“If there is one thing I have been impressed with over the last decades, it is that when the environmental community defines a number one priority, something happens. Not always something good—but something.”1
Dr. Kenneth L. Lay, Chairman, Enron Corporation, June 1997 (1)
Who was the late Ken Lay, the architect and chairman of Enron throughout its 16-year history? All parties to the current legislative debate on a CO2 cap-and-trade bill should know. After all, Lay’s tireless efforts to promote CO2 regulation and enact renewable energy quotas make him a father figure for HR 2354, the Waxman-Markey climate bill, what I have called the Enron Revitalization Act of 2009.
In his lifetime, Lay did not win CO2 regulation, but he got a very damaging renewable energy mandate passed in his home state of Texas. I asked:
How has Texas, which consumer choice made the leading oil and gas state, become the second most politicized energy state in the nation (after California)?
The regulatory spiral can be traced back to Enron, which in 1999 spearheaded a provision in the state electricity restructuring law (Senate Bill 7, signed by governor George W. Bush) establishing a statewide renewable-energy mandate. Enron’s lobbyists had in mind the special interest of Enron Wind Company, which is now part of General Electric.
It was a double win for the politically connected company. First, as the leading power marketer, and with its eyes on becoming the leading electricity retailer as well, Enron coveted mandatory open-access of electricity in the state. Secondly, it needed a big market for its money-losing Enron Wind. Cloaking both corporate-welfare goals in the guise of a renewable mandate got media-worshipped environmental groups on board to help push SB 7 across the finish line.
Whether it was hiring John Palmisano, writing op-ed’s, working with Clinton/Gore, contributing $1 million to Resources for the Future in appreciation of their cap-and-trade work, or a myriad other things, Ken Lay worked a mile a minute to promote CO2 legislation, all to help a variety of Enron profit centers (see below).
Ken Lay as Political Capitalist
In my recent book, Capitalism at Work, I try to answer this question for readers in the introduction:
Who was Ken Lay, the architect and chairman of Enron from its formation in the mid-1980s until its bankruptcy? The once-celebrated visionary of the energy industry was not an engineer, as were most leaders in the energy sector. Lay did not possess an accounting or finance background, as did some senior executives. He never clawed his way up the corporate ladder in various operational divisions, much less built a company from scratch. No, Enron’s leader was a Ph.D. economist, interested in the big picture and the ways of political power. His résumé was top-heavy with Washington experience, acquired at three federal jobs, the last two regulating the energy industry.
Ken Lay’s interests and skill set dovetailed with the political-capitalist system he found when he became a Washington energy regulator in the early 1970s. Predictably, then, when Lay reentered the private sector after nearly six years of government service, his niche became running federally regulated interstate natural gas pipelines, assets that he knew well from his time at the Federal Power Commission (now the Federal Energy Regulatory Commission).
And when Lay got his own show as chairman and CEO of a Fortune 500 company, he lost little time in applying his academic training, considerable smarts, uncommon energy, keen ambition, and soulful persona to the government-opportunity/government-favor game. He was an extraordinary, mile-a-minute political capitalist (or rent seeker in the jargon of economics), eager to deploy the political means to propel Enron to the top of the energy industry—and then the whole business world.
Lay employed a political capitalism model for Enron:
Government favor propelled Enron’s profit-centers in domestic power plants, natural gas and electricity marketing, wind and solar power, infrastructure in underdeveloped countries, and unconventional natural gas production. Enron was all about complex federal laws and administrative regulations, such as special provisions within the Natural Gas Policy Act of 1978, Public Utility Regulatory Policies Act of 1978, Omnibus Budget Reconciliation Act of 1990, and Energy Policy Act of 1992—or FERC rulings such as Regulation of Natural Gas Pipelines after Partial Wellhead Decontrol (FERC Order No. 436: 1985), Pipeline Service Obligations and Revisions to Regulations Governing Self-Implementing Transportation Under Part 284 of the Commission’s Regulations (FERC Order No. 636: 1992), and Promoting Wholesale Competition Through Open Access Non-discriminatory Transmission Services by Public Utilities; Recovery of Stranded Costs by Public Utilities and Transmitting Utilities (FERC Order 888: 1996). The arcane was pure gold to Enron.
And then there was the legislative reform that Enron could not land. In the 1980s, Lay’s company failed to persuade lawmakers to enact a sizable oil tariff to reduce interfuel competition to the company’s natural gas operations. Enron also fell short in its 13-year drive to persuade the federal government to regulate greenhouse-gas emissions, particularly carbon dioxide (CO2), an intervention that promised profit opportunities in no less than seven company divisions. Still, as an ex-Greenpeace official observed, Enron was “the company most responsible for sparking off the greenhouse civil war in the hydrocarbon business.”
Green Enron–As in Money
Enron’s climate alarmism was driving no less than seven profit centers:
Beginning in the late 1980s, global warming became a bread-and-butter issue for Ken Lay, Enron’s leader and up-and-coming industry visionary. Enron in the 1990s became a full-fledged “green” company, practicing “energy sustainability” with its investments in solar power, wind power, energy-efficiency services, and environmental services.
No U.S.-based company sounded the tocsin over climate change more than Enron. What John Browne did as head of the international energy major BP, Ken Lay did in the United States, working with interest groups and political leaders to push the energy industry and public toward CO2 regulation. Lay had his reasons—seven in terms of company profit centers, all of which stood to gain from government restrictions on carbon emissions. They involved:
· Natural gas production (relative to oil and coal),
· Natural gas transmission (relative to oil and coal),
· Natural gas-fired electric generation (relative to oil and coal),
· Energy outsourcing (a/k/a energy efficiency) services,
· Renewable energy generation (wind and solar),
· CO2 emissions trading (joining company trading in sulfur dioxide and nitrogen oxide), and
· Environmental outsourcing (a/k/a environmental services).
Of these, Enron’s natural gas activities were core, profitable activities (and “win, win” economically and environmentally, in their important applications). But the last four areas were problematic from the start and never profitable, even with special government favor. In retrospect, almost no amount of government subsidy would have been enough for these nascent businesses.
Enron and Environmentalists
Enron under Lay worked closely with environmentalists:
On the environmental front, Enron practiced sustainable development by sounding the alarm over man-made greenhouse-gas emissions beginning in 1988, supporting Clinton/Gore’s 1993 proposal for a Btu tax, aggressively investing in solar power in 1994, jump-starting the U.S. wind industry with the purchase of Zond Corporation in 1996, spearheading the effort behind what became the nation’s strictest renewable-energy mandate (in Texas in 1999), and lobbying the Bush/Cheney administration (unsuccessfully) to regulate CO2 emissions. Enron received a climate-protection award from the EPA and a corporate-conscience award from the Council on Economic Priorities. The company advanced the interventionist agenda of the President’s Council on Sustainable Development, Business Council for Sustainable Energy, Pew Center on Global Climate Change, and Heinz Center for Science, Economics, and the Environment, as well as sponsoring Earth Day events in Texas, California, and Oregon. Ken Lay’s Enron was pointing the way to a sustainable-energy future—or so it was thought.
Enron and Social Corporate Responsibility
Enron also preached social corporate responsibility:
In the fall of 2001, Ken Lay’s words set the tone for what would be Enron’s last Environmental, Health, and Safety Management Conference:
“We believe that incorporating environmental and social considerations into the way we manage risk, govern our projects, and develop products and services will help us maintain our competitive advantage. As we move forward, we will leverage our intellectual capital and innovative capabilities to promote sustainable business practices around the world.”
At this meeting, Enron’s CSR task force listed its “Accomplishments to Date,” which are reproduced verbatim below:
- Secured board oversight of social/environmental performance
- Expressed support for Universal Declaration of Human Rights
- Completed corporate responsibility task force
- Developed and pilot-tested human rights audit
- Developed security and human rights guidelines
- Established formal partnerships with WBCSD [World Business Council on Sustainable Development], IBLF [International Business Leaders Forum], and CI [Conservation International]
- Identified language to strengthen code of ethics
- Providing project support—Calypso, Transredes, Dabhol and Cuiabá
- Responding to stakeholder concerns on an ongoing basis
The goals for 2002 included:
- Formally adopt CERES Principles
- Complete indigenous peoples’ policy
- Specify social/environmental expectations in formal relationships with vendors and contractors
- Review results of stakeholder survey and develop strategy to address outcome
- Create awareness of social/environmental trends among [Enron’s] origination and investment groups
- Add corporate responsibility performance attribute to PRC [Performance Review Committee] process
- Present task force recommendations to Dr. Lay and senior management
Make no mistake—Enron was trying to practice CSR, so that it could monetize its “green” energy model. This had been Lay’s strategy for a decade with natural gas, as well as internationally, as with Enron Global Affairs’s 1999 launch of the Social and Environmental Responsibility Program.
Enron’s CSR initiatives came to a screeching halt in December 2001, along with all of the company’s other discretionary activities. The company was out of money and out of time. But the ship went down with its green lights on.
Conclusion: An Anti-Capitalistic Company
What is my book’s conclusion?
The fundamental lesson from Enron is this: Capitalism did not fail. The mixed economy failed. The capitalist worldview is stronger, not weaker, post-Enron. But there is another, deeper lesson that explains Enron and the mistakes of the intellectual mainstream before, during, and after Enron’s active life. It is that arrogant behaviors, or what in the Enron vernacular is called the smartest-guys-in-the-room problem, can strike anytime and anywhere. Whether in business or academia—or any profession or association—conceit, deceit, and dogmatism are the bane of personal, intellectual, and organizational success.
And the smartest-guys-in-the-room problem plagues the Obama approach to energy, which will be the subject of a future post.
(1) Ken Lay. Quoted in “The Energy Industry in the Next Century: Opportunities and Constraints,” in Irwin Stelzer. ed., Energy After 2000 (VIII Repsol-Harvard Seminar, June 1997), 21.
When you buy a product/commodity, i.e. coffee, sugar, cocoa, wheat, etc. there is tangible product that has value. However, with Cap & Trade, government regulators worldwide will create, out of thin air, Certified Emissions Reduction, or CER’s, the development of competing markets to buy and sell CERs. Cap & Trade assures the rise of an army of regulators to oversee the entire business, which is fraught with the opportunity for fraud and manipulation by accountants, politicians, bureaucrats, utilities, manufacturers, airlines, trucking, railiroad, investment bankers, and hedge funds, etc. etc.!
If you think the Savings & Loan/Resolutions Trust, Enron, Fannie Mae, Freddie Mac, TARP, Banking and Auto Bailouts were disasters, the potential debacle of Cap & Trade makes them all pale in comparison!
CER’s will be traded in commodity markets worldwide, however, unlike coffee, sugar, cocoa, wheat, etc, there is no underlying asset of value. By that I mean every tangible product has value and while the price of a tangible product goes up/down it is always worth something and never goes to zero. Such is not the case with CER’s.
[…] is Rob Bradley, quoting from his book Political Capitalism, on Lay and Enron: Who was Ken Lay, the architect and […]
[…] Climate progressivism, led by cap-and-trade, is a throwback to Ken Lay’s Enron. […]
Don’t forget Ken Lay took a long range approach to setting the stage. Ken Lay hand picked and supported Sheila Jackson Lee over Craig Washington in 1994 to take the TX 18 Congressional District. Ken is in his grave and we are still living with the results of his action. With your help I can defeat Sheial Jackson Lee. I received ~40K votes in the last election against her and will receive more in 2010. Please jump on board and help.
[…] she would be more disappointed today, particularly in the energy industry. Think of Enron’s Ken Lay and BP’s John Browne a few decades ago–and and Duke Energy’s Jim Rogers and T. […]