Enron’s End 

Energy firm’s collapse raises questions about everything from deregulation to George Bush’s judgment

Wednesday, Nov 21 2001

The Fall of the House of Enron would be enormous news were it not for the Terror War. The company’s pending acquisition by another big energy firm, Dynegy, for a mere fraction of its onetime value, is as much a rescue as it is a merger.

It’s also a fall from grace. The nation’s biggest electricity marketer in many respects led the energy industry, and America, into deregulation, globalization, the commoditization of essential products. As it did so, its vaunted CEO, Ken Lay, emerged as one of the principal backers of and advisers to George W. Bush. But in the end, Enron has proved to be a house of cards, exaggerating its profits and hiding its debts in off-the-books partnerships. It’s troubling rise and ultimate fall raises serious questions about the judgment of Bush and other leaders who embraced it.

“Enron was the next big thing,” says Center for Energy Efficiency and Renewable Technologies director V. John White. “Like the dot-coms, it lived and died on that.” But unlike the dot-coms, it cut an enormous swath through the real economy of real people around the country and the world who need power to live. Now, like the dot-coms before them, Enron and some of the other big energy firms have been cast aside by trend-happy investors. Their next big play? Defense, where a Pentagon source calls ISR (“integrated strike and reconnaissance”) the key to future techno-war fighting.

Related Stories

  • Best Indian Food 3

    The first time you enter Surati Farsan Mart is a potentially overwhelming experience. The place resembles a Jewish deli more than a restaurant, and during peak hours, the line can stretch out the door. The clientele are loud and almost entirely Indian. There are more women dressed in saris than...
  • SoCal Meets Old World: Stone Brewing Co. and Green Flash Announce Plans to Brew in Europe

    This summer has been full of interesting expansion news from several California breweries, including Lagunitas in Petaluma — which recently opened a Chicago tasting room — and Sierra Nevada, which has an expansive North Carolina brewery that is already releasing product. But none of the announcements made in the last...
  • Hollywood's Tax Win

    Jerry Brown, California's skin-flint governor, acceded Wednesday to an increase in the film tax credit to $330 million. Brown is a well-known skeptic of Hollywood subsidies, but the combined forces of organized labor, multinational entertainment conglomerates, and B-list celebrities proved too powerful to resist. The industry didn't get the $400...
  • App Killer? 12

    California ride-share apps say their future could ride on what happens this week. The California Senate will likely vote on two bills that would make it more costly to be in the ride-share business, and the California Public Utilities Commission is looking at increasing insurance requirements for the companies' drivers...
  • Eco Cheap

    Los Angeles has some of the highest rents in the nation, and our worst-in-America roads cost us dearly when it comes to wear and tear on our vehicles. But there's one thing we spend less on: Energy. Comparatively, whether we're talking about electricity or natural gas, we don't use that much. And that means...

Did Ken Lay have an inkling of what was to come last May when he convened a meeting of mostly conservative Los Angeles notables in a bid to preserve deregulation in California and quash a nascent public-power movement? Perhaps. Among those in attendance were former Mayor Richard Riordan, now the Republican front-runner for governor; Riordan’s old business partner, convicted junk-bond financier turned philanthropist Michael Milken; and Arnold Schwarzenegger. Lay’s purpose, as a source made clear, was to enlist high-level support for the continuation of deregulation in California. He also criticized the just-enacted state power authority. Nobody really wants more competition. But he also stressed that deregulation can work, that prices for electricity can begin to moderate from their skyrocketing levels.

And, as it happens, prices started to go down right about then. Since no price-control, rate-hike or big conservation programs had kicked in to affect those prices, this was an interesting development. One well-placed source said that Lay, Enron and others in the energy business have an interest in cooling the price gouging — first, to save deregulation; second, to expand into new business areas.

Although it began in natural gas and emerged as the dominant force in electric-power marketing, Enron was in the commodities business. It tried to create an international, privatized water market, losing much in the process. It also, like L.A.’s reeling Global Crossing, run by former Milken associate Gary Winnick, jumped feet first into the broadband business with massive investments — and losses — in fiber optics. Now Lay had his eye on something new. One increasingly valuable commodity is broadcast spectrum, the air waves 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 utilization of 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.

It was not to be, for Enron was already running afoul of federal regulators. But Lay and Enron probably did help save electric-power deregulation. Lay was instrumental in replacing right-wing ideologue Curt Hebert Jr., the head of the Federal Energy Regulatory Commission, who refused to scrutinize even the most egregious price gouging, with a Texas friend of his and the president’s, former chief Texas public-utility regulator Pat Wood. Hebert had become not just a lightning rod for Gray Davis and others, but an outright embarrassment. Wood proved to be just the ticket. His moderate posture — Wood has banked a great deal of credit with environmentalists for backing a very small requirement for renewable energy in Texas — has helped tremendously in stabilizing what had been the badly stalled drive for deregulation in other states.

Lay will probably be shown to have been instrumental in saving deregulation. His drive for globalization is another matter. By one of those coincidences that define this White House, Bush opposes a European initiative to dramatically expand renewable energy in the Third World to counter the greenhouse effect, at the very time that U.S.-based power companies — selling fossil-fuel plants, naturally — are cutting a wide global swath.

Fitting the radical-capitalist paradigm, the go-go deregulationist energy environment in the U.S. gave rise to a new type of power company — bigger, less ponderous, much more globalist. As companies expand and penetrate lucrative new markets, they combine and recombine.

In the last half of the 1990s, there were more than a dozen mergers and acquisitions every year in the U.S.-based power industry. And U.S. investment in foreign utilities — which, following the lead of Thatcherite Britain, have privatized not only across Europe but through virtually all of Latin America and much of Asia and Africa — has quadrupled.

As U.S. power companies globalize, they confront a dizzying array of options with varying degrees of risk and reward. Given the level of uncertainty, it’s not surprising that investments emphasize short-term profit rather than long-term development, as in California, where neo-Thatcherites spearheaded deregulation. This leads to a cycle of capacity shortage, also as in California.

But it’s all starting to go sour, with a number of countries reacting negatively to the Yankee power plans, and Enron, with its failing operations in India, is in the forefront of the downturn.

Enron’s $3 billion power-plant investment in India, that country’s largest foreign investment, was thrown into disarray when the Maharashtra state government canceled the only power-purchase agreement in May, complaining that Enron was overcharging. Lay compounded matters in August, creating an international incident with comments in the Financial Times in which he appeared to threaten to use his influence with the White House to invoke U.S. sanctions against India.

But by then, Lay and Enron had even bigger problems. At the same time as the dustup with India, Lay’s longtime business partner, Jeffrey Skilling, stunned Wall Street analysts by abruptly quitting the company, and Enron stock hit a 52-week low. The fall of the house of cards was well under way.

Fortunately for California, Enron doesn’t figure in the huge mess over the state’s long-term power contracts. But if its purchase by Dynegy goes through, other issues emerge. Dynegy co-owns three power plants in California, and Enron is trying to build a couple more. Enron controls much of the state’s natural-gas supply. Further concentration of its market power with that of Dynegy is a troubling prospect.

White also worries about the fate of Enron Wind, which he describes as “a very promising renewable-energy venture.” The largest and most powerful shareholder in Dynegy is Chevron Texaco, which is no friend to renewable energy.

The cards fell fast and far with the sudden collapse of the energy firm most identified with this energy-industry-dominated White House. Bush is fortunate indeed that his mostly good judgments so far in the Terror War eclipsed his bad judgment in aligning with Enron.

Related Content

Now Trending

  • Venice Boardwalk Beat-Down Caught on Video

    A brutal beating next to the Venice boardwalk this week was captured on video (on the next page). Los Angeles Police Department detectives are asking for your help in tracking down not only the suspect, but the victim, who "we haven't been able to locate," Officer Nuria Venegas told us...
  • L.A. Porn Production Shuts Down Over HIV Report

    The adult video industry's trade group today called for a moratorium on production after a performer might have tested positive for HIV. The Los Angeles-based Free Speech Coalition said in a statement that one of the facilities used by porn stars under the industry's voluntary, twice-a-month STD testing protocol "reported...
  • Here are the Winners and Losers in California's $330 Million Film Tax Subsidy

    Jerry Brown, California's skin-flint governor, acceded Wednesday to an increase in the film tax credit to $330 million. Brown is a well-known skeptic of Hollywood subsidies, but the combined forces of organized labor, multinational entertainment conglomerates, and B-list celebrities proved too powerful to resist. The industry didn't get the $400...
Los Angeles Concert Tickets