Enron Ascending E-Book

Robert L. Bradley

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 1630

Veröffentlichungsjahr: 2018

Beschreibung

A great fall cannot be understood apart from the rise that preceded it. Enron Ascending is the only book to date that examines in detail the first two-thirds of that iconic energy company's life. Thus, it is the only book to date that exposes the deepest causes of Enron's stunning collapse. Nobel economist Paul Krugman predicted that history would look upon Enron's plummet as a greater turning point than the fall of the Twin Towers. Enron Ascending explains the shock of the company's fall by recalling the astounding achievements of Enron's birth, childhood, adolescence, and early maturity. It sets forth the once-celebrated but now-forgotten industry and innovation that caused the company and its reputation to soar stratospherically. At the same time, always conscious of the company's fate, the book highlights throughout the developing habits of thought and behavior that later evolved into self-destructive acts of desperation and deceit. Written fifteen years after the firm's demise, Enron Ascending offers the long perspective of a uniquely positioned insider, Robert L. Bradley, Jr., the company's director of public-policy analysis and Chairman Ken Lay's personal speechwriter. The book also offers a library of previously unavailable information, drawn from Bradley's innumerable corporate documents and unrepeatable interviews, which he collected in his capacity as the company's prospective historian. Most important, however, Enron Ascending offers an antidote to the unending stories, studies, and books about Enron that are presented as just-the-facts but are in reality shaped decisively by the worldview of their authors. Bradley shows, beyond dispute, that the early habits which set precedents for Enron's history-making demise were directly contrary to the free-market behaviors and capitalist attitudes generally blamed for Enron's fall.

Leseprobe

Contents

Cover

Title page

Copyright page

Dedication

Preface

Acknowledgments

Introduction: The Process of Enron

Contra-Capitalism

Chairman Lay

Earnings Issues

Corporate Masks

Government Opportunity and Dependence

Achievements (in Political Space)

Contra-Capitalist Enron

Lessons for History

Part I: From HNG to Enron: 1984–1987

Chapter 1: The New Houston Natural Gas

A New Company

Back to Gas

New Talent

Acquisitions

Divestitures

Momentum—and Debt

Into 1985

A Final Piece?

Chapter 2: HNG/InterNorth

Northern Natural Gas Company

A Marketing Pipeline

Prelude to a Merger

HNG/InterNorth

Buyer’s Remorse

A Postmerger Stumble

Getting Together

Ken Lay Takes Charge

Competitive Pipelining

Positioning for the Future

A New Name

Chapter 3: Foundations

A New Home

The New Team

Enduring 1986

Brightening 1987

Conclusion

Part II: Peril and Progress: 1987–1989

Chapter 4: Crisis at Enron Oil Corporation: 1987

Sirens and Denial (Valhalla 1)

Crisis and Cleanup (Valhalla 2)

Lesson Unlearned

Chapter 5: Recovery: 1988–1989

Managerial Depth and Change

Repositioning EOG

Recommitting to Cogeneration

Pipeline Entrepreneurship

Capturing Gas Marketing

Liquid Fuels: Profitable Incrementalism

Getting Political

Vision Accomplished

Part III: Natural Gas, Natural Politics: 1990–1993

Chapter 6: Natural Gas Majoring

A New Vision

Growing the Interstates

Going International

Enron Power

Enron Oil & Gas Company

Liquids

Corporate Culture

Conclusion

Chapter 7: Political Lay

Mr. Natural Gas

Talking Up Prices

Fighting Oil

Warring Against Coal

Getting Gas to Green

Getting Bush to Rio

From Bush to Clinton-Gore

Environmental Enron

Politicking Elsewhere

An Energy Philosopher?

Part IV: Jeff Skilling

Chapter 8: Gas Marketing: 1990–1991

Regulatory Change, New Markets

Enron Gas Marketing: 1990

Enron Gas Services Group: 1991

Mark-to-Market Accounting

Conclusion

Chapter 9: Expanding Gas Marketing: 1992–1993

Enron Gas Services: 1992

Enron Gas Services: 1993

Regulatory Issues

Competition and Pressure

Part V: Expanding Enron: 1994–1996

Chapter 10: The Steady Side

Interstate Pipeline Progress

Enron Oil & Gas Company

Enron Oil Transportation & Trading (EOTT)

Conclusion

Chapter 11: Enron Capital & Trade Resources

New Name, Organizational Change

Wholesale Electricity Marketing

International

Risk Management, Corporate Culture

Talent Evaluation and Infusions

Conclusion

Chapter 12: International Ambitions

Early Successes

Developing Problems

Unfulfilled Aspirations

Enron Global Power & Pipelines

Enron Engineering & Construction

Conclusion

Part VI: Restless Enron: 1994–1996

Chapter 13: Alternative Energies

Big Thoughts, New Bets

Solar Power

Wind Power

A Try at Fuel Cells

Enron Environmental Services

President’s Council on Sustainable Development

Conclusion

Chapter 14: Visionary Enron

New Enron Visions

New-Economy Enron (Gary Hamel)

Great Man, Great Company

Conclusion

Chapter 15: Energy Retailing

Natural Gas

Electricity

Pilot Programs

Enron Energy Services

Conclusion

Epilogue: Dangerous Ambitions

Three Eras

Circa 1996

A Changing Company

Righting Misinterpretations

Contra-Capitalist Enron

Final Thoughts

Kenneth L. Lay: A Chronology

Selected Bibliography

Illustration Credits

Name Index

Business Index

Political Economy Index

End User License Agreement

Guide

Cover

Copyright

Table of Contents

Begin Reading

List of Illustrations

Chapter 1

Figure I.1

Enron’s nominally strong board of directors had too much allegiance to Ken Lay, in part because of Enron’s largesse toward them. John Duncan, executive chairman from beginning to end, was particularly smitten with Enron’s and Lay’s apparent success.

Figure I.2

Enron’s annual reports were all business in the early years, such as 1986 and 1987. Themed reports in 1992 and 1993 fashioned Enron as a natural gas company with global reach. Enron’s 1996 report highlighted the new logo with the company’s plan to retail gas and electricity to homes and businesses.

Figure I.3

Enron quietly but decisively entered the coal business in 1997, first in trading and then in asset acquisition to enhance trading. The coal unit was a welcome new profit center on the wholesale side of ECT.

Figure I.4

Enron’s asset-light and green-energy strategies, as well as virtually all its profit centers, were dependent on special government favor. A politically connected, politically correct Ken Lay was the common denominator of Enron’s public-sector activism.

Figure I.5

Enron doubled its original market valuation by the early 1990s (shown in billions of dollars), and doubled it again in the mid-1990s. Increasing earnings, accelerated by mark-to-market accounting, as well as Ken Lay’s stature and messaging, made ENE a momentum stock with a high price/earnings ratio.

Figure I.6

Enron Outlook for Natural Gas,

first published in 1989, and updated periodically, portrayed the resource base as prolific and open-ended. More than rebutting supply pessimism from other studies, the

Outlook

challenged electric utilities to build gas plants in place of new coal capacity.

Figure I.7

Enron’s practice of contra-capitalism involved not only government intervention but also habits of mind that classical-liberal thinkers long criticized and warned against.

Chapter 1

Figure 1.1

Ken Lay’s first annual report as CEO of Houston Natural Gas announced a return to the company’s core. The strategy, adopted from

In Search of Excellence,

was about incremental improvement, not revolutionary change.

Figure 1.2

Ken Lay’s first management team at Houston Natural Gas (bottom, left to right) was led by James Walzel (President and COO) and Mick Seidl (SVP, corporate development). The two major divisions were run by Melvin Sweatman (President, HNG Intrastate) and Ted Collins (President, HNG Oil Company).

Figure 1.3

Transwestern Pipeline Company, built in 1959 to connect gas supplies in New Mexico and Texas to southern California, was acquired by HNG in 1984. The system’s 4,434-mile mainline and 18 mainline compressor stations, moving 750 MMcf/d to California and 250 MMcf/d to Oklahoma, would prove very profitable for its new parent in the years ahead.

Figure 1.4

Florida Gas Transmission, completed in 1959, was part of Ken Lay’s first corporate stop after leaving the Department of Interior in 1973. Succeeding Lay as head of FGT was William Morgan (far right), who would join HNG after the merger. Not expanded since 1970, FGT would triple in capacity with four expansions during Enron’s solvent life.

Figure 1.5

Houston Natural Gas returned to its core by divesting its industrial gas, coal, and marine assets and purchasing two interstate pipelines and one small intrastate. The makeover more than doubled the debt-to-capital ratio in Ken Lay’s first eight months at the company with purchases outdistancing sales by almost two-to-one.

Figure 1.6

Ken Lay’s profile in the

New York Times

added to his reputation as an industry visionary. As a former economics professor (as mentioned in the article),

Dr.

Lay had gravitas beyond the usual business CEO.

Chapter 2

Figure 2.1

Northern Natural Gas Company began as a gas pipeline and distribution company and later diversified into exploration and production, gas liquids, and petrochemicals. In 1951, the company consolidated its operations at 2223 Dodge Street in Omaha. The company’s longest-serving presidents (top to bottom) were Burt Bay (1939–50), John Merriam (1950–60), and Bill Strauss (1960–76).

Figure 2.2

InterNorth was a rock-solid, mid-America company centered on natural gas transmission. In 1984–85, CEO Sam Segnar (upper right) instructed Rocky LoChiano (lower right) to find a merger partner before Irwin Jacobs (left) could gain control and break up the company.

Figure 2.3

The dual corporate communications and public affairs departments went into high gear to meld two corporate cultures and improve morale. The tag line

America’s Premier Energy Company

would soon be forgotten with what was to come for the balance of 1985 and in 1986.

Figure 2.4

A mid-1985 meeting of top gas executives from HNG and InterNorth formed an opening strategy for the new company’s intrastate and interstate grid, including the formation of a national marketing company.

Figure 2.5

Ideas have consequences. The advent of MOA for interstate natural gas pipelines was championed by a young FERC Commissioner, Oliver “Rick” Richard, who credits the 1984 book shown above for his inspiration and direction. Richard would go on to become CEO of Enron’s Northern Natural Gas in 1988.

Figure 2.6

In just under 10 months, HNG/InterNorth president and COO Ken Lay became chairman, president, and CEO. “The present business climate provides no margin for error,” Lay sternly stated on the opening page of the

1985 Annual Report,

but his penchant for overspending and going first class belied his prudent words.

Chapter 3

Figure 3.1

The Enron Building (upper right) was a big step up from the HNG Building and a world apart from Ken Lay’s childhood in Rush Hill, Missouri. The challenges of 1986 brought out some criticism of Ken Lay, including an article in

Business Week

(upper left).

Figure 3.2

The

Houston Chronicle

documented the management changes at HNG/InterNorth compared to the year before. Only 1 of 5 senior executives and 6 of 17 board directors had come from InterNorth. Meanwhile, HNG’s senior management prior to Ken Lay’s arrival had all but departed.

Figure 3.3

More than $1.3 billion in asset sales in 18 months after the HNG and InterNorth merger left Enron’s debt-to-capital ratio little changed, given other developments. Not until 1992 did this ratio fall below 50 percent, still above where the two companies were on a consolidated basis at year-end 1984.

Figure 3.4

Attempts by Mick Seidl and Ken Lay (lower left) to integrate Enron’s four pipelines into one synergistic system were limited by federal regulation. Enron’s senior natural gas management included (top right, left to right) Jim Rogers (interstate pipelines); Gerald Bennett (intrastate operations); and Ron Burns, John Esslinger, and Claude Mullendore (national marketing).

Figure 3.5

HNG Interstate, composed of Transwestern Pipeline and Florida Gas Transmission, expertly navigated a changing regulatory landscape. Stan Horton and Rod HaysIett came with the Florida Gas purchase; the other five joined HNG after Ken Lay took over in mid-1984.

Figure 3.6

Enron Oil & Gas received new leadership in 1987 with Forrest Hoglund, Ken Lay’s most rewarding hire. Hoglund is shown in 1977 upon joining Texas Oil & Gas and in 1989 with the top Enron brass at the New York Stock Exchange when EOG went public.

Figure 3.7

FERC’s open-access regulation led interstate pipelines, including Enron’s, to leave the bundled sales and transportation function. Independent marketers assumed the buy/sell commodity function, leaving the interstates as pure transporters. This created two profit centers for Enron where there had been only one before.

Chapter 4

Figure 4.1

Head of Enron Liquid Fuels, Mike Muckleroy (upper left) futilely blew the whistle on Enron Oil Company’s Lou Borget (lower left). Muckleroy cleaned up Borget’s mess, a fiasco that was not fully appreciated until after Enron’s bankruptcy in late 2001.

Figure 4.2

The PURPA-driven cogeneration work of John Wing (center) was a much-needed profit generator for Enron in the in the mid-to-late 1980s. Enron’s other two top cogen developers were Wing lieutenant Robert Kelly (upper right) and, from the InterNorth side, Howard Hawks (upper left), who would leave Enron in 1987 to found his own company, Tenaska.

Chapter 5

Figure 5.1

Financing with high-yield bonds (

junk bonds

) proved crucial for Ken Lay from the time of the HNG/InterNorth merger in 1985 through project financings in 1989, when Michael Milken was indicted for securities violations. Drexel Burnham Lambert filed for bankruptcy protection in 1990.

Figure 5.2

Enron Oil & Gas, advertised as “America’s Pure Natural Gas Play,” launched an October 1989 public offering that valued the company at $1.6 billion. Forrest Hoglund, chairman and chief executive officer, was off to a very fast start in a low-price environment.

Figure 5.3

Bayonne Cogeneration Plant in New Jersey was the inaugural project of Robert McNair’s Cogen Technologies. A decade later, Bayonne and two neighboring CTI plants would be sold to Enron for $1.1 billion and debt assumption, enabling McNair to found an NFL franchise, the Houston Texans.

Figure 5.4

After much turmoil, Ken Lay had a top team in place by 1989 to manage Enron’s North American gas assets. Under himself and Rich Kinder (the new vice chairman and soon president) were (lower, left to right) Ron Burns, who oversaw interstate pipelines and marketing; Forrest Hoglund, for exploration and production; Mike Muckleroy, running liquids; and John Wing, handling cogeneration.

Chapter 6

Figure 6.1

Enron’s 41,000-mile, 7.8 Bcf/d gas-pipeline systems were (as of 1996) limited synergistically under federal open-access regulation. Northern Natural’s capacity exceeded the combined size of Enron’s (wholly owned) Transwestern Pipeline, (half-owned) Florida Gas Transmission, and (35 percent owned) Northern Border Pipeline.

Figure 6.2

Ken Lay put Enron at the forefront of the 16th Economic Summit of Industrialized Nations, held in Houston, Texas, in mid-1990.

Figure 6.3

It was all smiles with the completion of the world’s largest cogeneration plant in Teesside, on April 1, 1993. Ken Lay and Tom White (center) join together with other principals of the UK project.

Figure 6.4

Transportadora de Gas del Sur (TGS) was a second major international step toward Ken Lay’s vision of Enron’s becoming the world’s first natural gas major. George Wasaff, in particular, brought best practices from Enron’s US interstates to Argentina between 1993 and 1998.

Figure 6.5

A 1993 issue of

Enron Business

was full of photo-ops on Enron’s early agreements with Russian and Chinese officials, but little activity would follow these heady beginnings.

Figure 6.6

The Dabhol, India, project of Rebecca Mark was a bold attempt to replicate Teesside in an undeveloped country. Contracts were completed and construction commenced in 1993, but political problems would soon engulf the project to leave Enron and its partners with a nonperforming, in-construction project.

Figure 6.7

New technology was necessary to increase natural-gas production in a low-price environment. Technologies such as 2-D and 3-D seismic and forays into fractionation and horizontal drilling were used at EOG in the early 1990s.

Figure 6.8

Enron’s big bet to enter into the reformulated-gasoline market concerned the natural gas–derived oxygenate, MTBE. This foray went south quickly, when the demand expected to emanate from new federal environmental standards pursuant to the Clean Air Act of 1990 failed to materialize.

Figure 6.9

Ken Lay liked to celebrate Enron’s success, such as awarding each full-time employee a $50 bill and when paying off the ESOP bank loan to allow stock dividends to go straight to employee ENE holders.

Chapter 7

Figure 7.1

Enron continually educated energy constituencies about the environmental advantages of natural gas under current technology. This summary from a company brochure (circa 1995) showed the emission reductions of a similarly sized gas plant versus coal plant in six relevant categories.

Figure 7.2

With strong arguments developed in part by fellow PhD economist Bruce Stram (pictured), Ken Lay challenged electric generators to choose natural gas instead of coal for new capacity. Less rent-seeking than moral suasion, Enron’s Natural Gas Standard was targeting franchised monopolists to do the right thing in the face of a rate-base bias towards coal.

Figure 7.3

Ken Lay, looking for the next big energy thing, was attracted to the global-warming issue and the analysis of Christopher Flavin of the Worldwatch Institute (see “Desk” written at top). Lay at times revealed his pragmatism on this issue, as this quotation attests.

Figure 7.4

While nominally a Republican, Ken Lay became a favorite of President Clinton and Vice President Al Gore with Enron’s support of their administration’s global-warming position. Lay joined other corporate executives, including Kenneth Derr of California-based Chevron, to split the fossil fuel industry on the climate issue.

Figure 7.5

Ken Lay looked to tax policy to penalize oil and coal relative to natural gas. This could be done with either a tax on the carbon dioxide content of each fuel or a Btu measure. Only later would Enron quietly get into the coal business.

Chapter 8

Figure 8.1

FERC’s regulatory restructuring of the natural gas industry is shown in this illustration from Enron’s

1990 Annual Report.

Unbundling sales from transportation gave Enron two profit centers in place of one, a key reason why Ken Lay refocused his company toward interstate gas transmission in 1984–85.

Figure 8.2

Gas marketing, a new business in the mid-1980s, grew significantly beginning with Gas Bank in 1989–90, Enron Finance in 1990, and Enron Gas Services in 1991.

Figure 8.3

The hiring of Jeff Skilling in 1990 would bring highs and lows to the corporation in the next decade. Two key early hires by Skilling (standing) were Gene Humphrey (left) for producer finance and Lou Pai (right) for derivative products.

Figure 8.4

The organization chart for Enron Gas Services in first-quarter 1991 showed five support groups, six profit centers, and five marketing sections.

Figure 8.5

VPP was a major Enron legal innovation to fund gas producers and thus supply end-user contracts. Gene Humphrey, vice president of Enron Finance (left), is shown with Rob Boswell of Forest Oil Company (right) after their first VPP in April 1991. VPPs took off to support long-term fixed-priced contract originations.

Figure 8.6

The hub of Enron Gas Services Group was gas marketing, which was divided into three regions (lower right). Jeff Skilling’s open-office concept is shown by the cubicles and transparent offices.

Figure 8.7

Enron Gas Services’ use of mark-to-market accounting, announced in the 1992 annual report, was defended in the employee magazine after receiving negative press. Enron’s Rick Causey would increasingly find himself lobbying his former employer, Arthur Andersen, for accounting liberties.

Chapter 9

Figure 9.1

The 20-year, 195 MMcf/d contract to fuel Sithe Energies’ 1,000 MW cogeneration project in New York State represented an extreme test for Enron Gas Services’ capabilities. Three Enron principals were Mark Frevert (left), Dan McCarty (center, responsible for supply), and Ken Rice (right, in charge of sales).

Figure 9.2

EGS’s 1992 EnFolio advertising campaign, featuring Spot the big black dot, warned gas buyers about price spikes and reliable short-term gas. Long-term, fixed-priced firm contracts, assuming locked-in gas supply, could receive immediate profit recognition and separately securitized (monetized) with outside investors.

Figure 9.3

Enron Gas Transportation and Trading (EGTT), a new unit within Enron Gas Services, divided North America into six regions for short-term deal making. The sketched areas were attached to a March 1992 memo from Steve Smaby (inset) to EGS employees.

Figure 9.4

Louisiana Resources Company’s 540-mile, 730 MMcf/d pipeline, delivering gas to industry along the Mississippi River between Baton Rouge and New Orleans, gave Enron a physical presence at Henry Hub, the trading center of the United States.

Figure 9.5

The unsolicited interest of the California Public Employees Retirement System (CalPERS) in energy investments by Enron was a corporate highlight of 1993. Equally funded by Enron, Andy Fastow–led Joint Energy Development Investments (JEDI) was capitalized at $500 million to fund Enron projects and outside ventures.

Figure 9.6

A mid-1993 organization chart showed the top 18 executives of Enron Gas Services Group. With Ron Burns joining Skilling and Esslinger at the top, the triumvirate presided over 11 presidents and 4 vice presidents.

Chapter 10

Figure 10.1

Enron’s interstates had a peak-day delivery capacity approaching 9 Bcf/d in 1996, a nearly one-third increase from a decade before. In addition to wholly owned Northern Natural and Transwestern, Enron held a 50 percent interest in Florida Gas Transmission and a 9 percent interest in Northern Border and operated all four.

Figure 10.2

Transwestern Pipeline’s global agreement with its customers, led by SoCalGas, created a de facto 10-year unregulated period in which cost improvements and revenue enhancements could be brought to the bottom line. Deborah Macdonald, Transwestern’s president, is shown along with a celebratory picture of other project team members.

Figure 10.3

Enron integration strategy for its interstate pipelines encountered regulatory and ownership obstacles. But one opportunity (in 1996) was combining the southern part of Northern Natural’s system with the eastern end of Transwestern into one entity.

Figure 10.4

Enron’s interstate pipelines practiced entrepreneurship under regulatory constraints. Under Stan Horton (bottom center), CEO of Enron Interstate Pipelines, the four pipeline heads were (clockwise) Deb Macdonald (Transwestern), Larry DeRoin (Northern Border), Bill Cordes (Northern Natural), and Bill Allison (Florida Gas).

Figure 10.5

EOG was a model of sustainable growth, with increasing production, earnings, and reserves, year after year. Forrest Hoglund (right) was atop this performance, as was Mark Papa (left), who would take over from Hoglund in 1999, the year that EOG fully separated from Enron to become EOG Resources Inc.

Figure 10.6

EOTT, the oil side of Enron, was spun off as a master limited partnership in 1994 with Enron guarantees to support the stock price and see that the partnership would meet its required quarterly distributions.

Chapter 11

Figure 11.1

Physical volumes and financial settlements at EGS/ECT increased dramatically between 1992 and 1996. But the overall growth rate was slowing, and increasing competition and maturing markets were reducing margins.

Figure 11.2

Enron’s capabilities expanded from marketing and risk management of physical commodities (including, most recently, electricity) into project financing in the mid-1990s. EGS/ECT’s tripartite pitch was supply reliability, price certainty, and a lower cost of capital.

Figure 11.3

The name change to Enron Capital & Trade Resources, the cover story of

Enron Business

(October 1994), was cause for celebration for the former Enron Gas Services Group.

Figure 11.4

ECT’s share of the wholesale electricity market dwarfed that of its closest competitors. But profit margins, a closely guarded secret, were falling from the early days of mandatory open access for natural gas. Volumes (in MWh) grew steadily.

Figure 11.5

A year after the Teesside cogeneration plant opened, Enron launched a UK-based European operation. Geoff Roberts (center, bottom-left picture) built the initial organization in 1994–95 (bottom right). In 1996, Mark Frevert’s “second wave” expanded Enron Europe at 40 Grosvenor Place in Westminster, London (upper right).

Chapter 12

Figure 12.1

Enron International projects ranged from the moneymaking Batangas power plant in the Philippines (upper left) to the non-revenue-generating Dabhol plant in India (lower left). Half of the 10 projects in “final development” in Enron’s 1996 annual report would not be completed.

Figure 12.2

Enron Americas, led by Mike Dahlke, was a little-known part of Enron until a gas leak from a pipeline in San Juan caused a human disaster. Only a lack of immediate linkage to San Juan Gas Company and Enron’s later implosion saved Ken Lay from a great embarrassment.

Figure 12.3

Seven years of effort in China resulted in one (problematic) project, Hainan Island (1996), signed and celebrated by Ken Lay. An earlier agreement signed by Enron to develop an LNG project in China (lower left) did not reach fulfillment.

Figure 12.4

A framework agreement was signed with Gazprom in 1993 in Enron’s 50th-floor boardroom. Witnessed by dignitaries from both countries, the signing did not result in major projects. The world’s largest gas entity was not interested in enabling a capitalist competitor on its home turf.

Figure 12.5

Enron Global Power & Pipelines, under Rod Gray, was Enron’s attempt to monetize its investments in developing-country projects. EPP’s problems in navigating between majority-owner Enron and minority owners resulted in Enron’s taking the unit back after less than three years.

Chapter 13

Figure 13.1

Enron’s partnership with Amoco was a quick entry into the international solar market. Robert Kelly (top right) oversaw a staff of five to market solar farms and to place large orders for rooftop panels. After troubled sales, Enron’s half-interest was profitably sold to BP (which purchased Amoco) in 1999.

Figure 13.2

Enron turned to wind power, a more economical (but still problematic) form of renewable energy than solar farms. The purchase of Zond Energy Systems to begin 1997 had Ken Karas (pictured) reporting to Robert Kelly of Enron Renewable Energy Corp.

Figure 13.3

Enron’s fuel-cell marketing began with high expectations and ended with no executed contracts, as ONSI Corp. was unable to install the units at a cost that allowed Enron to sell long-term electricity. Bruce Stram (left) led the 2/-year effort, assisted by marketing director Malcolm Jacobson (right).

Figure 13.4

A schematic presented to electric utilities and others explained the range and interaction of services offered by Enron Environmental Services (later renamed Clean Energy Solutions). Growing regulatory complexity suggested a role for a specialized aggregator and outsourcer, but Enron was not able to execute outsourcing arrangements.

Chapter 14

Figure 14.1

This slide (from Ken Lay presentations) highlighted several events that made Enron (in its own view) the premier integrated natural gas company in North America. The second major vision was set in 1990 (upper right).

Figure 14.2

Enron’s first three major visions went from natural gas and North America (1987) to natural gas and global (1990) to energy and global (1995).

Figure 14.3

Another Ken Lay slide showed a timeline of events that made Enron (in its own view) the world’s first natural gas major. But the steady growth of Enron’s traditional gas functions, as much as or more than these seven milestones, underlay that designation.

Figure 14.4

Enron’s “Vision and Values” statement (1995) listed 4 values and 22 descriptions as part of the new goal to “become the world’s leading energy company.” Lay saw values as “the tools [employees] will use to stay on course.”

Figure 14.5

Enron’s third vision (1995) contained a vision-within-a-vision: to double income (to $1 billion) by 2000. In what would be the company’s final solvent year (2001), Ken Lay declared Enron as the world’s leading energy company and announced a new vision: to become the world’s leading company.

Figure 14.6

The fatherly Ken Lay expounded his emphasis on corporate stewardship in the July/August 1996 edition of

Enron Business.

Subheadings in the article were “Citizenship begins in the workplace,” “Enron’s external focus a priority,” and “Enron’s role in community moves into the spotlight.”

Figure 14.7

In March 1997,

Fortune

magazine announced its poll results ranking Enron as America’s most innovative company—and first among energy companies in the America’s Most Admired category.

Chapter 15

Figure 15.1

Two major studies organized and funded by Enron made a consumer case for retail wheeling of electricity.

Customer Choice, Consumer Value

(left) estimated the reduced cost and prices from MOA;

Economic Deregulation and Customer Choice

(right) estimated the price declines from other industries to suggest the same for electricity.

Figure 15.2

The legal right of Enron to access utility customers (MOA), first at wholesale and then at retail, was the job of Government Affairs. Terry Thorn and Cynthia Sandherr (left) led the Washington, DC, effort. Steve Kean and Kathleen Magruder (right) led the state effort. Top executives (center) were dedicated to the overall electricity effort: Jeff Skilling and Lou Pai (front, left to right) and Mark Frevert, Ken Rice, and Thorn (back, left to right).

Figure 15.3

Enron’s branding, led by Beth Tilney (center), was highlighted by a new logo designed by Paul Rand (right). The unveiling of the New Enron in early 1997 was a company-wide celebration to get employees to take the effort to family and friends.

Figure 15.4

Situating Ken Lay as a world figure, part of Enron’s branding effort, included extracurricular activities, such as establishing the Enron Prize for Distinguished Public Service, awarded at the Baker Institute at Rice University. The second recipient, Mikhail Gorbachev, attracted a Who’s Who of American statesmen, such as Henry Kissinger and James Baker, both of whom consulted for Enron.

Figure 15.5

Enron Field was the capstone of Enron’s national branding effort. The political fight to get new taxpayer-funded sports stadiums in Houston, shouldered by Ken Lay and Enron, was a come-from-behind victory. Beth Tilney (lower left), shaking hands with Astros owner Drayton McLane, was helped by Cindy Olson (center).

Figure 15.6

Enron heralded a new era of energy convergence in the energy industry by acquiring Portland General Electric in 1997. PGE’s low-cost resource mix and open-mindedness toward retail wheeling were major attractions in the merger. Ken Harrison (right), CEO of PGE, became vice chairman of Enron.

Figure 15.7

Enron’s Big Enchilada was retailing electricity and natural gas directly to the home, not only to places of business. The estimated $305 billion market required a simultaneous lobbying and branding effort, which began with pilot programs in several states beginning in 1996.

Figure 15.8

Toledo, Ohio, was Enron’s laboratory for retailing natural gas directly to residential users. Ray Bowen oversaw this and other pilot programs as vice president of Enron Energy Services. Despite an all-in effort, low margins and a lack of scale would doom the retail efforts with gas—and with electricity.

Figure 15.9

Total energy outsourcing became the focus of Enron Energy Services. The range of services bundled together by Enron was assumed to multiply the opportunities to make margins. The premise that EES would achieve scale economies in centralizing such services for business would not be borne out in fact.

Epilogue: Dangerous Ambitions

Figure E.1

Enron was a momentum stock on the way up, beginning in the late 1980s. The ENE pitch in 1996 was that the past was prologue, despite the challenges presented by start-up businesses.

Figure E.2

Post-Kinder, the new leadership team atop Enron was Ken Lay and Jeff Skilling. President and COO Skilling would soon join Enron’s 14-person board of directors, which was led by John Duncan (bottom right).

Figure E.3

Into 1997, Enron had seven divisions, the newest being Enron Renewable Energy and Enron Energy Services. Within a year, Enron would divide itself into core (interstate pipelines, exploration and production, wholesale energy services) and noncore (international, retail energy services, renewables).

Figure E.4

By the mid-1990s, Enron was riding an innovation and reinvention wave, led by a wholesale-to-retail marketing push with natural gas and electricity. This

Wall Street Journal

advertisement by Enron touted its growing fame.

Figure E.5

Heavy capital requirements from Enron’s new businesses, coupled with the need to protect the corporation’s creditworthiness, inspired a reorganization. Enron Capital Management under Andy Fastow (right) was composed of a finance unit under Bill Gathmann (left) and a risk-management unit under Rick Buy (center).

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Political Capitalism: A Tetralogy

Book 1 Capitalism at Work: Business, Government, and Energy

Book 2 Edison to Enron: Energy Markets and Political Strategies

Book 3 Enron Ascending: The Forgotten Years, 1984–1996

Book 4 Contra-Capitalism: Enron and the Post-Enron World (Forthcoming in 2020)

Enron Ascending

The Forgotten Years, 1984–1996

Robert L. Bradley Jr.

This edition first published 2018 by John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, USA and Scrivener Publishing LLC, 100 Cummings Center, Suite 541J, Beverly, MA 01915, USA. © 2018 Scrivener Publishing LLC. For more information about Scrivener publications, please visit www.scrivenerpublishing.com.

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Library of Congress Cataloging-in-Publication Data:

Names: Bradley, Robert L., 1955- author. Title: Enron ascending : the forgotten years, 1984-1996 / Robert L. Bradley Jr. Description: Hoboken, NJ : John Wiley & Sons, Inc., 2018. | Includes bibliographical references and index. | Identifiers: LCCN 2018002976 (print) | LCCN 2018010698 (ebook) | ISBN 9781119494201 (epub) | ISBN 9781119494232 (pdf) | ISBN 9781119493709 (oBook) | ISBN 9781118549575 (cloth) | ISBN 9781119556169 (dust jacket) Subjects: LCSH: Enron Corp–History. | Energy industries–United States–History. Classification: LCC HD9502.U54 (ebook) | LCC HD9502.U54 E5727 2018 (print) | DDC 333.790973–dc23 LC record available at https://lccn.loc.gov/2018002976

In Memory of Two Mentors

Murray N. Rothbard

Donald C. Lavoie

“We still have much to learn about and learn from Enron’s remarkable history to understand its meaning for twenty-first-century American capitalism.”

—Malcolm S. Salter, emeritus professor, Harvard Business School; author of Innovation Corrupted: The Origins and Legacy of Enron’s Collapse.

Preface

Enron is well on its way to becoming the most intensively dissected company in the history of American business.” So wrote Bethany McLean and Peter Elkind in their 2003 account, The Smartest Guys in the Room. Today, Enron stands as the most-analyzed corporate scandal in modern history, with countless books, journal articles, and reports about an iconic company gone rogue.

Imprudent investments coupled with financial and accounting legerdemain constitute the well-documented why of Enron’s artificial boom and decisive bust. But the why behind the why—the attitudes and strategies that produced risky and deceptive practices—has been less chronicled and little understood.

Simplistic criticisms have abounded. “Fish rot at the head” declared one popular Enron book. “Shocking incompetence, unjustified arrogance, compromised ethics, and an utter contempt for the market’s judgment” found another. “Thoughtless and incompetent leadership” and “careless and lazy management” concluded the most professorial study of Enron to date.

Hubris, amorality, and greed were certainly present at Ken Lay’s company. But accusations of incompetence, lethargy, and thoughtlessness fall short. Enron brimmed with smart, dedicated, focused decision makers who tirelessly sought to create a new kind of company. How and why did so much talent and effort go astray? Why was “innovation corrupted,” as a Harvard Business School professor asked.

Was it capitalism run amok? A species of market failure? Or was it, directly or indirectly, a nonmarket failure, an unintended consequence of interventionist public policies and a contra-capitalist ethos by, respectively, government and executives?

More specifically, did prevalent government involvement with natural gas, coal, oil, and electricity before and during Enron’s life shape the leadership and strategies atop the once storied company? Did special features of America’s mixed economy invite financial deceit and other delinquencies at the grand experiment called Enron?

If so, why did bad practices come to dominate Ken Lay’s Enron rather than, say, Lee Raymond’s Exxon (later Exxon Mobil) or Charles Koch’s Koch Industries? What was so different about Enron? What was the role of the company’s founder and beginning-to-end chairman, the Great Man of his industry, and, as much as anybody, Mr. Houston?

These questions have been inadequately explored for several reasons. First, many journalists lacked deep familiarity with Enron and the energy industry. Second, employee-book retrospectives (a dozen or so), which might have offered deeper insight, tended to be provincial and personal narratives. Third, most analyses were preoccupied with Enron’s last years and missed how earlier developments made the end all but predictable, absent a major (even radical) course correction. Above all, though, most accounts failed to appreciate the political dimension of Enron’s profit centers and the pervasively contra-capitalist mentality of Enron’s leadership.

Lacking technical depth and theoretical breadth, mainstream history became misleading history, especially when placing Enron in its social-economic-historical-political context. Ironically, commentators fell back on Enron’s own misleading self-narrative about its free-market reverence.

The company, and no one more than Ken Lay, time and again pledged allegiance to free enterprise, deregulation, privatization, and competition. Come the implosion, that rhetoric was taken at face value. If Enron was capitalism, then capitalism was prone to flim-flam and deception, even fraud—and failure. Conclusion: More, tighter, smarter regulation was and will be needed; privatization must be checked, especially in undeveloped countries; and business-funded lobbying must be constricted, if not banned. Only then can the government intervention that might have prevented Enron prevent future ones.

This narrative stubbornly persists. The fall of the company remains a modern-day allegory for the perils of free enterprise and the capitalist spirit. Business students and professors purport to draw lessons about the need for regulatory oversight. Pundits, politicians, and intellectuals continue to make ideological points by using the company’s name as a metaphor for unfettered profit seeking. The result is that, even after the 15th anniversary of Enron’s bankruptcy (December 2, 2016), the company still lacks the detailed, chronological, you-are-there history needed for fuller interpretation and better insight.

A complete history must focus on Enron’s beginning and maturation—and even its antecedents. What the company actually did—not merely what it said it was doing—must be established. Painstaking analyses must document how the company’s principals, and no one more than Ken Lay, acted, interacted, reacted, and failed to act during his company’s solvent life (approximately 17 years).

But more than better documentation is required. The real lessons of Enron require a reliable, integrated worldview spanning the social sciences. Earlier interpretations, albeit presented as just-the-facts, rested explicitly or subtly on the worldview of American Progressivism: Whatever capitalists do is capitalism. The result was a contradictory and unintelligible picture of a supposedly free-enterprise firm profiting heavily from its political influence. This book, and the tetralogy Political Capitalism of which it is a part, endeavors to resolve that contradiction.

Capitalism at Work (Book 1) explicated the classical-liberal worldview; Edison to Enron (Book 2) detailed the back story of Enron’s industry and Ken Lay’s early career. Drawing on those previous works, this book (and the one to come) will trace the false prosperity and spectacular demise of Enron to the company’s violations of classical-liberal principles in epistemology, ethics, business, and politics.

Contra-capitalism is most easily recognized in the pursuit of special government favor, a practice that came to define Enron. Its deepest roots, however, lie in transgressions of the “bourgeois morality” (or Smilesian virtue, as Book 1 termed it) that has always constituted the foundation of commercial capitalism. Such contra-capitalist transgressions may be essentially personal—such as self-deceit, imprudence, recklessness, and prodigality. Or they may be intracorporate vices that violate the rules for honest cooperation and best-practices leadership.

The false representation of achievements and difficulties, philosophic fraud, was Enron’s greatest corporate sin. But mixing personal and professional relationships, serving multiple masters, substituting image making for profit making, and CEO worship were others. Such contra-capitalism is explained in the Introduction and identified throughout this book to show that Enron, in spirit and in practice, was radically antithetical to classical liberalism.

Classical liberals applauded the fact that the market, not regulators, exposed and ruined Enron. True, but the broader point and the deeper moral of the story is this: Enron and Ken Lay, as they were and became, would not have existed in a truly capitalist culture. The ambitious and talented Lay took a political company to the top of a politicized industry within a politicized economy, fooling nearly everyone about the firm’s economic sustainability and goodness.

The first draft of history, emanating from news analyses and resulting books about Enron, reached three major conclusions: one correct, one partially so, and one wrong. Affirming, completing, and rectifying those takeaways is the task of the present book—and the finale to follow.

The first conclusion—Enron should have failed—is sound. Ken Lay and Jeff Skilling reversed cause and effect by arguing that Enron had been undermined by bad press and short sellers of ENE stock. Enron was not “a great company,” as Skilling and Lay each maintained. And Enron certainly was not “a strong, profitable, growing company even into the fourth quarter of 2001,” as Lay avowed until his death. Enron was a hollow enterprise that had precious few assets to offset liabilities when liquidated after its 2001 bankruptcy.

Enron was able to deceive outsiders, and even itself, for far too long. The company’s few critics and short sellers were brilliantly right, in retrospect, working from traces of smoke to find fire. If anything, Enron should have failed sooner. Many years of apparent success, Ken Lay’s mighty persona, political correctness, new-economy hyperbole, and financial trickery kept the mirage shimmering for years longer than otherwise would have been the case.

The half-true conclusion is that a successful, sustainable Enron was sunk by the loss of Richard Kinder and the ascension of Jeff Skilling as 1996 turned into 1997. “It was one of the saddest days for Enron when Rich Kinder left,” an Enron board member reminisced. “Sometime around 1996–1997, Enron crossed the line,” a book author wrote. “Richard Kinder’s departure as the financial conscience of the company seemed to be a critical step in this transformation.”

Enron employees echoed the same sentiment. “I think that your book and other people’s books are going to come back and say, Enron’s downfall started on January 1, 1997,” stated Jim Barnhart, a beloved, long-time Florida Gas Company/Enron executive who retired in that year.

Although true in important respects, the reality is that Enron was badly off track by 1996. Tipping points can be identified in 1987 (the Valhalla crisis), in 1989 (earnings acceleration), in 1992 (mark-to-model accounting), and in 1996 (financial gaming), not only in the more recognized episodes in 1997 forward, associated with CFO Andy Fastow. Outside the rock-solid interstate pipelines, as well as the industry-leading exploration and production unit, both of which had very different corporate cultures from their parent, Enron’s major divisions were listing, and important new initiatives were unproven and problematic.

Ironically, troubles at Enron were partly the result of its might-have-been savior. In the leadership triumvirate of Ken Lay, Rich Kinder, and Jeff Skilling, tough-guy Kinder was the chief operating officer who wielded the hammer and ensured accountability from the business units. But Lay had helped make Kinder successful and rich, and Kinder had been notably compromised in the process. Indeed, he kowtowed to Ken Lay. The boss’s shortcomings—a lack of focus and a perilous appetite for hazard—left Kinder with messes and complicity. From an oil-trading scandal to short-sighted accounting practices to Lay-family nepotism to inflated public relations to political forays, the CEO called the shots, and the COO was in places that he did not want to be.

Kinder’s flaws went beyond acquiescence. Because he was Enron’s top lawyer, the Valhalla trading debacle was partly his gamble and whitewash too. Kinder was personally unrelenting in his efforts to make promised earnings, quarter to quarter, year to year. He jumped at quick fixes that violated the economics of net present value to meet corporate and key-executive performance goals and, not coincidentally, put himself over the top financially. Until his time was up in 1996, the chief operating officer presided over misleading financial engineering, practices that would worsen.

Kinder developed flawed compensation systems, including a system for international projects that rewarded closings, not successful operation. He signed off on naked risks and okayed investments that resulted in large write-offs. A large buildup of off-balance-sheet debt occurred under his purview. Imprudence and artifice existed alongside Kinder’s constructive actions of instilling accountability and practicing tough love.

The belief that Kinder would have saved Enron rests less on what he did at the company than on what he accomplished afterward. Having declared personal bankruptcy earlier in his life, Kinder relearned at Enron how high-sounding ventures by smart people could go awry. This lesson, and the end of his subservience to Ken Lay, served him well. Kinder and fellow HNG-ex William Morgan founded Kinder-Morgan on a hard-asset, midstream model that achieved a multibillion-dollar valuation by the time of Enron’s demise. (They began by purchasing assets Enron no longer wanted.) This anti-Enron company, located across the street from the Enron Building, resulted from a fortuitous exit by a company builder (Kinder) who became, entrepreneurially and managerially, the anti-Lay.

Meanwhile, the new team of Skilling and Lay substituted hype, hope, and hurrah for midcourse corrections and allowed the company’s bad divisions to overwhelm the good. Enron chose not to bid aggressively for new pipelines or focus on new domestic infrastructure projects at the core, betting instead on trendy ventures with postulated higher rates of return. The divergent paths taken by Enron and by Kinder-Morgan gave rise to an alternative history—if only Kinder had stayed—that is far from certain.

The third major conclusion, concerning the role of ideology in shaping Enron’s business strategy, demands wholesale revision. The question to be answered is: Was the “systemic failure” involved in Enron’s collapse—implicating all the private and government gatekeepers and guardians of business—attributable primarily to free-market incentives and capitalist attitudes or to an outlook favoring government intervention (regulation, tax preferences, subsidies), as well as deceit and cornercutting?

The mainstream view is that capitalism failed. Didn’t Enron egregiously exploit the rules meant to protect the public? Didn’t Ken Lay pay homage to deregulation and free markets during his entire Enron tenure? Wasn’t Jeff Skilling the epitome of Social Darwinian capitalism? Didn’t the final result—tens of thousands of innocents financially compromised—reveal the downside of modern capitalism? Amid the wreckage, even the Wall Street Journal editorialized that Enron was “a problem for anyone who believes in markets.” More regulation and better enforcement, Progressives concluded, must protect against free-market debacles. Post-Enron legislation, supported by both political parties, reflected this view.

But one must look beyond Enron’s promarket image to actual behavior and true motivation. It is here that a far different view emerges.

Enron is a problem for anyone who believes in the modern mixed economy. Ken Lay’s business model leveraged government-sponsored commercial opportunities in myriad and sustained ways that ultimately came at the expense of competitors, investors, taxpayers, and consumers. In contrast to such business/political scandals as Crédit Mobilier and Teapot Dome, however, Enron’s acts of political enrichment were legal. In the mixed economy, moreover, they were often politically correct, achievements to be heralded in the media and in Enron’s own annual reports.

Enron is also a problem for anyone who believes in the highly regulated economy. The company became a master of gaming complex tax codes and regulatory rules. Indeed, Enron came to embody those sharp practices and philosophic frauds so long decried by classical-liberal thinkers and free-market entrepreneurs. Yet, as with Enron’s lobbying, these manipulations were almost all legal. And those that were not were typically mere infractions of accounting minutiae.

What allowed Enron to prosper greatly through its dissimulations, and for so long, was nothing but the government’s regulatory role, which Enron’s brightest gamed into profits. Because of the moral hazard created by Progressivism’s bureaucratic oversight, private-sector gatekeepers failed to discover and denounce the company’s violations of moral and commercial best practices, as they surely would have in more of a self-reliant, buyer-beware market.

A revisionist view of Enron must also focus on the modus operandi of Ken Lay, a big-picture PhD economist with much regulatory experience inside and outside federal agencies. After becoming CEO of Enron-predecessor Houston Natural Gas Corporation, Lay quickly remade his new company into a federally regulated entity. From innocent beginnings, he gradually came to abandon centuries-old maxims of business prudence, in a vain quest to make Enron into the world’s leading energy company and, later, the world’s leading company.

Highly ambitious and über-optimistic, Enron’s chairman was running from a past and superaccelerating into the future. What appeared to be a real-life Horatio Alger story would end up as an American tragedy, the subject of Book 4 (covering Enron from 1997 through bankruptcy and the criminal prosecutions). Jeff Skilling’s release from prison will constitute a final data point for my history of Enron and this tetralogy on political capitalism inspired by the rise and fall of Ken Lay’s enterprise.

The current project began as a three-part book: Political Capitalism: Insull, Enron, and Beyond. Then each part—worldview, backstory, and Enron proper—expanded to become its own book, reflecting the unanticipated richness of each subject on a stand-alone basis.

Book 1, Capitalism at Work: Business, Government, and Energy (2009), applied the classical-liberal worldview to Enron and the US mixed economy in which the company thrived. My foray into business strategy, history, philosophy, economics, and political economy documented how leading capitalist thinkers identified and emphasized economically sustainable commercial practices.

Adam Smith, Samuel Smiles, and Ayn Rand each warned against the behaviors that came to define Enron. In our day, classical-liberal entrepreneur Charles Koch has codified an integrative business philosophy in his books The Science of Success (2007) and Good Profit (2015) that is quite opposite to Enron’s modus operandi.

No less important than the history of ideas is the history of institutions. Book 2, Edison to Enron: Energy Markets and Political Strategies (2011), explored the antecedents of Enron in terms of predecessor companies and individuals, including Ken Lay himself. The rhyme-in-history stories of John Henry Kirby and Samuel Insull offer parallels to that of Ken Lay, bankruptcy and all. The lessons of history, particularly the rise and fall of seemingly bedrock individuals and firms, show that history unknown, unlearned, forgotten, or simply unappreciated is valuable knowledge foregone.

The present book begins my analysis of Enron proper and its aftermath. But for several reasons this book turned into two—and the trilogy into a tetralogy.