Is this a huge crisis we're facing? What's going on in the energy
Lay was Enron Corp.'s first chairman and chief executive officer, taking the
helm of the Houston company in 1986. Enron is a leader in the so-called energy
merchant sector, where companies trade wholesale electricity and hedge risks by
charging its customers premiums to insulate them from price fluctuations. In
2000, Enron's annual revenues surpassed the $100 billion mark, more than
doubling its revenue of $40 billion in 1999. Critics charge that Enron earned
such record revenues by exploiting the California market. FRONTLINE interviewed Lay on March 27, 2001.
It's probably a crisis in California. It's a problem in other places around
the country, but California has allowed itself to get so short on supply, given
the growth in demand, that there's likely to be some additional serious
interruptions of power service in California over the next few months. ...We
could experience some blackouts in other areas, limited blackouts. And
obviously, New York is the other area that's of concern.
If we go back over the last 20 years, as a country, we have underinvested in
energy infrastructure. That was possible because 20 years ago or 15 years ago
or so, we had a lot of surplus capacity. We had a lot more power-generating
capacity than we really needed which was really built up under regulated
models, where the more you invested, the more you spent, the more profits you
made. And so we overinvested in power plants. We overinvested in transmission
lines, we overinvested in pipelines. And then, of course, with the
deregulation of wellhead natural gas prices, we stimulated a lot of drilling
activity. We also allowed supplies to be moved from Canada down to the lower
48 states and around the country in the most efficient way.
And now, particularly with the strong growth in the economy in the late 1990s,
the strong growth in demand for electricity from our high technology economy,
we have used up that surplus capacity and now we've got to start investing
again to keep up with the economic growth.
Some have said to us, as President [Loretta] Lynch did of the California
Public Utilities Commission, that California had plenty of capacity for
electricity, it's just on certain days, all of a sudden, it disappeared, when
normally they had it.
I think that oversimplifies the problem. This summer virtually everyone is
estimating that California will be at least 10 percent short of capacity. In
other words, demand will exceed supply by at least 10 percent this summer. And
of course, particularly during peak periods during the day, when peak usage of
electricity occurs, that's going to create serious problems.
Now, it could be what she was referring to is that, up until the last year or
two, when California did need extra supplies, it could almost pull on supplies
outside the state--get more of the hydro supplies from the Northwest or other
surplus supplies in other nearby states and bring it in. Well, now that has
dried up, because those states are also getting tight on supply. The tightness
has been aggravated by something that really nobody had any control over, and
that's the weather.
That means the hydroelectricity capacity in the Northwest is significantly
reduced, by 25 percent to 30 percent, and in some cases, 40 percent. So those
surplus supplies that could be pulled on by California previously have
So it's not just a political ploy to blame the weather?
No, it's not. At the same token, prudence would have said, you don't depend on
having high hydro season power every year, because that doesn't happen either.
And so, to the extent that they've had some very robust hydro years the last
four or five years, there should have been some calculation in there, that's
probably not something we're going to get every year. And of course, this
year, we're not getting it.
...Your company makes money off the volatility of the market or how many
transactions you can get involved in?
We basically make money on putting together the transactions, packaging up the
supplies--both on the buy side and the sell side, packaging up the supplies,
locking them in under long-term contracts, with creditworthy buyers and
sellers, and then, of course, arranging to have that delivered to our
You know people have called this your "black box." It's a mystery in
I've heard that, but again, I think that also kind of introduces some mysticism
into it [that] doesn't really exist. It's no more a black box than what goes
on every day in all the world's financial markets, whether it be interest rate
swaps, whether it be currency swaps. Trillions of dollars every day are being
exchanged around the world in all of the financial markets. ...
Today, there are also buyers and sellers of all these energy commodities, just
like there are buyers and sellers of food commodities and many other
commodities. And when there are a lot of buyers, that means a lot of
liquidity, and that means that companies like Enron, through a virtual
integrated system--not an actual integrated system--can always arrange supplies
that can be delivered reliably, at predictable prices, to customers all over
That's what all these people are doing on the trading floors in this
That's exactly what they're doing. ...
We asked [Lynch] about Enron. [She said] "Enron makes money through trading
tiny little arbitrage opportunities, and making millions in profits. They are
part of a daisy chain of profits, eventually paid by the consumer."
I think it's pretty clear Mrs. Lynch does not understand Enron or the business.
... The Public Utility Commission in California required the utilities not
only to buy all of their wholesale electricity through a PX, a pool--in other
words, a single buyer, seller of electricity for the whole state--but forced
them to buy it on the short-term market, the day-ahead market. ... They
required the utilities to buy 100 percent of their supply on the short-term
market. They were betting that the short-term wholesale market price would
always go down.
Now, for the first two or three years, they were right, because there were
surplus supplies, what we talked about earlier. But as soon as you get a
shortage, which we have now, that spot market is by far the highest price,
because all of a sudden, you have a lot of demand, and of course, the market's
very tight, and so it drives prices very high.
Again, in California, if Mrs. Lynch and others would have encouraged the
utilities to have a portfolio approach to buying their wholesale supplies-- so
they would have bought some supplies, maybe for ten years, some for five, some
for three, and then some on the short-term market-- California wouldn't have
the problem they've got today. And as recently as last summer, Enron, among
others, was trying to persuade some of the utilities to do that. And the
Utility Commission discouraged them.
When she says that the real problem here is that electricity is different,
that it is in a sense oxygen for modern society, you can't really play with it
like any other commodity in the marketplace. Not true?
Well, everything's different. At least, I've observed that over the years. We
use competitive markets to arrange for delivery of our food supply. We use
competitive markets to arrange for delivery of our shelter, our housing. We
rely on competitive markets to arrange delivery of our clothing, and of course,
the gasoline we put in our cars, so we can get to work in the morning; the
heating oil that we buy in the Northeast and elsewhere to heat our homes when
it's 30 degrees below zero. ...
It's always kind of interesting to me how whatever it is that a regulator or
maybe a monopolist is involved in is so different that, somehow, it does not
conform or comply with the laws of supply and demand, and the competitive
market forces. If the rules are right--and they were not right in
California--but if the rules are right, electricity, like any other commodity,
can be arranged for, can be priced more efficiently by competitive market
forces than it can be by regulators and monopolists.
Where are the rules right?
Rules are pretty much right in Pennsylvania, pretty much right in New Jersey,
pretty much right in a number of other states. Of course, as you know, Texas
is just now beginning to open its market up. And certainly we believe there's
reason to believe that the rules in Texas are very much right, and will result
in much lower-priced electricity than otherwise would be the case; over time,
it will, in fact, provide for reliable electricity. Unlike California, for
example, I think something like 25 new power plants have already been built
since deregulation was passed in Texas.
But you're creating a situation that existed during the time, as you said,
of regulation--surplus in the electricity market. Then you can have
competition. But can you have real competition in a situation of
Sure you can. Of course, you have competition for people that want to build
plants, and of course, move into that market, if you get the rules right. The
problems in California have been that it's been very difficult to site and
build new power plants. As you know, [during] the 1990s, while the economy
grew very strongly, there was so much resistance in many of the communities and
so forth to building new power plants. But in the case of Texas, when the
rules were set on deregulation, the generators from around the country looked
at those rules and said, "That's going to be a good market in which to build
power plants, so [we ought] to build power plants."
But Texas is unique. You're self-sufficient, basically, in all your energy
needs. You don't have to deal with the FERC, the Federal Energy Regulatory
Commission. You don't have to depend on them to set wholesale rates. You can
do that here, within the state itself.
First of all, FERC has jurisdiction over wholesale rates around the country,
including Texas. Whatever FERC does on wholesale transmission and wholesale
rates for electricity, and wholesale rates for natural gas applies equally as
much to Texas as it does to California. Indeed, one could argue that the more
dependent a state is on out-of-state supplies of energy, then the more liberal
its market should be. ...
You're not paying the prices that California is paying here in Texas, you're
not paying the prices for natural gas that California is. If you were, your
electricity generators would be pretty upset. ...
We're not paying the same price as they are in California. That's because,
first of all, we do produce a lot of natural gas in Texas, and we have a lot of
pipeline capacity in Texas. But we are paying higher prices. ... Natural gas
prices in Texas have also gone up two or threefold over the last several
months, and indeed, electricity prices have, too.
Here in Houston, our local utility just announced its second or third increase
over the last nine months. I believe that will get the total increase up to 30
percent or so, in electricity rates, 30 percent or so over where it was about a
year ago. I think with these latest increases in California, their rates,
finally, will be up 30 percent from where they were a year ago.
So if rates keep going up in Texas and California, why do we want to
Well, rates would go up whether you deregulate or not, and of course, the rates
that are going up right now on the electricity side are still within the
regulated framework. We haven't yet opened the market to start something this
year, as I said. And indeed, all of the utilities under the old regulated
scheme had fuel cost pass-through provisions.
So just like we saw in the 1970s, when oil prices and natural gas prices went
higher, electricity rates went up, even though the cost of generating
electricity did not change. So you're still going to have higher prices,
higher rates. My argument would be that, again, over a reasonable period of
time--and that's probably five years or more--you'll still have lower prices.
You'll have lower prices under deregulation than you will through
We haven't had them yet.
Yes, you have.
You did in California for three years.
Until there was a shortage.
That's right. You had three years, when, in fact, rates were lower. ... And
then, of course, that flipped around a little less than a year ago. ...
Maybe the best example in deregulation that I can give you would be on natural
gas. As you've already indicated, this past winter we saw some big price
spikes in natural gas. Move outside of California, the prices were up to maybe
$10 or so a million BTU, which is almost fivefold what they were just a year
ago, or a little over a year ago.
But with those prices, we finally got back to the prices that in fact we saw
back in 1984, in real terms. In the intervening years, consumers in this
country have saved $175 billion through competition as prices came down and
stayed down. Now, natural gas prices have come back down again to about half
where they were last winter. And they'll come down further as in fact new
supplies come onstream. Markets are working in the case of natural gas. OK,
prices went way up. Today there are 50 percent more drilling rigs out drilling
for natural gas than there was a year ago.
People are now talking about opening up the [liquid natural gas] facilities
that have been mothballed on the East Coast, maybe building new ones. Markets
are responding, and markets will respond more efficiently when you've got
hundreds and thousands of different entities looking for the cheapest and best
way to solve the problem.
So you see yourselves, as I understand it, as the good guys in what's going
on in the current economic marketplace.
We see ourselves as first helping to open up markets to competition. And
through competition, reducing costs, and of course significantly reducing
prices paid by consumers. Also we see ourselves as being innovators in these
new markets once they're deregulated, where we can come in and begin providing
a lot of other products and services. ...
You hold up Texas as the example, but the Texas marketplace is going to be
regulation. We're not talking about getting rid of regulation; we're just
talking about changing the rules.
That's true in all the markets. The transmission systems are still regulated.
The distribution systems are still regulated. It's mainly a matter that the
generation of electricity--the marketing, the buying, the selling of
electricity and natural gas are not regulated. But [that] really puts the
pressure on getting the rules right for transmission and distribution, which we
haven't done yet on electricity on a national basis, even. The transmission
grid needs to be open, so in fact everybody can use it, just like the natural
gas pipeline grid is open, so everybody has equal access to it.
The question would come back again. As you said, the rules aren't right,
nationally. And what we hear from people is, then why experiment until we get
the rules right?
Indeed, we're moving the right direction, though, in most parts of the country.
And a number of states ... are doing reasonably well. ...
When your people noticed the price of natural gas going up through the
ceiling last summer, and then continuing, leveling off, and then going right
back up in the winter, did they think something was wrong? Was that what we
call market power?
Our people began, in the spring or so, to sense that the markets were really
getting tight. That's pretty easy to measure, because the storage levels were
getting low. ... I'm sure many other companies saw the same thing. Of course,
once that happens, then people start trying to protect their positions.
Obviously, if you think it's getting tight, you want to try to be long and not
short in that commodity.
"Long" means you want to have--
You'd rather have a surplus versus a shortage in your position. In the case of
Enron, we balance our positions all the time. We're basically making markets,
buying and selling, arranging supplies, deliveries. We do not, in fact,
speculate on where markets are headed. If we think markets are getting tight,
we try not to be somewhat short. We'd rather be somewhat long.
This is the spread in prices, you mean?
No. Just whether in fact you're in perfect physical balance or not. But we
have very, very narrow limits on all of our buying and selling of all of our
commodities worldwide; different kinds of terms, etc. We try to keep them as
close to balance every day as we can. In other words, if we sell a supply to
somebody, we go out and buy it, or vice versa. We don't try to just stockpile
stuff, because we also know that, no matter how good you are in this business
or any business, you cannot predict the market set accurately. ...
In your view, are environmental regulations holding back energy and power
production in the United States?
Let's start at near-term, short-term, in the case of California. One reason a
lot of those plants are not operating all the time out there is because they
run out of pollution credits. Over 60 percent of the power plants in
California are over 30 years old. That's another problem when you haven't been
building new power plants. You have older power plants that are dirtier power
plants, and they put out a lot more emissions. Last year, a lot of the power
plants out there ran out of these emission credits, and had to shut down. And
the same thing will happen ... it's already happening this year, unless, in
fact, some of those emissions credit limitations are waived.
So it could be temporarily, in California, that some of those emissions should
be waived while new plants are being built. Then, of course, the new plants
over time will displace the old plants, and then you can go back to much
tighter emission controls.
Your company and you have been very big supporters of George W. Bush, of his
father, and in contributions that you've made to the campaign.
I've been a strong financial and political supporter of, first, President Bush
Sr. when he was running for president, and even when he ran for president a
time or two and failed. And then certainly when he ran for president and was
elected in 1988. [I'm] very close to the family, to Barbara Bush and the
When Governor Bush--now President Bush--decided to run for the governor's spot,
[there was] a little difficult situation--I 'd worked very closely with Ann
Richards also, the four years she was governor. But I was very close to George
W. and had a lot of respect for him, had watched him over the years,
particularly with reference to dealing with his father when his father was in
the White House and some of the things he did to work for his father, and so
did support him.
That's held up as an example of, in a sense, where political power and the
private power of the energy industry come together. But in your case,
recently, I think Senator Mikulski's staff has rejected your proposals on
CO2 emissions and making a market out of that--right? They've
rejected your ideas as to transmission lines and eminent domain to open up
transmission lines around the country. What's going on? Was it a bad
No. First of all, I don't look at that as investment. ... It's interesting to
me that immediately it's assumed that, if you make a contribution to a
political campaign, you expect kind of a quid pro quo, something in return for
it. There are a few of us that are still maybe idealistic enough to think that
we can support a candidate because we really believe in the individual. We
believe in their policies. We believe in the direction they're going to take
the country. Clearly, there are going to be times when my views may be
different than President Bush's. But I think, overall, he's going to be a
Do you believe in global warming?
The weight of the evidence today would indicate that in fact the probability of
that being a problem is high enough that we need to start addressing it. I
don't think we ought to embrace the Kyoto agreement. I think there are a lot
of things that have been proposed that don't make economic sense. But I think
we ought to at least begin addressing the problem.
In California, they say we can't deal with this problem because the real
market cop is in Washington--the FERC, the Federal Energy Regulatory
Commission--and they're not helping us.
Basically, what they're saying in California is, "We want the FERC to put price
caps on wholesale electricity prices." That just camouflages the problem. It
doesn't solve the problem. We have a supply/demand imbalance in
California--too much demand, too little supply.
... I prefer to let the market sift that out. When the governor put on price
caps back in October, we, along with another company, cancelled the
construction of a couple of big power plant peaking plants, which would have
been available for this summer, because we couldn't justify making those big
investments in peaking plants, which will just run a few days during the year.
Price caps do not solve the problem, but price caps just require the
politicians to decide who's going to be curtailed.
You have faith in the market.
I have faith in the market when we get the rules right.
But the rules aren't right.
They're making progress on that. The governor has moved ahead to put in place
some streamlining of the approval processes to build new plants. That's a good
step. Now the governor needs to do some other things, I think, on buying down
or reducing demand. This recent rate increase will probably take care of a
good percentage of that. Such things as peak pricing, where people really
understand, particularly big manufacturing companies, what the price of
electricity is during those peak periods. And let them kind of move more
production out to the non-peak periods.
"Just and reasonable rates." That's the law in the United States-- federal
law. You're saying just and reasonable rates will be naturally created by the
market and it doesn't need any cop to police it.
In both the wholesale law for electricity and for natural gas, it really gives
FERC alternatives. They can rely primarily on market forces as long as they
believe there is not any undue exercise of market power. Or they can in fact
go back to more of a cost-based, as you say, just and reasonable
cost-based-type regulation. Thus far, FERC has decided that we prefer to go
with market forces, so long as there's not any undue market power. And thus far
they have not found any undue market power.
And "undue market power" means manipulation ... and overcharging.
But the ISO in California said there was $6.2 million in overcharging since
I've not seen any justification of that. I'm sure he's got some justification
of that, and I think he previously has filed some things with FERC, including
on manipulation. FERC has found that they could not see any evidence of any
manipulation. We have disagreements here on facts, as between what the local
people here, the ISO president, and what FERC is saying.
FERC Commissioner Pat Wood said yesterday, for instance, in natural gas, he
thinks the prices look funny. He said straight out yesterday that there is no
cop on the beat in Washington on the issue of market power.
OK. I think that's the way we ought to address the problem. If we think
there's market power, if we think there's manipulation by anybody in the
industry, either inside the state or outside the state, then that ought to be
attacked, and attacked aggressively. But that still doesn't argue necessarily
for cost-based rates versus letting market forces make the decisions here. We
do know that there are some serious physical constraints in getting natural gas
into the state of California.
You don't believe that there is excess capacity that's been withheld in
If anybody has any electricity or natural gas and elects not to sell it at the
kind of prices they've seen over the last 12 months--that's stupid. But indeed
we do have problems of getting any more natural gas into the state. Our
pipeline has been running full out, full out. We even somewhat expanded it
last May. ...
There are some actual physical constraints here. Just like there's a 10
percent shortage of generation in the state, there's also a shortage of
pipeline capacity in the state.
...You guys sit here at your own marketplace here and observe what's going
on. So you didn't see any market power being exercised this past winter in
We did not. Keep in mind, we are not a generator in the state of California.
... And again, the markets were all working. Every time there's a shortage or a
little bit of a price spike, it's always collusion or conspiracy. It always
makes people feel better that way. But if there's any evidence of that, then of
course people in Washington in particular ought to be looking at it
aggressively, and I think they have, a couple of times.
... Around the country, [people have] seen their rates going through the
ceiling. They look down at Houston, and they say, "That's where all the money
went" ... So it appears that there's some kind of great funnel; the money is
all flowing down here to Texas, and you guys are in control.
That's grossly overestimated. There are quite a few energy companies
in Texas; there always have been. But keep in mind, first of all, when we talk
about the generators, like the generators in California, only two of them are
headquartered in Texas and in Houston. That's Dynegy and Reliant. You've got
Duke in the Carolinas. And of course you've got the Southern Company down in
Georgia. ... You've got Calpine in California. ...
But somehow, [you all] say its coming to Texas. You talk about the natural gas
business. We have a large number of natural gas companies in Houston; I'm sure
by far the most of any place in the country. But you still have other big
companies, like Chevron out in California, or Texaco in New York and so forth
that are really big in the natural gas business.
But so far, when we talk to public officials in California, and public
officials here ... they all say it looks like market power to them. And you say
no, there's no evidence of that.
Thus far, nobody has come up with very convincing evidence that there is. I
didn't say that it shouldn't be looked at. ...
As you know, there's been some documents from inside El Paso. These
documents say that when they took over control of their own capacity, their
plan was to help manipulate the physical spreads. Words like that were used.
Is that pretty unusual?
I read the article in the New York Times, and I couldn't quite get the
same interpretation you just gave me. There was some reference to widening
basis differentials, which is different prices for different geographical
regions. Whether they said that they could manipulate those or change those, or
whether in fact they were just predicting to their own management that they
felt that was what was going to happen because this market was going to be so
tight on supply--that I don't know. ...
Before I made any judgment on that, at least individually, and before anybody
else would, I think they'd like to see all of the data, and then see what the
whole story looked like.
Because from your point of view, from Enron's point of view, it's not
helpful if someone is, in a sense, manipulating the market?
It is not helpful. We've been asked that many times. But indeed a market like
California is not good for Enron. I mean, we can makes some money on it, like
anybody else can. ... But indeed what we'd like to see are well-functioning
markets. That is in our best long-term interest. Of course, that has not been
a well-functioning market over the last 12 months.
This comes from a utility in California: "What's Enron doing to help
We've tried to get as much supply into California as we can. ... We had a
peaking plant ready to be built last October. That peaking plant would have
come onstream before this next summer, which we thought the state needed and
would provide more supply. But then when the price caps were imposed, we
couldn't justify the investment. We have worked with the utilities,
particularly PG&E, on a number of their credit issues. I think if you ask
PG&E's chairman, that he would confirm this. ... In other words, we've
taken additional credit risk as well as working with them to make sure we get
as much supply in the state as we can.
I'm going to refer here to Commissioner Pat Wood, and just make sure I
understand... He says every market needs a cop in order to insure
competitiveness. I assume that you agree with that.
I do agree with that. That's what our antitrust laws are all about. ... If
people are abusing the marketplace, if they're colluding, if there's
conspiracy, then in fact there are ways to handle that.
And don't you run up against that when you try to use transmission
In the case of transmission, quite often the utility, during peak periods or
high usage periods, will shut off access to those transmission lines. And we
find even in some cases where they may go off and sell their supply to our
customer. That's the reason we think we need much better rules for the
transmission grid. But right now, the nationwide transmission grid is not
being used efficiently and effectively, because the rules still aren't
I want to address this specifically in terms of those people who think that
everything is operating like a big cartel or a conspiracy. You're really, in
some ways, at war with some of the other energy companies.
We are usually on opposite sides with the monopolists. When you have a
monopoly franchise player exercising their market power, then usually we're out
on the other side of those issues.
Like Southern Company.
Like Southern Company, sometimes. We seem to have similar views to Southern
Company in those markets outside of the Southeast, where they are dealing in a
deregulated market. But we have different disagreements with them in their own
Some people have suggested that that's become sort of a political battle,
because Southern Company is associated with the Senate majority leader, and
you're associated with the president.
I don't think there's going to be any political battle along those lines. I
think certainly we will continue to try to get monopoly markets opened up for
competition. And then we'll continue to try to get, at a minimum, the
interstate transmission grid that has rules such that everybody will have open,
... The people who control the transmission lines won't let you
Won't let us through all the time on a nondiscriminatory basis.
And you wanted to build your own transmission lines, or have the right
We would do that in certain cases, too. But the main thing right now is to get
the rules right on the transmission grid, even before this summer, if possible,
because that means that more electricity can flow through those lines
... The restructuring and deregulation of the marketplace, you agree, has
been happening in an uneven way, and an unsatisfactory way, from a rules point
of view. So we're really experimenting, aren't we, in this whole world right
You're always experimenting. People talk about markets in transition. Every
market is in transition. Some are more perfect than others; there are very few
perfect markets in the world. But again, markets in general do a better job at
setting price and allocating resources than regulators or politicians.
But in this case with electricity, people are getting hurt, because they
need it. They can't do without electricity.
They can't do without electricity. They can do with less electricity. That is
the other side of this equation. To the extent that prices go up 20 percent,
if people use 20 percent less, obviously their overall monthly bill is the
same. That's exactly what prices are supposed to do. Reduce the demand by 20
percent in California, and the problem's solved. And if you can't do that
except through price, I don't think that's necessarily bad, with appropriate
safety nets and so forth.
But there are other things... If our food supply dries up for very long, we
don't last very long. If our water supply dries up very long, we don't last
very long, obviously. If you're in the Northeast or in the Midwest and it's 30
below zero and your heating oil's not there, you've got a problem. There are a
lot of things that are very critical to life that, again, we depend on the
market to make those decisions. There's no reason the same can't be true on
electricity, if the rules are right. And the rules are largely right in some
But not nationally.
Not nationally, yet.
And the price for the dislocations in the market is paid by consumers.
That's the reason that this is such a big issue--it affects so many people and
But the savings from deregulation also impacts their lives. Again, I referred
earlier to the $175 billion of savings in the natural gas markets from 1984
until this year. That, obviously, spread across the whole economy. In
virtually every industry with deregulation, we've seen 20 percent to 40 percent
cost reductions. Telephone. In general, those economies, or those savings,
are coming back to provide for much stronger economy, stronger job creation,
productivity, and all the other things that go with that.
In the reality of what's going on today, is the public really paying too
high a price? And wouldn't you agree--because the right rules are not in
place, even by your own view?
The right rules are not in place. But again, when you say paying too high a
price, how we going to measure that? In the case of California, those problems
can be solved, and solved rather quickly, with the right policies. Not to
minimize them, but those problems have been developed over a decade and longer,
and those problems could have existed even under regulation.
Editor's note: FRONTLINE conducted a second interview with Ken Lay on May
The transmission grid is of primary importance to you, right?
Oh, absolutely. It's the high voltage backbone for the electric industries.
It's kind of like a superhighway system for electricity. It moves electricity
around the states and around the country.
Now you went into the White House to talk to people about this, right?
You're in the formulation of the national strategy, is that correct?
I had two or three meetings with various people in the White House on the whole
issue of energy policy, and that did include some discussion about, in fact,
the interstate transmission grid, and how we thought it could be made to
operate more efficiently.
The vice president says he met with you.
He says he knows you well and you're friends. You helped him build a
stadium. What's that all about?
The stadium, I'm not sure how important that is, but I have known Vice
President Cheney for a number of years, both from his previous government
experience as well as when he was CEO of Halliburton. ...
Did you meet with the president and speak with him about energy
I did not. I've been in a couple of meetings with other CEOs where he's asked
questions about the general economy or commented on it, but I have not had any
separate meeting or private meeting or telephone conversation with the
president about it.
People we've spoken to have said that you brought a list of your nominees,
your favorites for the FERC, into the White House.
I brought a list. We certainly presented a list, and I think that was by way of
letter. As I recall, I signed a letter which in fact had some recommendations
as to people that we thought would be good FERC commissioners.
That went to Clay--
That went to Clay Johnson. ... He is the top personnel person in the White
We understand that you personally interviewed some of the potential
nominees, at least on the phone or otherwise.
I'm not sure I ever personally interviewed any of them, but I think in fact
there were conversations between at least some of them and some of my people
from time to time. And again how much of that was an interview versus them
calling, expressing interest, talking about their philosophy, and so forth.
We talked with Joe Garcia, who did not make it to the FERC, and he says he
had a long conversation with you on the phone.
And you're absolutely right. I did have a conversation with Joe Garcia.
On the telephone.
His impression was that you were a lot more relaxed than some of your
executives in terms of trying to get him to agree with them about issues around
open access. ... Mr. Garcia says that he agrees with you on open access but he
... doesn't believe the FERC has the authority to enforce it now, that is, to
open up transmission lines. So maybe you could explain what it is you
What we've been proposing for quite some time, including the previous
administration, is that to make the interstate transmission grid operate more
efficiently and thus carry more electricity, we need nondiscriminatory open
access to that system, where the local utilities cannot unilaterally decide
from time to time just to block access to third parties. [That] makes it very
difficult to arrange electricity supplies, particularly when the markets are
And you also want access to the retail markets, is that right?
We do. That's a whole separate issue, and for the most part that's handled at
the state level. ...
Is that a litmus test for your support of a nominee?
I'm not sure of a litmus test. I think that's one of several things that are
very important to us. And when I say important to us, I mean important to
making the market work more efficiently.
Mr. Garcia says that you politely thanked him for his views and said that
you were going to take up these issues with your friends in the White House
afterwards. Did you do that, related to any of the nominees?
Again, I'm not sure what I told him about my friends in the White House, but in
fact as I recall Joe Garcia was on our short list of people that we would be
quite comfortable with.
So you weren't involved in rejecting him for--
Oh no. Matter of fact, I think he's a very qualified individual, and certainly
based upon everything that I knew about him, that others knew about him, we
felt that he would be a good candidate.
How often have you spoken with [FERC Chairman] Curt Hebert?
... I think two or three times, and let me say, I think those have all been
initiated by him, as I recall. I'm trying to think about that pretty
carefully, but I believe those were initiated by him. I think I was responding
back to a question he had for me, so at least one of those I initiated.
(Editor's note: For Mr. Hebert's version of these conversations, see his interview.)
You remember talking with him? Because he does [remember talking to you], a
few weeks after he was made chairman, and you were laying out to him your
desires, Enron's desires concerning open access.
Let me first say also that we recommended to the White House that he be made
chairman, because obviously the new administration could make one of the
He was the only one at that point, right?
Well, he was. But we did recommend they move ahead and make him chairman. ...
What he says is that you told him ... Enron wanted to establish that the
FERC had the power itself, without new legislation, to open the grid, and that
he doesn't agree with you on that. He doesn't believe that there is that legal
authority. Do you remember that?
That's very possible but, indeed, our lawyers are very clear that they do have
that authority and it was granted ... just a little bit less than one year
The reason he says he really remembers this conversation is that he believes
that you made it a requirement of your continued support of him being chairman.
You implied that you would not support him if he didn't agree with you on these
I suppose Curt's entitled to believe whatever Curt believes. Let me say, Curt's
a very, very capable individual. And indeed, I think we talked about several
things in that conversation and not just this one issue. I think he's done a
superb job in pushing different market approaches to electricity. ... This is
an area that we still think is essential if we're going to get the interstate
pipeline or the transmission grid working effectively. But I'm quite sure I
did not in that conversation, as I would not, say, "If you can't agree to this,
then we can't support you." I think I did say in that conversation that clearly
whoever became chairman would ultimately be decided by the president, not by
Enron, not by anybody else. ...
You remembered this conversation, and he said he was quite upset, offended
really, because he felt that there was too close a line between what comes
before the commission and the implication of some kind of political quid pro
There was never any intent of that. Again, let me say just a couple of things.
First of all, to my knowledge, at that point in time there was nothing pending
before FERC with reference to this particular issue. Now, there had been a lot
of discussion about it throughout the previous several months. ... Indeed, it's
kind of interesting. I do know the trade association heads and others ...
occasionally will visit with him ... concerning industry positions on various
things. Such as, "Our membership will support this or would support that if
y'all decided to go that direction or whatever." That's been true, I think,
historically at the FERC. Now there are some very fine lines as to what you
could talk to the commissioner about. ...
You don't recall talking with him about your backing him or Enron backing
him with the White House or with anybody for him to continue as
I remember him requesting that we do that, and basically what I told Curt was
that again, the final decision on this was going to be the president's,
certainly not ours. ... For sure, I did not feel like we were in a position to
say, "OK Curt, you will become the chairman."
It isn't true that you're the closet secretary of energy?
I am not the closet anything. ... This administration has some very, very
capable people, particularly in the energy area, starting with the secretary of
energy but also people like Dick Cheney and Don Evans as well as the president
When we interviewed Vice President Cheney, I asked
him, "Had you met with any CEOs of any energy companies in the preparation of a
national energy policy?"
... Over the years, Vice President Cheney and I have worked on different issues
together. We also served on the American Enterprise board of directors for
several years, and of course that institute takes up many energy, natural
resource and other issues. And I'm flattered that he decided to meet with me
and at least hear me out as to some of the things that I thought were pretty
important that should be considered for his report.
You understand when people read this in the newspaper ...
I think you need to keep in mind also, for better or for worse, we had a lot of
access in the Clinton administration. Certainly [former Secretary of Energy
Bill] Richardson called on me and Enron on a number of occasions to at
least discuss different energy matters, [I] was asked a few times even by
then-Chief of Staff Mack McLarty about various energy matters, and [former
Treasury Secretary Robert] Rubin on other matters. As a major energy company
in the country doing a lot of international business too, we have a lot of
reason to, in fact, talk with different officials in our government just like
they have many reasons to talk with us.
... We went to the Edison Institute, for instance, and we asked them, "Did
you submit a list, for instance, of nominations for the FERC?" They didn't do
it. We asked them, "Have you ever talked to Clay Johnson about anybody being
nominated to FERC?" They say they didn't do it. And, "Have you ever had any
direct conversations with Curt Hebert about policy questions?" And they say
they didn't, they don't do that. ... Do you have a response to that?
Well, I'm very surprised with all those answers.
You don't believe them.
So if Curt Hebert says this was a unique experience, that's not true
Well, I don't know about that. And I don't know what you're referring to as a
unique experience. Clearly, we had two or three conversations, and like I say,
at least a couple he initiated. ... But I didn't in any way say, "Without this
agreement or this litmus test or whatever else, there's no way we can support
you." Because I didn't think it made much difference whether we did or not. We
have a president that in fact has some pretty definite ideas about a lot of
things, particularly about what he wants to do on energy.
When we interviewed Vice President Cheney, he told us--and at that time the
interview was embargoed, that's why he agreed to give it to us as of that
date--that Pat Wood was the new chairman of the
I'm not terribly surprised, and of course I think, in fact, part of that was in
one of those conversations with Curt Hebert, too--that certainly President Bush
had been very close to Pat Wood as they worked through the deregulation issue
in Texas, and that I would not be too surprised if Pat Wood [ended] up in
administration somewhere. I think at that point in time he was also being
considered for a position at the Federal Communications Commission as well as
You haven't heard from anyone amongst your various acquaintances who are,
let's say, close to the seat of power that once Mr. Wood is confirmed he will
be elevated to the chairmanship?
No, no. I'm not terribly surprised about that, just because of the comfort
level that I know President Bush has with Pat Wood. ...
You recently had a meeting with Governor Davis in Sacramento?
Is Governor Davis correct in saying that you told him that things are going
to get a lot better because Pat Wood is going to be on the commission?
I think he's told me that. He said he met with Pat Wood and he was convinced
that, in fact, things would get better with him on the commission. ... He was
convinced that Pat Wood would take a lot more proactive role in trying to help
California solve its problem.
And Mr. Hebert, you think, hasn't been as active as he might have
I didn't mean that as any criticism of Curt at all. I just said that the way I
viewed what the governor told me was that he thought Pat Wood would be more
So the governor told you, you didn't tell the governor?
That's the way I recall the conversation. ...
When Mr. Shapiro, one of your executives, spoke, he was very critical of
[Hebert] and his unwillingness to admit to open access and the idea that the
FERC already had that authority.
Mr. Shapiro has to speak for himself. I basically think Curt Hebert has done a
good job. Obviously, in this one area, I think he could have done more, and
certainly from my standpoint, based on the legal advice that I get, FERC does
have the authority to move ahead and impose nondiscriminatory open access
provisions on the high voltage interstate transmission grid.
And you got basically that kind of endorsement in the national energy
I think the general endorsement just was that FERC [should] do everything it
can to make the interstate transmission grid more efficient. Again, how they do
that is up to them. ...
Do you feel like the national energy policy represents, in a sense, your
views as well? Can you endorse the policies that are--
I'd rather say the latter than the former. I'm not going to say they
necessarily endorse my views. ...
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