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Road to Kyoto: Letter from Ken Lay to George Bush (April 3, 1992)

“[Enron was] the company most responsible for sparking off the greenhouse civil war in the hydrocarbon business.”

- Jeremy Leggett, The Carbon War (London: Penguin Books, 1999), p. 204.

“The United States fully intends to be the world’s preeminent leader in protecting the global environment. [E]nvironmental protection makes growth sustainable…. [This] recognition … by leaders from around the world is the central accomplishment of this important [United Nations] Rio Conference.”

- George H. W. Bush, “News Conference in Rio de Janeiro, June 13, 1992.

The rise and fall of Enron Corp. is Exhibit A by government advocates for increasing regulation of what is seen as unbridled, market-failure-ridden capitalism. As one economics textbook states: “The story about Enron reminds us of a serious fact of economic life—that markets fail….” [2]

But upon closer inspection, Enron is Exhibit A against political capitalism, not free-market capitalism. Enron was about the political means, or rent-seeking, rather than about economic means of consumer service.

Enron is a fascinating case study about the perils of interventionism, not the perils of business in a free society.

Ken Lay and Enron set in 1990 set out to become the world’s first natural gas major; the most innovative and reliable provider of clean energy worldwide for a better environment. [1] The enemy to natural gas was coal, and Lay worked not only to remove artificial advantages of coal over natural gas (Fuel Use Act of 1978; incremental pricing rate design, etc.). He worked to reverse the tilt in favor of gas.

Before Lay and Enron were done, seven profit centers were created around the climate-change issue, or more specifically, pricing carbon dioxide (CO2). And when the Kyoto Protocol was signed in December 1997, a euphoric Enron lobbyist wrote back home: “This agreement will be good for Enron stock!!).

So where did the road to Kyoto begin, both in terms of Enron and the United States?

Just perhaps it began with a three-page, carefully orchestrated letter from Enron’s chairman Ken Lay to George H.W. Bush in April 1992, a few months ahead of a major kickoff UN global warming meeting . A reluctant Bush went, spoke …  and the rest is history.

Here are some key excepts from Lay’s letter (which was cc’d to Clayton Yeutter and C. Boyden Gray):

Dear Mr. President:

I am writing to urge you to attend the upcoming United Nations Conference on Environment and Development scheduled for early June in Brazil and to support the concept of establishing a reasonable, non-binding, stabilization level of carbon dioxide and other greenhouse gas emissions.

This stabilization level should serve as a useful public policy guide, not a policy mandate. Moreover, I believe a market-based policy approach is the most cost effective and environmentally beneficial method to achieve greenhouse gas stabilization.

The demagoguery on both sides of this issue has been extraordinary fierce. Frankly, I do not believe the oceans will boil in a few years if we don’t address greenhouse gas emissions, but I also do not believe the U.S. will suffer from economic ruin if prudent steps are taken to reduce CO2 emissions in order to protect the global environment. In fact, if pursued through market-based policies, a reduction in greenhouse gases should result in a cleaner environment, cheaper electricity, and more American jobs.

Among other industries, I am convinced that America’s hard-pressed domestic natural gas industry would benefit substantially from a market-based approach to reducing CO2 emissions. Natural gas is our cleanest fossil fuel and through its increased use in electric power generation could play a major role in reducing CO2 emissions and delivering lower electricity prices to consumers.

For example, as compared to a new coal-fired power plant, a natural gas-fired power plant, a natural gas-fired power plant reduces carbon dioxide emissions by 58 percent (the principal greenhouse gas), produces virtually zero sulfur dioxide emissions (the main cause of acid rain), and cuts nitrogen oxides by 80 percent (one of the main contributors to smog). Of course, a gas-fired plant does not produce any solid waste—ash or sludge.

Natural gas electric power generation is not only cleaner, it is cheaper—at least 30 percent less costly than coal-fired electricity generation over the life of the plant using long-term natural gas prices currently offered by Enron and others. Natural gas power plants have also proven to be significantly more reliable than coal or nuclear power.

………

In summary, I urge you to provide leadership on this important global environmental issue. Not only will many U.S. industries benefit from measures to reduce greenhouse gas emissions, including the natural gas industry, but with the appropriate market-based policies, the measures will result in a cleaner environment, cheaper electricity, more American jobs, and a reduced trade deficit.

Sincerely,

Ken

———-

[1] Enron Corp, 1989 Annual Report, p. 4 (dated March 12, 1990).

[2] Gary Clayton, Economics: Principles and Practices (McGraw-Hill, 2008), p. 179.

3 comments

1 Andrew { 10.17.13 at 9:31 am }

Something really ought to be done about this infuriatingly nonsensical notion of “market based policies.” It seems to me an inherent contradiction in terms, an oxymoron if you will. After all, the word “policy” implies government action, which must by definition alter and disrupt the activities of a true market.

2 rbradley { 10.17.13 at 9:46 am }

Right Andrew. Emissions trading was considered ‘market based’ since it ‘let the market’ decide where to cut emissions relative to command-and-control.

3 Wayne Lusvardi { 10.17.13 at 11:54 pm }

It should be made clear that Enron did not manufacture the California Energy Crisis of 2001. It was a bit player that had very little market power to manipulate the entire diffuse California energy system.

The one accusation that was made against Enron was that it shut down power in its 52 MW Las Vegas power plant at the peak of the crisis on January 17, 2001 and thus caused power prices to spike upward. When I was on an Energy Crisis Task Force for a large water utility in 2001 I called a few energy industry insiders to ask if they could verify whether Enron did shut down the power plant. They confirmed that Enron did shut down or curtail deliveries of power from the plant. But the reason that Enron curtailed power deliveries was that California’s power grid was congested at the time. In other words, Enron cut back on power to lessen congestion and lower prices. But reality is written by those power elites in the media who spun the story that Enron caused the California Energy Crisis.

Of course, government needed a fall guy to keep attention off of what it was doing. The original cause of the California Energy Crisis was not Enron, deregulation or monopoly energy pricing. It was the 1996 Environmental Protection Agency’s mandate to clean up urban smog by 2001 or face a cut off of federal highway and education funds. The only way to comply with this federal “mandate” was to shut down old polluting fossil fuel power plants along the California coast owned by Pacific Gas and Electric, San Diego Gas and Electric, and Southern California Edison. These obsolescent power plants were subsequently divested to private operators and converted to cleaner natural gas fuel power plants. By the summer of 2002, the San Gabriel Mountains northeast of Los Angeles were not hidden in plain sight anymore behind a curtain of smog.

California was not running out of energy in 2001; it was running out of clear sky. The real crisis was not energy, but how to pay off the unpaid corporate bonds –- called “stranded assets — on the mothballed power plants. Everybody wanted smog eliminated, but no one wanted to pay for it. Federal environmental policy became “clean air at any price.” It ended up as energy and water and air pollution credits at nearly any price.

The initial deregulation solution to the energy crisis in 2001 was to give a quasi-monopoly to natural gas suppliers, mainly in Texas. The unstated idea was to try to pay off the bonds on the old power plants by loading the extra cost into electricity rates. This policy was erroneously called “deregulation.” It failed. The plug was pulled on deregulation when a Democratic Legislature and governor came into power and replaced it with a system of energy price caps. Energy caps have never worked for very long wherever they have been tried.

Retail electricity prices were eventually capped, resulting in an induced energy pricing fever in wholesale power rates. This bubble in energy prices was intentionally created in an attempt to pay off the unpaid bonds on the mothballed power plants. But price caps also failed miserably and even resulted in some fatalities due to rolling blackouts.
Finally, some $42 billion in unpaid corporate bonds were rolled into price premiums loaded into long-term energy contracts, mainly to run the pumps for the California State Water Project. Smog reduction was indirectly paid for by inflated water rates.

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