Enron's Political Power Rises

By Peter Behr

Washington Post Staff Writer

Friday, March 9, 2001; Page E01

In just a few short years, Enron Corp. has literally become the nation's largest power broker.

One of the early apostles of utility deregulation, the Houston-based company has capitalized on the industry's restructuring and is now the biggest marketer of electric power and natural gas in North America.

As a broker of political power, its stock is also on the rise, with George W. Bush in the White House. Long-standing ties of friendship, politics and ideology link the president and Kenneth Lay, chairman of Enron and one of Bush's most important political supporters.

"I do have a good personal relationship with the new president," Lay said in a recent interview. "That's not to say it in any grand way. I've just known him a long time, just like I've known his parents for a long time."

It's a fortunate connection for Enron at a time when California's energy problems have sparked expanding debate over the wisdom of allowing the marketplace to make decisions about electricity that were once made by utilities and regulators.

California's energy crisis has slowed or halted electricity deregulation in many of the two dozen states considering it, and Lay and other proponents are trying to keep the backlash from expanding.

Enron is also fighting demands from California and other western states for federal price controls on wholesale power sales. And Enron is pressing the new administration to create a more wide-open national electric grid, to make it easier for Enron and other energy marketers to move electricity around.

Enron's operations, more than those of any of its major competitors, are designed to take advantage of an expanding, unregulated trade in energy.

Enron doesn't prospect for oil, doesn't covet drilling sites on the Arctic slopes, and doesn't make gasoline or heating oil. Although it bought and sold more than half a billion megawatt-hours of electric power last year, it owns just a few power plants.

What Enron does do is trade energy -- gas, oil, electricity -- plus steel, pulp paper, farm commodities and, more recently, space on Internet fiber-optic networks. Most of Enron's power sales involve delivered electricity, but the company is also a huge dealer in "paper" electricity -- contracts traded on commodity markets.

More than 1,500 traders sit at computer terminals on five floors in Enron's Houston headquarters and other offices around the world, quoting buy and sell prices and taking orders, like the specialists at the New York Stock Exchange who create a market for their stocks.

"We are just market makers. We're buying and selling, and usually making a little bit on every transaction," Lay said.

At the same time, Enron tries to create financial insurance for itself and its clients through other investments -- in stocks, interest-bearing securities or currencies -- that could cut losses if other market prices go the wrong way.

EnronOnline, its 15-month-old business-to-business e-commerce Web site, has grown phenomenally, handling more than 3,850 transactions with a trading value of more than $2.6 billion each business day. As changes in energy prices became wilder and wilder in the past year, so has the speculative trading of energy products, and regulators say a large chunk of that trading has moved to Enron's online market.

"They get incredible amounts of market data. They're trading every day, 24 hours a day, 365 days a year," said Andre Meade, an analyst at Commerzbank Securities.

What happens to prices when the weather turns hot, or drought cuts hydropower supplies, or a nuclear plant goes down unexpectedly? Enron has a lot of know-how on such questions that help sharpen its trading strategies, Meade said.

Volatility is Enron's friend, analysts say. And to some industry critics -- and industry officials -- it is too soon to say whether the huge increase in electricity trading that has accompanied deregulation will result in a better long-term deal for consumers, or just higher prices.

"I don't think we know yet," said David W. Penn, deputy executive director of the American Public Power Association, which represents municipal utilities.

"Ultimately, we have to ask whether what Enron offers to energy policies is simply a way to make money," said Tom "Smitty" Smith, director of Public Citizen's Texas Office, a consumer group. "We think this churning and trading ends up increasing the cost. Their answer is it decreases the cost. Only time will tell who is right," Smith said.

California Target

Without doubt, 2000 was a banner year for Enron. Revenue jumped to $100.8 billion, from $40 billion the year before, after a 60 percent increase in the amount of energy it sold.

A fourfold increase in natural gas prices and the escalation of wholesale electricity prices to unheard-of peaks in California and the Northwest helped Enron boost earnings to $1.3 billion last year, 32 percent more than in 1999.

Enron's success has made it a target of California public officials, who accuse Enron and other electricity generators and marketers of taking advantage of the state's power shortages to drive up prices.

Louise Renne, San Francisco's city attorney, named Enron as one of the defendants in a civil suit alleging violations of the city's unfair-business-practices law. Although Renne's staff has not yet seen any documents from the energy companies, she said, "We do have reason to believe there was gaming in the market."

Enron said it broke no laws in California.

"Our financial success is not built on California's back," Enron Chief of Staff Steven J. Kean said at a Senate hearing a month ago. Its profit has grown because of greatly increased sales, and because the volatile changes in electricity and gas prices have created much more demand for Enron's energy contracts, which are designed to protect customers from dramatic price shifts, he said.

Lay and his company won't say how much profit came out of California. "Most of it came from elsewhere," Lay said.

The political reaction to California's problems has thrown several obstacles in Enron's path, including the demands for federal price controls on wholesale power sales. Those demands are strongest in California and the Pacific Northwest, but if electricity shortages and rising prices spread to New York and New England this summer, so will the clamor for price controls.

A second problem for Enron is the move by California officials to make it harder, if not impossible, to move electricity across state lines. That trend could gain support too, if California's problems move elsewhere.

California Gov. Gray Davis's electricity rescue plan has taken the state deeper into direct operation of power supply, first as a buyer of electricity and next as the operator of the statewide high-voltage transmission lines.

"Right now they want to kind of build a wall around their state," telling the utility companies that California's power may not be exported, Lay said. But California depends on power transmitted from outside its borders. How can it insist on a one-way trade? Lay said.

Lay acknowledged that the idea could spread. "Different states are trying to put barriers on any power in their states leaving their state," he said. "You can't have interstate commerce that way."

Enron is pressing the Federal Energy Regulatory Commission to open up electricity transmission so that marketers can buy power where it is plentiful and sell it where it is scarce.

Competition -- the core principle of electricity deregulation -- requires that kind of freewheeling movement of electricity. But today, utilities in some of the nation's most populous areas guard their transmission lines, blocking the access that Enron and other marketers seek, Lay said.

The FERC has the authority to create that access, and Enron wants the commission to act.

Texas Ties

Lay has worked closely with Bush in the past. In Texas, Bush as governor allied with Lay and Enron in enacting legislation that will deregulate the state's electricity market next year.

Lay led Enron executives and employees in contributing more than $500,000 to Bush's campaigns for governor and president, according to the Center for Public Integrity in Washington. About $350,000 of that came from Lay personally.

Lay said his access to and influence on Bush is "grossly exaggerated" and that in any case, Enron and the administration have similar agendas.

"I rarely call him," Lay said. "I've not called him since he's been president, as a matter of fact.

"He's got good, strong advisers around him that he sees every day that know an awful lot about energy, as he does himself. . . . All of them believe in markets, believe in competition, believe in deregulation," Lay said.

Enron, of course, plans to make sure the administration knows what the company wants from the FERC, and who its members should be, Lay said.

Two seats on the five-member commission are vacant. "They've asked for some suggestions [on filling the FERC's vacancies] and we've given them suggestions, but they've also asked that of a lot of other people."

Will Bush turn to his advisers when the time comes for a decision and ask, "Have you checked this with Ken Lay?"

"I don't know. I doubt it," Lay said.

© 2001 The Washington Post Company

-- Swissrose (cellier3@mindspring.com), March 09, 2001