creatively engaging Enron’s thousands of employees, particularly in Houston and in Portland.

Every employee was a walking Enron, as well as an ENE holder. Each had a home life and a social life. Beginning in May 1997, the company magazine was sent to the home rather than distributed at work. “I hope you enjoy receiving your Enron Business at home,” Ken Lay wrote. “We’re doing it because we believe it’s important that our families know and understand our business and community activities so they can support and share in Enron’s success.”

Community Affairs launched Enron Envolved to engage employees in benefits for the Downtown YMCA, Juvenile Diabetes, Ronald McDonald House, United Way, and other local organizations. Activities in Portland, home of PGE, were also emphasized, as were some events in Calgary, home of ECT–Canada. Ad hoc opportunities were pursued, such as Enron’s hosting the Women’s Leadership Conference in Houston in October 1996. “This is an exciting time for us because one of Enron’s ultimate goals is to enhance its image as a responsible corporate citizen and increase visibility in communities where the company operates,” Cindy Olson explained in Enron Business.

Community Affairs had a political side too. Much work was required to engineer a come-from-behind victory for a taxpayer-financed sports stadium in 1996, a key part of Enron’s branding effort. Olson would work on all things stadium related, including fulfilling the construction-phase minority set-aside pledge that had been crucial in the referendum’s victory, explained below.

Enron’s branding aspirations were global, not just regional and national. “In my community role, I was also responsible for helping Ken with many of the efforts he got involved in around the world to promote Houston,” Olson remembered. Ken Lay “firmly believed that if Houston was viewed as a world-class city, then we could attract the world-class talent we needed to work at Enron.” Among other things, she traveled to Tokyo for economic-development meetings that Lay cochaired between the two cities through the Greater Houston Partnership.

Olson’s time as vice president of community affairs was “the most fun I had ever had at Enron.” Big budgets and over-the-top events were all in the name of a company on the upswing. “Our community programs were generating nearly $15 million in earned media or free media for Enron every year,” she remembered about the heyday. (The party would quickly end in the second half of 2001.)

Ken Lay was graduating from Great Man of Energy to Great Man of Business. Enron’s CEO was named one of BusinessWeek’s top 25 managers of 1996—and one to watch in 1997. “Kenneth L. Lay has built Enron from a small pipeline company into the first natural gas major to rival oil giants in vertical integration and global breadth,” the cover story read. And now “Lay is pushing abroad and barreling into the $200 billion electricity market at home with a $3.2 billion bid for utility Portland General.”

Lay had won over the Clinton administration several years before by Enron’s embrace of the global-warming issue.²² Enron’s new pitch concerned the benefits of retail competition, which “spoke directly to Ken Lay’s missionary instincts.” Enron’s Great Man just needed positioning to join the greats of business, politics, and academia.

In the mid-1990s, the company set up an endowment at Rice University’s James A. Baker III Institute for Public Policy to award the Enron Prize for Distinguished Public Service. The first recipient, retired general Colin Powell, would be joined by other major figures to raise the profile of Enron and Ken Lay in particular.²³ In the same period, The Houston Forum inaugurated the Kenneth L. Lay Lecture Series to feature nationally known PhD economists to local audiences.²⁴

Ken Lay’s commoner story, drawing from his modest beginnings in rural Missouri, was the basis for induction into the Horatio Alger Association. His 1998 admittance was preceded by much fanfare. “Enron Chairman and CEO Kenneth L. Lay Named to Horatio Alger Association of Distinguished Americans. Award Recognizes a Lifetime of Achievement and Community Service,” a November 1997 press release from the company was headlined.²⁵

The son of a lay Baptist minister, Ken Lay always had a religious streak. This card was played when Lay told his story onstage at Robert Schuller’s “Hour of Power” at the Crystal Cathedral in Garden Grove, California, a program broadcast in a number of foreign countries where Enron was active.

Lay’s growing public appearances necessitated a speechwriter, which led Ed Segner to hire the present writer into corporate affairs in mid-1995. Industry events, public policy conferences, and business schools were common venues. A highlight was the annual World Economic Forum in Davos, Switzerland, where Enron’s CEO participated in numerous panels with world-class business, government, and nonprofit leaders. In Enron’s final year of solvency, Lay was involved in five presentations at Davos.

The Road to Enron Field

How could Enron brand itself nationally? For a newcomer, obtaining the naming rights to a sports stadium was ideal. An ambitious electric utility based in Cincinnati, Ohio, did just this, with Riverfront Stadium becoming Cinergy Field in 1996. Former Enron executive Jim Rogers, a Lay protégé, was the decision maker there.

But Houston had a professional sports problem. Its National Football League franchise was abandoning the 30-year-old Astrodome for a new taxpayer-subsidized stadium in Nashville, Tennessee. Baseball’s Houston Astros wanted out from the Dome too. The NBA Houston Rockets, in another aging facility (The Summit), might well follow in a few years.

With Houston and Harris Country budgets tight, taxpayer-backed bonds would be necessary to build any new stadium, much less three. Voters would have to approve such borrowing. But the idea of average citizens subsidizing wealthy owners and rich players was unpopular, particularly on the heels of the 1994–95 Major League Baseball (MLB) strike and the lackluster performance of the Astros. MLB was the least supported of the three major sports in Houston. Another problem: Not knowing what stadium might be built, the various professional teams were not unified for the referendum.

Informal polling said that Houstonians would defeat a public funding measure. Indeed, voters had rejected a $390 million school bond only six months before.

Facing few good options, Houston’s popular mayor, Bob Lanier, had gone to Washington to explore the strategy of lobbying Congress to repeal the antitrust exemption for major league sports in order to increase the number of franchises. Lanier even lined up counsel to sue the National Football League (NFL) for triple damages for the cost of the lost franchise.

Enron had its eye on naming rights. Houston was the logical place.²⁶ A new stadium situated downtown could revitalize the area and be an easy outing for Enron employees on business or pleasure. The best and brightest that Enron was recruiting from elite business schools would embrace downtown living and nearby recreation. New York City, Chicago, San Francisco, and other top destinations for financial professionals had what Houston was in the process of losing.

Lanier was negotiating with Astros owner Drayton McLane Jr. to keep the team under a new long-term contract. Other markets, led by Washington, DC, were poised to erect a new stadium for McLane on terms that Lanier felt Houston voters would not match. “When the deal looked like it was about to slide away,” recalled Lanier, “Ken Lay came in.” At midsummer, with the vote in November, it was now or never—or the Astros would likely go the way of the NFL Houston Oilers (soon to be Tennessee Titans).

Lay took on the task of closing the gap between what the city and county were willing to give and what the Astros wanted, as well as raising the money to finance a winnable referendum campaign. The amount that voters needed to approve was estimated at $180 million of the $300 million total, but the language on the ballot would be just for the authority to levy taxes to get the needed amount. With property taxes taken off the table for the referendum to be passable, the burden would fall on hotels and rental cars, aka visitor taxes, which would require a last step of approval from the Texas Legislature.²⁷

When head of the Greater Houston Partnership, Ken Lay had impressed city officials. “He was a leader in the business community,” Lanier remembered. “People would follow him.” Optimism crept in. “I could sense we would move from leaving the deal to making the deal,” Houston’s mayor recalled. But Lay had one condition: The new stadium would be downtown, not near the Astrodome eight miles away.

After meetings to assess the situation, Lay spearheaded the formation of the Houston Sports Facility Partnership to provide a $35 million interest-free loan without any repayment until 10 years after the stadium opened. But in the fine print, what the media described as a “contribution” had the benefits of repayment with interest, purchase and leaseback rights to the stadium land, and first rights “to provide goods, services, advertising and naming rights to the new facility at competitive prices and terms.” Announced in August, Enron was 1 of 14 companies to contribute. (The final draw would be $33 million, almost 12 percent of the total estimated cost of $265 million.)

Enron Community Affairs poured resources into the effort. Lay solicited Enron’s vendors. About $1.4 million was raised, plus in-kind services, to mount an all-out election campaign.²⁸

“Bringing world-class professional sports facilities to downtown Houston is one of the great opportunities that Houstonians have been thinking and talking about for quite some time,” Enron’s CEO editorialized in a Houston Chronicle piece, “Downtown’s a Natural for Sports Arenas.” Other notables who would be the public face of the campaign were legendary Astros pitcher Nolan Ryan and George H. W. Bush. (Son George, now governor of Texas, stayed above the fray.²⁹) Opposition came from a small pro-taxpayer group, the Houston Property Rights Association, led by Barry Klein, as well as influential local radio host Dan Patrick (later to become lieutenant governor of Texas).

“It’s not just about sports. It’s about the future of our community,” a one-page flyer for Proposition 1 read. The pitch was about jobs (“retain or produce thousands of jobs”); no property taxes (“paid for by the team, private business, tourists, and the stadium users—not Harris County property taxpayers”); and downtown revitalization (“reinvigorating business, shopping, entertainment, and residential housing”). And passage would mean a done deal, with McLane and the Astros agreeing to a 30-year commitment to stay in Houston, as well as a chance for the city to win a new NFL franchise.

With just weeks to go, polling indicated that Proposition 1 was heading to defeat. The answer was an eleventh-hour strategy of increasing the minority set-aside so that black pastors, led by William Lawson of Wheeler Avenue Baptist Church, would preach Yes. Going above the regular 20 percent target for local public projects (which was not a legal requirement), Lay and McLane promised 30 percent, stating that their businesses would otherwise true up their pledge if the stadium work fell short. “So that kind of formalized it,” remembered Lanier.

“Local Black Leaders Agree to Support Stadium Plan,” a Chronicle headline read just days before the election. Another article the same day reported polling indicating defeat for the referendum. But a Sunday morning push was planned for the pews, and Hispanics and Asians were courted too.

A memo went to all Enron’s Houston-based employees the day before the vote. “Proposition 1 is about more than just keeping the Astros in Houston,” Ken Lay wrote. “It’s about revitalizing downtown and making our central business district a popular destination for not only those of us who work here, but also for everyone in the areas, as has been proven by other cities around the country when new stadiums have been built.” The Astros were ready to leave town, it was noted, having received “a deal in another city which is much more lucrative than the one proposed to keep them in Houston.” Lay closed: “I hope you vote for the last item on the ballot—Proposition 1.”

Proposition 1 passed—narrowly. With 51.1 percent for and 48.9 percent opposed, 16,400 votes made the difference. Mayor Lanier recalled Senator John Kennedy’s (1958) quip that his father was “willing to pay for a victory but not a landslide.”

The come-from-behind victory needed everything: a 10-to-1 spending advantage, public figure support, relentless editorializing by the Houston Chronicle (the sports section sold many papers), and the minority set-aside sweetener in the home stretch. The Greater Houston Partnership was also all-hands-on-deck.

“The proposition pulled ahead as affluent and low-income residents inside the city countered middle-class suburban voters opposed to the proposition,” the Houston Chronicle reported, adding: “Astros owner Drayton McLane Jr., who last Friday announced an affirmative action program to help minority contractors gain work at a proposed ballpark, thanked all supporters and especially minority voters for the win.”

Ken Lay was pleased. “I want to thank all of you who voted for Proposition 1 in Tuesday’s election,” he wrote to employees.

This was the first and very significant step toward building a new downtown baseball stadium and renovating the Astrodome for a new professional football franchise…. Had the proposition failed, it could have been years, and perhaps decades, before Houston would have had professional baseball and football teams again.³⁰

“The baseball stadium passed in large part thanks to the African-American vote, and Ken’s and Drayton’s commitment to diversity,” remembered Cindy Olson. “Ken called on three of his friends in the African-American community to help.” They were Howard Jefferson, president of the Houston NAACP; Bill Lawson, who would be a rare public defender of Lay after Enron’s fall; and Al Green, a Houston judge who would go on to become a US congressman.

Olson enforced the 30 percent target on the major contractor (Haliburton), which was trying to keep costs within budget. Enron significantly increased its own minority spending under her leadership, going from under 1 percent to 30 percent in 18 months, according to Olson.

Lay would be present for downtown baseball’s groundbreaking in October 1997. The Ballpark at Union Station was renamed Enron Field in April 1999 under a 30-year, $100 million contract. In short order, newly formed Enron Energy Services announced a 30-year, $200 million energy contract to provide the gas and electricity, as well as heating, ventilation, and air conditioning services, for the new $265 million retractable-roof stadium.³¹ And Ken Lay would throw out the first pitch on opening day, April 7, 2000, a highlight of his life.

“Enron now joined dozens of companies that had their names on sports arenas, such as Qualcomm Stadium, Continental Airlines Arena, and Coors Field,” noted author Loren Fox. The Enron logo was on tens of thousands of baseballs, caps, and bats, a nice accoutrement in many offices at 1400 Smith Street. Employees enjoyed their special access (“a lot of employees secured favorable seats at the field”), and staffers actually threw out the first pitch and sang the national anthem at games. Enron was a fun place to work. It would be a fun year and a half, ending when Enron’s problems led McLane’s Astros to buy naming rights back from Enron in 2002.³²

The November 1996 affirmation led to a second vote to complete the three-stadium building plan: $286 million for baseball (Astros), $252 million for basketball (Rockets), and $500 million for football (Texans). “Few places have venues to match the billion-dollar collection of Minute Maid Park [formerly Enron Field], Reliant Stadium [now NRG Stadium], and the Toyota Center,” the Houston Chronicle later noted.

Where did the public money come from? It was not property taxes but an increase in the hotel tax from 2 percent to 17 percent and a new 5 percent car rental tax. Ken Lay and Enron’s decisive effort resulted in not only three stadiums but also the highest hotel tax rate in the country and a jolting car rental fee at the airports.

The Lay-Enron connection with Houston professional sports went beyond politics. In 1999, Bob McNair sold Cogen Technologies to Enron for $1.1 billion in Enron stock (and assumption of debt). Cashing out of ENE, he was ready to fund a National Football League franchise for Houston in 2001. (McNair’s winning NFL bid was $700 million.) The next year, a new stadium next to the Astrodome brought the NFL back to Houston.

A third new stadium for the National Basketball Association’s Houston Rockets followed a more complicated script.³³ A fourth facility, BBVA Compass Stadium, did not require voter approval. Built with city and county funding, the home for the Houston Dynamo soccer club broke ground in 2011 and opened the next year. Except for professional hockey (as in Dallas to the north), Houston was a professional sports town shaped by Ken Lay in the mid-1990s.

“We’re just trying to do what is best for the city,” Ken Lay told the Houston Chronicle as the vote neared. But what was good for Houston (Enron’s headquarters) was good for Enron, for branding, for recruiting, and for employee morale. “Enron needs to have its headquarters in a world class city,” Lay stated right after Enron Field opened four years later. “All world class cities have one thing in common: a world class downtown district, with an abundance of business and entertainment.”

The revitalization of downtown and Enron Field was a boon for Enron’s cutting-edge recruitment. “It has been amazing,” Enron recruiter Billy Lemmons stated in the summer of 2001. “Tomorrow afternoon, for example, I am taking a group of Analysts and Associates to a businessman’s special, as they call it, for the afternoon game at 3:00.” In addition, “We have a huge number of people in our program that are moving into these new condominiums and townhomes being developed around the perimeter of downtown.” He added: “Some of them are walking to work now.”

Indeed, “the house that Lay built” was a major factor in $1.6 billion in new downtown construction, with another billion dollars in projects under way or planned. Enron’s gain was “much more than a management contract or marketing opportunity,” an Enron Business retrospective stressed. “It is a chance to give something back to the community, and community efforts and charitable contributions are an important part of Enron’s culture.” Public purpose, private purpose: for Enron, it was one.

Acquiring Portland General Electric

Enron knew electricity as a cogenerator and as a marketer of natural gas to power plants. But Enron Capital & Trade Resources was well outside the fraternity represented by the Edison Electric Institute. Enron did not own transmission lines or have firm transmission contracts. Enron was not federally certified to buy or sell power—and certainly did not hold a franchise to deliver electricity at the local distribution level.

Still, Enron knew where it wanted to go. Mandated open access had helped to build the company on the natural gas side, and the same model awaited electricity with a change in federal and state law to enable, respectively, wholesale and retail marketing. Ken Lay’s lobbying strength, in fact, got the ball rolling with Section 721 of the Energy Policy Act of 1992, which instructed FERC to issue wholesale transmission orders to parties seeking access to utility systems.³⁴

Enron Power Marketing (EPM), formed in 1993, began buying and selling electricity the next year. But wholesale deals did not begin to bring in the margins that covered the start-up expenses of marketers, lobbyists, and public affairs specialists, not to mention support systems. A major scale-up was needed.

Skilling’s original strategy was to confederate geographically dispersed utilities where, for a split of profits, Enron would market in each member’s service area. EPM head Ken Rice pitched the North American Power Consortium (Power Con) idea to 25 or so companies and was able to meet with about 10. Those meetings were polite but tense; Enron was seen more as a threat than as a business partner. Not one was interested, much less the six or so that Skilling wanted. It would take a special utility in the right locale with special incentive to get Enron into the electricity club, or at least to get, in Skilling’s words, its “Good Housekeeping Seal of Approval.”

PacifiCorp, based in Salt Lake City, was Enron’s first target. Discussions collapsed, and Rice, along with merger and acquisitions specialist Cliff Baxter, focused on a smaller target, Portland General Electric.

PGE, which served most of Oregon, had prepared for the new regulatory environment. CEO Ken Harrison did not protest retail competition; his was a low-cost provider with a diverse resource mix, including hydropower. Having addressed cost recovery for its troubled Trojan Nuclear Plant, PGE was about to increase its dividend for the first time since 1986. Harrison was a director of the Edison Electric Institute too.

PGE described itself as “ahead of the industry in implementing strategies that bridge the old world of regulation and the new world of competition.” Specifically, PGE was ahead of other electric utilities (but not Enron) when it came to trading. Because it employed a strategy of “staying short” on generation—that is, buying power at wholesale and limiting the amount of power it generated—PGE had a “fully integrated energy trading operations” tapping into the surplus western US power-generation market.

Thus, PGE was a premier wholesale power marketer in a premier market. In 1996, one of two delivery points chosen for electricity futures by the New York Mercantile Exchange (NYMEX) was a PGE interconnect at the California-Oregon border. The company’s transmission accessed California, which had set rules for retail MOA. PGE’s marketing push was not only for its 3,170-square-mile service territory but also in neighboring Oregon markets and in California.

More than electricity, PGE began selling home-safety products. For commercial and industrial users, PGE developed “a portfolio of energy and utility management services,” including real-time pricing and storage, “to help manage power use and ultimately lower costs.” Pilot programs were being introduced for residential users, offering new pricing and service options in anticipation of retail competition.

In mid-1994, Enron and PGE met. Serious discussions resumed in early 1996, whereupon the parties realized that the only path forward was a merger, not a complicated and possibly unworkable legal agreement, reminiscent of the ill-fated Enron–Bankers Trust partnership five years before.³⁵

Enron offered PGE shareholders a 25 percent premium through a tax-free PGN-for-ENE exchange, fairly standard. PGE held out and got “an extraordinary 48 percent premium for shareholders,” with a straight one-to-one swap of shares. This rich price for a set of highly regulated assets would result in a lower debt ratio for the combined company and help earnings too, Enron explained in an 18-page press release announcing the agreement, dated July 22, 1996. A ratings upgrade was even mentioned in the press.

The $3.2 billion acquisition, pending regulatory review, created a $12.5 billion gas and electric company “to provide integrated energy solutions for wholesale and retail natural gas and electricity customers in North America and internationally.” The “strategic, not defensive” merger would not result in job losses, management changes, or a headquarters shift. The synergy was between Enron’s marketing capabilities (national reach, risk management, and future branding) and PGE’s physical delivery capabilities (generation; transmission; and metering, billing, and auditing for 658,000 retail customers).

The principal negotiators explained the rationale of Enron’s gas-to-electric diversification. “At the retail level, our vision is to become the leading national brand-name total energy provider,” Cliff Baxter of Enron stated. “Almost every other utility merger in the country has been about cost reductions, increased efficiency, and employee layoffs,” stated Joe Hirko of PGE. “I think this is the first merger in this industry that is entirely focused on opportunity, strategic positions, and building markets.”

Ken Lay was thinking bigger. “By leveraging the operating and engineering expertise of Portland General with Enron’s worldwide asset base and experience, we will be able to expand domestic and international activities across multiple fuel lines, including gas, oil, coal, hydro, and renewables.” PGE’s Ken Harrison agreed. “This is going to be the most uniquely positioned company in our industry, period,” he stated. “There is no one that will look like us or have the skills that we have.”

“Overall, there will be a lot of rethinking as to what the competitive framework in this industry is going to be over the next two to three years,” Lay told the press. He forecast more deals in which gas and electricity converged, as well as a quicker MOA for the $200 billion downstream electricity market. “They all want to be the Enron of the electric business,” Lay stated in a hubristic moment. “But we’re going to be the Enron of the electricity business.”

July 22, 1996, was “a day that will be remembered as a new chapter in energy history,” Enron Business stated. Ken Lay was quoted: “Just as coal was the primary energy source of the 19th century, and oil was the primary fuel of the 20th century, we believe natural gas and electricity will converge as the primary sources of energy in North America and many other markets around the world for the 21st century.” For Enron investors, the article noted, the acquisition was “an outstanding opportunity for us to create the leading energy company of the future in the North American energy markets.”

The buzz was all positive about a combination that remade Enron as the seventh-largest electric company (in kWh sales), ahead of hometown Houston Lighting & Power and even Southern California Edison. The merger was a “breakthrough,” reported Natural Gas Week. “One plus one equals three,” stated investment analyst Ron Barone of Paine Webber. For the industry, this was “the model for future [energy] combinations,” reported the Houston Chronicle. “Once again, Enron is on the leading edge of the new world,” stated another investment analyst in Gas Daily.

Other mergers in the period would give rise to the theory of a gas-electricity convergence.³⁶ But was there really a discontinuous jump in an MOA world? Electricity, after all, was a very different industry from natural gas. A plenty smart economist, seeing neither synergies nor scale economies, Robert Michaels, was saying no.

The merger was not greeted enthusiastically by Enron investors. While PGN rose one-fourth to $28.125, ENE fell 5 percent to $39.75. It was reminiscent of the purchase of HNG by InterNorth back in 1985 when John Olson quipped: “It looks like a great business combination until you get to the terms.”

One concern was the role of the Oregon Public Utility Commission (OPUC) in trying to capture for ratepayers synergistic profits that otherwise would accrue to shareholders. The “pro-competition” merger would not create issues for the SEC, FERC, or the antitrust division of the Department of Justice. But OPUC’s approval process could exploit Enron’s eagerness to close the deal; after all, Oregon was not particularly friendly to business, much less to an interloper from Texas.

From the beginning, Enron stressed the consumer benefits for PGE, as well as each company’s “strong traditions of active community involvement and support for a healthy environment.” Enron’s filing before OPUC in September 1996 included philanthropy of $10 million from each side, $20 million total. Still, opposition poured in from electric utilities in the Northwest and in California, civic groups, and environmental organizations.

OPUC set 23 conditions for approval.

Ken Lay and Jeff Skilling had more work to do to avoid an embarrassment. Doling out “a robust assortment” of benefits, Enron reached a memorandum of understanding with 13 civic and environmental groups (one, the Northwest Conservation Act Coalition, was an alliance of 80 subgroups). One provision of the understanding redounded to Enron’s considerable benefit, however: a commitment by PGE to support 25 MW of wind power was a set-up for the just-purchased Zond Corporation (soon to be renamed Enron Wind Corporation).

The January 1997 agreement was hailed by Ralph Cavanagh, senior attorney with the Natural Resources Defense Council, as “a model for the industry as it evolves to greater competition.” Cavanagh testified glowingly for the merger, citing Ken Lay’s leadership on the climate-action and the renewable-energy fronts, including his ability to get Republican support for the environmentalists.³⁷

Regarding a rate reduction for captive customers, the bidding began at a rate freeze from Enron versus a rate reduction of $190 million from OPUC, which Enron calculated to have a net present value of $141 million. OPUC staff held the cards, and the nonnegotiable offer led the merger partners to change their deal. A swap of 0.9825 ENE for PGN was favorably greeted by both companies’ investors. OPUC approved the merger on June 4, the last such obstacle. (FERC had given expedited approval back in February.)

Effective July 1, 1997, the “stand-alone, fully integrated utility” became Enron’s eighth business unit.³⁸ The acquisition price, with the assumption of $1.1 billion of debt, was just under $3 billion, a 42 percent premium for PGN in premerger terms.

“Welcome PGE,” read the lead in Enron Business. “We’re a company that respects our employees, customers, and shareholders and conducts our business with integrity,” stated Ken Lay and Jeff Skilling. “Enron people also care about the communities in which they live and work, taking the initiative to support educational programs and the arts, and promote a clean environment.” Lay and Skilling closed: “Again, we’re delighted to have you on our team and look forward to working with you as we shape the energy industry in the next millennium.”

A June 30 celebration at the Rose Garden Arena in Portland sported pennants, noisemakers, and prizes dropped from the sky. Big screens from Enron offices around the world welcomed PGE’s 4,000. “We have created the single most strategically positioned energy company in the country, if not the world,” said PGE’s CEO—and new Enron vice chairman—Ken Harrison. “I firmly believe that three or four years from now, we will have people who are on career paths that were never dreamed or even conceived of years ago.” (He could not have known how perversely true his words would become.)

In December, just five months into the merger, 20 ECT traders relocated to Portland to open Power Trading and Origination (Western Region), joining PGE’s own traders. Some PGE employees transferred to Houston, such as Patrick Stupek, who joined Cindy Olson’s branding effort as manager of community relations.

Another postmerger highlight was the Customer Choice Introductory Program, which allowed 50,000 PGE customers in four counties to select a new electricity provider as of December 1. With discounts of 10 percent off current rates offered by a dozen or more providers, the program was intended to prove the basic concept before beginning systemwide implementation in 1999. Enron had gladly offered retail wheeling as a part of its OPUC settlement; the idea was to model an “unflinching commitment to the principles of competition” (in Ken Harrison’s words), what other utilities needed to do to implement national state-by-state MOA.

As it turned out, Enron’s “entrée to California’s power grid and a copy of the utility industry’s secret playbook” was overstated—and increasingly costly. PGE earnings were predictable, nothing more. Other utility executives asked facetiously whether they too could get a 40–50 percent premium. (Enron’s original offer of 25 percent was more normal.)

The upsides went away, one by one. With no stop to its regulating, OPUC rejected PGE’s plan to spin off its generation units from its regulated (distribution) side. Trading synergies proved limited, with PGE’s vaunted trading and transmission access reserved for its regulated side. PGE’s subsidiary, FirstPoint Communications, was not a golden extra but a temptation that would be taken much too far, contributing to Enron’s ultimate fate.³⁹ PGE also created legacy problems for Enron when the Public Utility Holding Company Act of 1935 inspired financial shenanigans by Andy Fastow that would mark Enron’s decline.

What was predicted to be either a home run or a long sacrifice fly turned out to be neither. While retaining the wholesale marketing and trading operation, as well as PGE’s telecommunications unit, Enron would put the rest of PGE up for sale after two years. Enron not only needed the cash but also wanted to dislodge assets of Enron Wind from Fastow’s special-purpose entity (RADR).

An announced sale to Sierra Pacific Power Company for $3.1 billion in 1999 (a $200 million loss) would fall through in the wake of the California and western US power crisis. A second sale announced in Spring 2001 to Northwest Natural Gas Company for $3.0 billion (a $300 million loss) was called off a year later.

At Enron’s bankruptcy in December 2001, wholly owned PGE was not included in the parent’s filing. But the woes of PGE employees’ 401(k) accounts made national news as ENE fell from the $80s to several dollars per share and then to nothing.

(PGE would not separate from Enron until after the parent’s bankruptcy. An agreement to be purchased by Texas Pacific Group in November 2003, approved by the bankruptcy court, was turned down by OPUC in April 2005. Still, for accounting purposes, Enron took a $1.8 billion write-off. Finally, a year later, with the 10th anniversary of the merger in sight, PGE would become a stand-alone company again via a stock distribution to Enron’s creditors.)

“Like Dabhol,” Malcolm Salter concluded, “the Portland General affair cost Enron shareholders hundreds of millions of dollars.” It was errant entrepreneurship from those who thought they knew the most about the future of electricity. The gas-electric convergence for Enron, as for other such combinations, proved elusive. Trading “optionality” and a “spark spread” (Btu comparison of gas versus electricity prices) were more sound bites than economic opportunities, as it would turn out.

Peterborough (Electricity)

In May 1996, a first-in-the-nation pilot program began for 17,000 customers of Public Service of New Hampshire (PSNH), representing 3 percent of the state’s electricity users. The program was to prepare the statewide opening set for early 1998, a legislative initiative inspired by an average statewide rate of $0.15 per kWh, one of the highest in the country.

Enron dispatched 30 employees to New Hampshire, more than any other of the two dozen independents vying for the same business. Of particular interest was Peterborough (population 5,300), which bundled its business for bid. In June, Enron’s offer of 2.3 cents per kWh was chosen, a one-third savings from the prior utility’s commodity rate. To widen this pilot program, Enron secured other customers by offering a bonus of $50 for new signees, among other promotional packages. Overall, Enron advertised saving consumers about 20 percent.

The March 1997 Enron Business described the “big success” of Peterborough. Happy faces, from Jeff Skilling on down, adorned the story. But this was “a piddling conquest for a $13.2 billion energy company,” noted a summary in the New York Times. The township’s “preferred” provider (Enron) had spent six figures on advertising, promotions, donations, and a grand town party, not counting employee costs.⁴¹

Enron’s “rock bottom” rates left little or no margin for the seller. What Peterborough did provide was the centerpiece of Enron’s national branding campaign. “In a state whose motto is Live Free or Die, people didn’t like paying some of the highest energy rates in America,” the ad line went. “Now, their newfound freedom of choice is yielding lower rates, better service, and a like-minded partner in energy.” The pitch closed: “What’s on your energy wish list?” with a toll-free number.

As it turned out, New Hampshire would not open up to statewide competition until well after Enron’s solvent lifetime. Enron exited the pilot in September 1998, about the time it pulled up stakes in California and elsewhere. Several hundred remaining customers in the state would be transferred back to PSNH.

Toledo (Natural Gas)

Enron’s big try with natural gas concerned a retail pilot in Toledo, Ohio, in early 1997. Enron’s Clean Start program offered 15 percent off each customer’s previous-year average gas price. A media campaign and local sponsorships were undertaken to build brand and goodwill for the eligible market of 160,000 residentials and 12,000 small businesses.

Each customer offered only a few dollars of profit per month, a pittance compared to cost. The lure was learning-by-doing, in preparation for the big time. “If we can win first in Toledo and then in big states, such as California, we believe the momentum will carry through to a national victory,” stated Enron’s program head, Stuart Rexrode.

Enron cited its 15-year history in the state (via Access Energy, purchased 4 years before). Its book of 500 commercial customers demonstrated the company’s “proven track record of providing reliable service and savings.” The strategy incorporated lessons from Peterborough.

“Market softening” television commercials by Enron were followed by print ads featuring residents and local celebrities in the Toledo Blade. Direct advertising followed with specifics about Clean Start. An Energy Rewards program was set up, under which residents could get free electricity from Enron should that market open. An 800 number was set up, and plans for a local retail office were readied. Sponsorships were bought for the zoo and the Mud Hens minor league baseball team. It was like a “political campaign,” noted Rexrode.

Enron’s sign-up exceeded 10,000 customers. But a single-digit switch rate from the eligible population reconfirmed the value of incumbency. For most customers, the promised savings were not worth the study, paperwork, and uncertainty of leaving mainstay Columbia Gas Company for an upstart headquartered 1,200 miles away.

(Enron would quit and return its customers to Columbia Gas the next year. Also in 1998, Enron passed on a far bigger gas program with 1.4 million customers of Atlanta Gas Light Company, stating a need to wait until the market matured. By this time, Enron had made the painful decision to deemphasize commodity retailing in favor of having Enron Energy Services offer large organizations total energy outsourcing, discussed below.)

California (Electricity)

California’s “Blue Book” proposal in 1994 triggered a national debate about moving from wholesale wheeling to retail access. Two proposals later, enough of a “California Consensus” emerged to put Enron in full deployment. But while “a clear and virtually irreversible choice to embrace retail wheeling” had been made, there was still a lot of politics ahead—enough, even, to sink Enron’s effort.

In early 1997, Enron began a 400-strong deployment to the Golden State. “Major opportunities await in California, which will be the first state to open the electric power industry to full competition on January 1, 1998,” stated Ashok Rao, president of the new subsidiary, Enron Energy Services. “EES has already launched a comprehensive public relations, advertising and direct marketing campaign there, where employees are working hard to sign up customers in this $10 billion market.”

In October, with the market-opening a few months away, Enron offered “an eye catching” two-year deal of 10 percent off existing rates, plus two weeks of free electricity. “We are here to do business,” EES’s Chairman and CEO Lou Pai stated in a press release announcing the California blitz. “Enron has been fighting for energy deregulation for over a decade and now we’re offering low rates and more innovative products to as many Californians as possible.” Enron pitched green, too, citing its solar and wind power investments. But environmentalists were nonplussed over Enron’s price emphasis, preferring conservation(ist) measures instead.⁴²

Five marketing offices were opened: in San Diego, Long Beach, and Costa Mesa for the southern part of the state, and in San Francisco and Walnut Creek for the north. Direct mail and general advertising, as well as a technology bet on a new generation of meters, were part of Enron’s $20–$25 million effort covering the state.

Six months in, this “Olympics of deregulation” yielded 50,000 households—1 percent of the market. “All that grassroots outrage about monopoly power than Lay talked about, the pent-up rage at the utilities—it simply didn’t exist,” one assessment concluded.

The failure of EES in California had several fathers. The politics of retail access cut against Enron, reflecting the clout of utilities. There was a three-month delay in the start date (to March 31, 1998). The California legislature mandated a residential rate cut of 10 percent by utilities, which diminished the incentive to switch. An unspecified transition-cost surcharge on retail rates charged by independents, intended to pay off the utility’s uneconomic generation (stranded costs), also muddied Enron’s value proposition.

Then there was competition. PG&E Energy Services (Pacific Gas & Electric, not Enron’s Portland General Electric) set up 5 marketing offices in the state and another 15 elsewhere in the country. California-born New Energy Ventures secured a low-cost supply source to sign up retail groups. This was a tough game to play from all sides.

Oregon (PGE and Customer Choice)

Enron’s purchase of Portland General Electric in mid-1997 was conditioned on a 60-day requirement that PGE implement a customer choice (customer disaggregation) plan for its 680,000 residential users. This requirement from the Oregon Public Utility Commission (OPUC) was exactly what Enron itself wanted when it joined the electricity club. PGE was already going there, a reason for the merger.

“We’ve been saying for several years that our customers should have a choice of energy suppliers,” CEO Ken Harrison stated. “I foresee many of its central elements being adopted in customer choice plans around the nation.”

In October 1997, OPUC approved a pilot choice plan for 50,000 customers in four cities beginning December 1. Harrison’s number two, Peggy Fowler, called the program a “ground-breaking experience” to “ensure PGE makes a smooth transition to a future with customer choice … to help customers and utilities throughout the nation realize the benefits only a competitive market can provide.”

PGE’s Customer Choice Introductory Program attracted only two competitors, ECT (Enron) and Electric Lite. Both independents ceased operations in July 1998, whereupon the participating residentials (8,700, or 17 percent of those eligible) were returned to PGE (the regulated side of Enron). The primary reason for the failure was familiar: high transaction (hassle) costs, that is, customers disliked spending the time and effort needed to switch more than they liked the savings that switching purported to offer.

PECO Energy (Electricity)

Restless Enron attempted to create its own sizeable market in a bold competitive skirmish against PECO Energy, the largest electric utility in Pennsylvania. PECO was well along in restructuring talks with the Pennsylvania Public Utility Commission (PPUC) when Enron nosed in. With a retail power rate of $0.14/kWh, double the national average, reflecting its high-cost nuclear fleet, PECO had hammered out a settlement that traded a 10 percent rate cut for postponed retail access. Enron had negotiated for a very different outcome and found itself on the outside. It was the classic just-say-no utility dodging retail competition.

Enron took matters in its own hands after PECO refused to meet again. With just days to go before the PECO/PPUC et al. settlement was approved, Ken Lay arrived in Philadelphia on October 7, 1997, with a bold proposal to lower rates by 20 percent, while assuming $5.4 billion in PECO’s stranded (noneconomic) generation costs, which according to PPUC, would be fully recovered in rates. With a national movement to precipitate and branding to do, an Enron-hired plane buzzed PECO’s 29-story building with the banner “Enron Choice Plan Saves 20%.”

Nothing like this had ever happened in the electricity industry in almost a century of public-utility regulation, when franchise protection and cost-based rates took firm-to-firm rivalry out of the picture.

PECO’s CEO Corbin McNeill took it personally, comparing his background (a nuclear submarine commander) to that of “policy man” Lay. “He counts beans and bullets, and I launch torpedoes.” But just the opposite had happened. Skilling and Lay took to radio and ran media ads in PECO’s territory to sell their offer. Enron lobbyists worked the state legislature, and Christian Coalition leader Ralph Reed was hired to help with a grassroots strategy. “It’s like a political campaign,” Lay noted.

A press release from PECO and McNeill was blunt. Defending its all-but-approved settlement that “has already extracted the maximum value that our Company can give without financially damaging PECO Energy,” McNeil directed his ire toward the uninvited party. “Enron, a Texas company often accused of less than forthright business dealings, is attempting to prostitute the regulatory process in Pennsylvania to attain for itself illegitimate business gain and advantage.”

To the national press, Enron was rather ingeniously “seeking to take over the Pennsylvania service area.” To McNeill, Enron’s play was “nothing other than a ‘hostile takeover’ of a significant part of your local utility.”

In a tight spot, regulators renegotiated their deal. Rates were cut 15 percent, midway between the original amount and Enron’s offer. Wheeling was scheduled for 2000. Ken Lay’s company, however, gained nothing.

“Enron did not win,” summarized Loren Fox. “But its interference caused a different outcome.” What Enron called “a win for consumers” was expensive publicity and a moral victory only.

Disengagement, Re-engagement

Andy Fastow, Rick Causey, Ray Bowen, Ashok Rao—the business plan and path to profitability for residentials was under severe strain. It had been a tough 18 months, costing some $20 million. The end came when a newly hired consumer marketer with experience at Pepsi and Taco Bell, Jim Badum, went (with Lou Pai at his side) to present his findings to Ken Lay.

Enron needed “to slow things down,” Badum stated. Enron was not a prototype marketing company. There were simply not enough customers now or in the near term to bring revenues toward the level of cost.

“This is the last thing I expected from this meeting,” Lay told Badum. Heady thoughts about half the national retail market being open by 2001 and Enron being an energy retailer on par with a major oil company were off the table. Securing as many as 20 million electricity customers to complement Enron’s wholesale dominance would cease at less than 50,000, and they would need to be returned to their utilities.

Announcing “our decision to suspend our residential efforts in California” before the Western Economic Association in mid-1998, Lay complained about a wayward reform process that threatened to leave everyone worse off. Consumer welfare and supply-side innovation were being sacrificed to placate utility managers and shareholders, Lay explained. A combination of full stranded-cost recovery and incumbency advantage (leaving utilities as default providers) was akin to “trading in a regulated monopoly for an unregulated one.”

But some of the blame was on Enron. “We’re not a marketing company,” Lou Pai would confess. “That’s not our expertise.” Boiler-room sales using Enron employees was a cultural mismatch, not only a financial one. And if the utility remained the default supplier, customers would rarely switch—with reason, as it turned out.

Lesson learned, the plan was now to wait until more markets opened—and to relaunch with partners who could cheapen and thus enlarge the needed customer base. That would come 2½ years later. In May 2000, Enron-led New Power Company went public at $21 per share, retailing electricity and “complementary products” to homeowners and small businesses. Capitalized “in excess of $120 million” and with in-kind service agreements with IBM and AOL for Internet marketing, New Power saw its valuation rise.

“We’ve studied the residential and small business market for several years and believe this is the optimal way to provide value to these customers,” Lay stated at the rollout. “By assisting in setting up an independent company, Enron is able to leverage its core competencies of energy and risk management, while partnering with other industry leaders to give the New Power Company extraordinary and immediate depth and capability.” The result, however, would not prove to be substantially different from what had occurred several years before.

Headed by H. Eugene Lockhart, New Power’s promising beginning would stall. As before, there was tepid customer interest in expending effort and shouldering uncertainty to save a few dollars per month. Also halting progress was the California electricity crisis of 2000–2001, which had been set up by regulation but exacerbated by Enron’s gaming, a story told in other books.⁴³ And as New Power’s stock lost value from its early peak, Enron’s hedging strategies (Raptor III) designed to lock in high profits and cash flows for year-2000 backfired.

With Enron’s collapse, interest in retail wheeling waned in many states. (Texas was another story, with Enron’s model law enacted in 1999.) New Power itself would enter bankruptcy in 2003.