High-Wire Dreamin’

While Enron consistently declined to break out its California business in its corporate statements, the state's energy crisis coincided with an explosion in the volume of business the company reported. In the year 2000, profits from Enron's Commodity Sales and Services division leaped by $1 billion, from $628 million, an increase of 160 percent. Its trade receivables, derived largely from transactions in energy and natural gas, rose from $3 billion to $10.4 billion. And its "assets from price risk management activities" -- the swaps and derivatives in which it specialized -- shot from $2.2 billion to more than $12 billion.

Much has happened since those figures were issued, of course, and Enron's numbers cannot be taken at face value. But nobody has challenged the surge in actual volumes transported by the firm, nor the doubling in commodity transactions. And for all the various enterprises the company was pursuing -- retail energy services, broadband data transmission, even a deal with Blockbuster to deliver movies online -- Enron never claimed substantial profits outside its core energy businesses. Says Frank Wolak of Stanford: "They made a boatload of money in California."

Certainly Wall Street thought so. Enron stock jumped 86 percent in 2000, reaching a high of $90.75 on August 23. Enron quickly recognized that California's misfortune had brought a windfall. In January 2001, with energy prices continuing to climb, Lay, Skilling and other executives rewarded each other with millions of dollars in bonuses, augmented by personal sales of stock that brought $1 billion more.

AS THE TURMOIL IN THE MARKETS deepened, Ken Lay and Enron did all they could to forestall government intervention, touting Lay's free-market gospel to anyone who would listen.

In California, Lay engaged in a series of meetings with Davis, whose run for the state house he had backed with contributions of $75,000. The meetings were cordial despite the obvious policy differences, according to Davis spokesman Steve Maviglio. "Ken Lay is extremely charming," Maviglio says.

More important, Lay saw his friend George W. Bush elected president. Taking advantage of unparalleled access to the new administration, Lay held meetings with the new secretaries of Energy and the Treasury, huddled with Bush in Texas and in Washington, and was appointed to the committee advising Vice President Dick Cheney on energy policy. Clearly he was getting his message across. A day after a private meeting with Lay on May 17, Cheney told reporters: "Price caps are not a help. They take us in exactly the wrong direction."

But Lay's easy access to the administration soon turned into a liability for Bush. In California, Governor Davis was denouncing the Houston energy combine as "pirates" and "snakes." In February, the governors of eight of 11 Western states, most of them Republican, voted to endorse caps on wholesale energy prices. In May, Representative Vic DeFazio summed up the mood in remarks to Congress: "This is the great new thing the Bush administration wants to bring to all of America: more profits, rolling blackouts, price gouging, and a mandate from the Republican administration that every state be subject to this sort of case. Now, this is because of Enron, the largest energy conglomerate in the world."

The economic hemorrhaging from the nation's largest state could no longer be ignored. The Bush administration quietly stepped aside, and on June 18 the FERC voted to cap the wholesale prices of electricity in the Western market. Energy prices immediately began to sink across the West, as did stocks of energy producers and traders like Enron.

The impact was magnified at Enron by the unusual financing arrangements with subsidiary partnerships it had used to shift debt off the company books. The debt in those partnerships was guaranteed by shares of Enron stock -- so long as the shares held up, the deals would as well. But with share value slipping below $50, the partnerships would backfire. Enron accountant Sherron Watkins spelled out the bind in her now-famous memo to Ken Lay. "If Enron stock did well, the stock issuance to these entities would decline and the transactions would be less noticeable," Watkins wrote. Instead, she observed, "All has gone against us."

Seen from California, Enron's demise takes on a tinge of irony. "They were betting on enormous windfall profits to keep the house of cards up," said Larry Drivon, an attorney with Joe Dunn's Market Manipulation committee. "They waited for another spike -- they waited and waited, and when it didn't come, it was kaput."

HALF A DOZEN DIFFERENT COMMITtees of Congress are now sorting through the wreckage, along with investigators from the Securities and Exchange Commission and the Department of Justice hunting for evidence of administrative or criminal misconduct.

The leading suspects include Lay, Skilling and Andrew Fastow, one of the executives who profited so handsomely by creative accounting and in-house partnerships. But as brazen as their acts look in hindsight, it's hard to tell whether they're guilty of chicanery or mere hubris.

Remember, these were people who believed they were harbingers of a "New Economy," that they would spread enlightenment -- and profits -- simply by applying their focused attention. Consider a few lines from Enron's 1999 annual report: The key to Enron's success was "innovation, driven by a quest to restructure inefficient markets, break down barriers and provide customers with what they want and need." That drive came from within. "Enron has been and always will be the consummate innovator because of our extraordinary people," the report explained. "Move our assets to another company and the results would be remarkably different."