The Nation

FEATURE STORY | March 4, 2002

How Enron Did Texas
by NATE BLAKESLEE


In the spring of 1991 Texas State Representative Kevin Bailey killed an Enron bill. The freshman Democrat from Houston had been advised by his veteran campaign manager to play ball with the company, which at that point was still just a natural-gas-pipeline concern. But Bailey didn't listen, and it very nearly ended his career. In 1992 he found himself in a primary fight against an Enron-recruited candidate, who promptly used Enron cash to hire away Bailey's own campaign manager. When Bailey narrowly won that contest, Enron tried to unseat him again in 1994. Bailey survived, but he was chastened. Even then, "Ken Lay had a lot of influence," he said. "People were afraid to mess with him, because they always knew he'd try to get you." In subsequent years, Enron grew steadily more powerful in Texas. The company rose in tandem with the state Republican Party, which has been lavishly bankrolled by Enron executives and PACs. By 1999, when the Republicans, led by George W. Bush, swept every statewide Democratic official out of office and seized control of the State Senate for the first time since Reconstruction, Enron was sitting at the top of the heap, the king of the lobby.

That was the year Enron pushed its holy grail, deregulation of retail electricity, through the Texas legislature. Through its joint venture, the New Power Company, Enron stood to make a bundle when competition officially began in January of this year--if only the company were around to see it. Instead, Lay and his wife are fighting for liquidity, and the state's top Republican officials are heading into an election year with a Texas-size albatross around their necks. Governor Rick Perry has taken more than $227,075 from the company, including a $25,000 check from Ken Lay delivered the day after Perry appointed a former Enron executive, Max Yzaguirre, to head the Texas Public Utility Commission. Yzaguirre resigned under pressure on January 18, but Perry says he will not be returning the money. Neither will Republican Attorney General John Cornyn, who has received $193,000 from Enron. Cornyn recused himself from the state's investigation of the meltdown, though so far there has been little activity on that front. State Comptroller Carole Keeton Rylander, the elected official who oversees the collection of taxes from companies like Enron, has received $63,000 in contributions. Enron is also the largest corporate contributor to the current membership of the Texas Supreme Court, whose justices are elected in expensive partisan races and where some portion of the coming Enron litigation may very well wind up.

Already some veteran politicos are invoking the dreaded name of Sharpstown, the Texas banking scandal of the early 1970s. In the wake of that disaster, voters replaced virtually every incumbent statewide elected official, as well as half the sitting legislators. As the current election season gets under way, each new revelation in the morning paper has campaign consultants scrambling to uncover who got what from Enron over the past decade, and what Enron got in return.

In Houston, Enron's money went to art museums, opera houses and hospitals; in Austin, it went to politicians. "Lay and the big executives were absolutely everywhere in political circles," Democratic lobbyist Patrick Woodson said. "I mean, Enron's influence was just enormous." For the better part of a decade, Enron applied that influence with single-minded purpose toward one goal: cracking open the lock that the state's investor-owned utilities, principally Texas Utilities and Houston Lighting and Power, had on retail electricity sales--and on Texas politics.

"You have to understand, what they did in Texas politics is pretty amazing," Woodson said. The real roadblock to deregulation was that the strongest lobby in Texas, the investor-owned utilities (or IOUs, in regulatory parlance), had no interest in competition. Never mind that when Enron began pushing for electricity dereg in the mid-1990s, there was little public interest in the idea, and that power in Texas was already relatively cheap, compared with New England or California. Nobody had ever taken on the big utilities and won--that was Enron's real coup. "Enron took them on and put for the first time credible financial resources up against them," Woodson said. "There's no question that if Enron had collapsed before the 1999 session," Kevin Bailey says, "we wouldn't have had dereg in Texas."

As Enron wedged its way into the inner circles of state government, the company's political largesse became legendary. "I think they viewed campaigns as an investment strategy, and it paid off for them," Woodson said. The most important investment Enron made was in George W. Bush's first gubernatorial campaign, in 1994. As Bush somewhat disingenuously sought to remind voters this past December, Lay had been a minor patron of Democratic Governor Ann Richards. But when W. entered politics, Lay switched horses in a big way. A longtime supporter of the Bush clan, Lay was considered for a Cabinet post during the first Bush presidency. He then became a close adviser to W. and a key source of funds: $146,500 from Enron PACs and executives in the 1994 campaign. After Bush eked out a narrow win over Richards, the new governor gave the company a fundamental component of its Texas strategy in one of his first appointments: Public Utility Commissioner Pat Wood, a deregulator's dream.

A Harvard law graduate from Port Arthur, Texas, Wood began his public career on the staff of the Federal Energy Regulatory Commission, which was in the process of deregulating natural gas sales. Eyebrows were raised when Wood returned to Washington last summer, this time as Bush's choice to head the FERC, because of revelations that Ken Lay himself had vetted the list of candidates and given Wood his approval. But Wood has always been Enron's man. According to a report by Lowell Bergman in the New York Times, Lay endorsed Wood, just 32 at the time, for the PUC job in a letter to Bush in 1994. After four months on the commission, Bush made Wood the chairman, the most powerful regulatory position in the state. In an interview with the Houston Chronicle last year, Wood said that his orders from Bush were clear: "Get us to a market," Bush told him.

By all accounts, Wood did not need any convincing. From the outset, the chairman's pronouncements about the desirability of competition sounded strikingly similar to Enron's growing public relations effort. "Pat Wood was Enron's favorite PUC commissioner," Woodson said. "He started the dereg process and really put the ball in motion for them. They were the biggest player politically and financially in the dereg movement, and Pat was with them every step of the way." Wood has earned praise from some public interest lobbyists, like Public Citizen's Tom Smith, for being amenable to their concerns. But even his supporters agree that competition always came first with Wood, before any other consideration. "They've got religion" became a common refrain about the PUC under Wood.

With prospects looking up, Enron stepped up its campaign, buying statewide television and billboard ads hawking competition. The company funded front groups, like Texans for Affordable Energy, to simulate a grassroots call for deregulation. "That was a big joke, because whenever we went to community meetings we never heard a single person voice an interest other than people who worked for the companies involved," Bailey said. In fact, Texas energy prices were trending downward in the late 1990s, a fact that Wood freely admitted at the time. Because the Texas dereg formula called for freezing rates for several years, dereg initially would mean higher rates than if the legislature had simply done nothing. "But it all became this market argument that Enron put out there," Bailey said. "We had to have a free market; a free market will give people choice." Enron was simultaneously lobbying dozens of state capitals, as well as pushing its now notorious proposal for federal deregulation of online energy trading, which led to the California energy meltdown. Enron executive Jeffrey Skilling told the Fort Worth Star-Telegram in 1996 that Texas's average rate of 6 cents per kilowatt hour was "absurdly high." He said, "There's nothing in this market that suggests we won't see the same savings of 30 to 40 percent we've already seen elsewhere." (This was, of course, several years before price spikes and blackouts began hitting California.) The company hosted luncheons for Texas legislators at posh downtown hotels in Houston, where Lay and other executives gave elaborate presentations on the merits of competition. And always there was plenty of campaign cash--and arm-twisting--to back up the pitch.

As Enron made inroads with legislators, the IOUs began to see the writing on the wall. Bush's support for Enron was a big factor. "It was pretty obvious that the Bush/Pat Wood/Rick Perry triangle was Enron-oriented," one Democratic consultant said. "Without that, the IOUs would have run over them." Wood sweetened the deal for the IOUs by suggesting that, as with California's deregulation plan, they might be allowed to recover debts incurred from bad investments, or so-called stranded costs. In a deregulated environment, inefficient power plants, like Texas's two nuclear facilities, would be worth much less than the value their owners currently claimed for them, since they would not be able to deliver power as cheaply as more efficient competitors could. Utilities would thus be forced to write down the value of those plants, and investors would have to absorb huge losses.

In mid-1998 Wood proposed that utilities--under the guise of preparing for competition--be allowed to raise rates temporarily to recover those stranded costs from consumers, a windfall worth billions. When the 1999 session rolled around, the IOUs were finally on board. "It was free money for Texas Utilities and Houston Lighting and Power, so they figured if it was going to happen, they might as well take what they could get," said Janee Briesemeister of the Consumer's Union. (The method of measuring stranded costs was highly speculative, and, as it turned out, the projected losses have largely failed to materialize in Texas. Some lawmakers have called for a refund of much of the stranded-cost money collected by the utilities over the past two years.)

When things looked rocky, Bush was there to shepherd the deal through the legislature. "He never lobbied us directly," Kevin Bailey said, "but his legislative guys worked it hard." Sometimes a little too hard. Bailey recalled one instance in which a House committee had just approved his pro-consumer amendment to assess more of the stranded costs to big industrial customers instead of individual ratepayers. (Convinced that the bill was destined to pass, many progressives reluctantly supported deregulation in 1999, seeking to get what good they could out of the process.) When the governor's mansion got word that Bailey had added a possible deal-killing amendment to the bill, Terral Smith, Bush's legislative liaison, raced over to the committee. "He pulled all the Republicans into the back room and convinced them to vote again," Bailey said. Smith's heavy-handed tactics miffed enough members that Bailey still prevailed by one vote. The amendment didn't kill the deal, but Smith watched the bill like a hawk the rest of the session, Bailey said.

When Bush called Wood to Washington last June to head the FERC, it was Governor Perry's turn to do Enron a favor. (Perry, the former lieutenant governor, came to office when Bush went to the White House; he has yet to face election as governor.) The devil in deregulation is in the details, and the contest was now being fought in the arena of the PUC's rule-making process. Perry's selection in June of Max Yzaguirre, chief of Enron's Mexico operations, to fill Wood's spot was carefully calculated. Documents released by the governor's office in late December show that Perry's staff debated long and hard about how Yzaguirre's nomination would be viewed. State law prohibits anyone who has worked for a Texas public utility or a direct competitor in the previous two years from serving on the PUC. Perry's staff rationalized that since Yzaguirre hadn't worked for any part of Enron that did business in Texas, his nomination adhered to the letter of the law. In any case, Perry figured, with the legislature recessed Yzaguirre would not face the scrutiny of a nominations committee for eighteen months. (The Texas legislature meets every other January for four months.)

Last fall, however, as interest in Enron's financial troubles increased, Yzaguirre amended his application to reveal that he had served as an executive on several North American subsidiaries of Enron, and things began to unravel. As pressure mounted on Perry in the wake of Enron's December collapse, the governor held fast to his appointment, even after the embarrassing revelation that Lay had personally donated $25,000 to Perry on June 14, 2001, the day after the Yzaguirre appointment. Perry called the timing a coincidence. (In a bizarre episode, Perry's bumbling staff also sought to hide Yzaguirre's criminal record--he shot a whooping crane in south Texas in 1989--from Democrats by redacting portions of his official application, which is a public document.) "I think we underestimated how firmly they would stand by Yzaguirre," said Democratic consultant Kelly Fero. "This was a question of a lot of money. This wasn't just a little payback--this was the guy who was going to oversee deregulation and an awful lot of people were going to get rich." Finally, on January 18, Yzaguirre stepped down.

Meanwhile, a second PUC commissioner, Brett Perlman, has come under fire for previously undisclosed Enron connections. Appointed by Bush in 1999, Perlman worked until 1998 for McKinsey & Company, the consultants who helped Enron evolve from a pipeline company to a global energy trading firm. According to documents obtained by the Fort Worth Star-Telegram, Perlman described his work there as "assisting the leading US natural gas and electricity trader in developing an industrywide online electricity trading system."

In just as deep with Enron is Texas Attorney General John Cornyn. Despite having accepted $193,000 from the company and its executives, Cornyn at first declined to recuse himself from the state's investigation of the Enron collapse. "This is not the time for him to recuse himself from his duty," his spokesperson told reporters shortly after Enron declared bankruptcy. One day later Cornyn changed course, announcing that he would form a task force within his office to determine the state's strategy and that he would take no part in the investigation. (Cornyn's announcement accompanied a cascade of recusals by Texas officials, including the US Attorney in Houston and several federal judges in the Houston area, all of whom cited conflicts of interest.)

Compared with the effort launched by other states, Texas's investigation of Enron has been noticeably lethargic. In Florida, for example, where public pension funds lost $334 million on Enron investments, the Attorney General began issuing subpoenas shortly after the bankruptcy was announced. Florida is now jockeying with California, New York and several other large states to become the lead plaintiff in a class-action suit to be heard in federal court in Houston. Texas, which has lost more than $60 million in public pension funds, somewhat belatedly announced it would join the suit.

"What [Cornyn] ought to be doing is taking matters before a grand jury in Houston," said former Attorney General Jim Mattox, a Democrat. The AG also has the power to seize corporate records and review them for evidence of illegal activity. Mattox said he would have gone after both Enron and Arthur Andersen's books immediately. "There's no doubt that the state should have a major role in the investigation, but I don't think that's happening," he said. "It raises the greater question of how campaign contributions affect policy," Public Citizen's Tom Smith said. "If the Attorney General is acknowledging this as an issue, then you have to question how others can say it doesn't affect their decision-making."

Among those decision-makers is Chief Justice Tom Phillips of the Texas Supreme Court. Phillips recently told reporters that he would not be returning the $12,250 he took from the company, because to do so would imply that there was something wrong about taking the money in the first place. (In fairness, Phillips is on record calling for judicial campaign reform.) Together, seven justices on the court have taken $134,058 from Enron. One of those justices, Priscilla Owen (down for $8,600), has seen Enron connections threaten her appointment to the US Court of Appeals for the Fifth Circuit. Members of the Senate Judiciary Committee, some of whom were already opposed to the conservative Owen, have indicated that she will have to answer some tough questions.

Enron has also funneled thousands of dollars to Texas Supreme Court justices and other GOP officials through a special-interest PAC called Texans for Lawsuit Reform, of which Ken Lay has been a major funder. A handful of deep-pocketed Republicans have made the group, one of several seeking to limit access by plaintiffs to Texas courts (under the rubric of tort reform), the largest PAC in Texas in recent years. TLR and its members have been John Cornyn's single largest career contributor, pitching in a staggering $1.98 million over the past five years. Nowhere has TLR's influence been greater than on the Supreme Court, which has gradually shifted from being generally considered pro-plaintiff to what is now considered one of the most staunchly pro-defendant courts in America. According to a report by the campaign finance watchdog Texans for Public Justice, Enron has fared unusually well before the court, which has accepted two of three petitions brought by the company (both of which Enron eventually won) and rejected all three petitions brought against Enron by adversaries.

Last spring Texas politicians and ratepayers watched nervously as California's deregulation experiment imploded and Texas's own countdown to competition wound down. A series of mysterious price spikes in a pilot program last summer sent state regulators scrambling to determine if anyone might be gaming the system. The findings were inconclusive, and it's too soon to tell how competition will play out. "I think we're going to have to come back to the legislature to make the whole process more transparent," said Public Citizen's Tom Smith.

"In the old vocabulary of politics there used to be an element of populism that was conservative," said Bill White, a Houston businessman and longtime Democratic Party funder. "Before they would make a dramatic change in the way people got electricity, people would take it slow and careful." That was not the Enron way. "Their executives, with their high-profile civic and political activities--part of what it did was, it gave them this aura, sort of 'These people are the new establishment, and these are smart people who play their cards well,'" he said. "And it turned out they were spending money they didn't have."