Oregon Public Broadcasting: Oregon Considered, August 5, 2002
Enron: The Oregon Connection
PORTLAND, OR 2002-08-05 (Oregon Considered) - Until it declared bankruptcy last fall, Enron was the seventh-largest corporation in the United States with operations around the globe. Here in Oregon it owns the state's largest utility: Portland General Electric. Enron's collapse has left PGE's future cloudy and some say it has cast a pall over efforts to further deregulate the electricity industry in the state. We examine Enron and it's Oregon Connections, starting with Enron's beginnings in themid 1980s.
Enron's roots are in natural gas. This animated cartoon from the Internet explains how the company was created.
Internet parody: (Wedding music) On a gorgeous Sunday afternoon in August, 1985, Houston Natural Gas Company married high school sweetheart InterNorth and soon gave birth to an adorable Enron.
The name "Enron" doesn't mean anything. It was chosen after the company rejected Enteron which, it turns out, is the medical term for the intestines.
Enron's parents were, in business terms, a conservative lot, dependably supplying gas to utilities across the country. At the time, natural gas was well on its way to being deregulated. Enron embraced deregulation and positioned itself as a company on the cutting edge of the "new world" of energy.
Oregon Public Utility Commissioner Joan Smith first heard of Enron in the early 1990s. She was on a Natural Gas task force with other regulators.
Smith: They had the reputation of being cowboys of being way out there on the front end of things of being experimental of rushing in to do things and also, notably, if they didn't think it was working out in terms of their business plan they back right out again.
Smith said most regulators where skeptical of Enron its flashy reputation didn't fit in with the rest of the utility world. But Wall Street loved Enron. During the 1990s Fortune magazine named it "America's Most Innovative Company" five years in a row.
In 1996, Enron announced it wanted to buy Portland General Electric. Joan Smith says she was surprised.
Smith: It doesn't fit with who they are as a culture. It doesn't fit with who they are as a company. I never heard a good reason why they would want to have in their portfolio a utility, except because they could!
At about that same time, California had begun to deregulate its electric utilities. Customers were given a choice of electricity suppliers: their same old utility or a new competitor. Enron blanketed the state with television ads offering customers free electricity for two weeks and cheap rates thereafter.
Enron wanted to spread the California model to other states. In a public meeting with Oregon's PUC on Valentine's Day, 1997, Enron CEO Kenneth Lay tried to woo commissioners with the prospect of taking a ride on the cutting edge with Enron.
Lay: We're also convinced that working with you and the staff, we can develop a model going forward for electricity competition and consumer choice here in Oregon that will be emulated, virtually, around the country.
Commissioner Joan Smith says Enron put on an impressive show.
Smith: We had guys that had suits on that cost more than my car!
But commissioners were still skeptical, and Smith says they were having trouble getting specific information about the proposed acquisition of PGE.
Smith: At one point while they were doing this shine-on thing about how good it would be for Oregon but not using one single fact or not answering one of our questions, I just lost it.
Here's Smith's reaction from the 1997 meeting.
Smith: We're not children. We're not simpletons. We do not ride around in turnip trucks here.
A few months later Enron agreed to the PUC's stipulations for approving the acquisition, and the deal was closed. But Enron's vision for Portland General never panned out. PGE executive Fred Miller says everyone was excited about deregulation, except customers.
Miller: What we found is that a lot of people were perfectly happy with their existing utilities and were not really interested in a variety of choices.
Commissioner Joan Smith says within six months of buying PGE, Enron became an absentee owner and didn't even take part in Oregon's effort at deregulation, which was just beginning to take shape.
Looking back, Smith says the PUC's skepticism of Enron paid off. Commissioners refused to okay the deal unless Enron agreed to create a "brick wall" between itself and PGE. No assets could be transferred from the utility without regulator's approval. As Enron spiraled into bankruptcy it wasn't able to tap into PGE's coffers, and the utility remains a prized asset.
Smith: We're busy pattin' ourselves on the back.
Enron's bankruptcy was the largest in U.S. history until Worldcom filed for protection from creditors last month. Enron's fall echoes an earlier bankruptcy also filed by a parent company of Portland General Electric in the 1930s. That company was owned by a man named Samuel Insull. Like Kenneth Lay, Insull was a friend of the politically powerful and a businessman honored as a visionary.
Insull was born in London and later moved to the United States where he co-founded the company that became General Electric. At the peak of his career, Insull owned utilities that supplied most of the power to the Midwest.
Historian Larry Plachno edited Samuel Insull's posthumously published autobiography. Plachno says during a particularly hard time, Insull borrowed money from rival utility magnate J.P. Morgan to keep his empire going.
Plachno: When the depression hit he tried to keep everything afloat; he used some of his own money to keep things going and keep people employed.
But he soon ran out of money and his empire collapsed. It was a difficult time and Plachno says it only got worse for Insull.
Plachno: At the time they obviously needed a scapegoat and he was unfortunately sitting in the wrong place at the wrong time, if you will.
Portland State University Professor Jeff Hammarlund says, like Kenneth Lay, Insull rubbed elbows with power brokers before his fall.
Hammarlund: Insull was courted by politicians throughout the country early on. He was considered a man of great stature. And as soon as the tides turned against him he was villified by some of the very same people that had wanted their picture taking with him just months before.
Franklin Delano Roosevelt referred to Insull in his early presidential campaign speeches. During a stop in Portland in September of 1932, Roosevelt blasted Insull with words that, hauntingly, could apply to Enron today. There are no known recordings of that speech, so it's read here by an actor.
Franklin Delano Roosevelt: That "Insull monstrosity" grew during the years of prosperity until it reached a position where it was an important factor in the lives of millions of our people. The name was magic. The investing public did not realize then, as it does now, that the methods used in building up these holding companies were wholly contrary to every sound public policy.
The purpose of Roosevelt's speech was to convince voters that electricity monopolies should be regulated by the government to keep them honest.
Leone: It seems extremely apropos and pertinent to today!
Jerry Leone is manager of the Public Power Council. She's never been a fan of deregulation.
Leone: In fact it puts me in mind of another famous quote: "Those who do not read history are condemned to repeat it." Which is exactly what we're doing, of course.
While the collapse of Samuel Insull's empire prompted calls for regulation, Enron's fall came in the middle of a period of deregulation. The 70 or so years in-between held relatively little excitement for the electricity industry. But in recent years, some have begun to think that regulation has outlived its usefulness even some regulators like Joan Smith with the Oregon Public Utility Commission.
Smith: If I've learned one thing over the years, it's that the market can discipline the monopolists much easier and more quickly than we the regulators can.
Such thinking led to the deregulation of California's electricity industry in the late 90s which led to the energy crisis of 2000 and 2001. Deregulation defenders say California just didn't do it right. But Jerry Leone isn't convinced.
Leone: Well that's horse pucky. That's kind of the "True Believer" capital T', capital B' saying, "Well, if we just did this one other thing In theory it ought to work." It reminds me of the forecaster who said, "Grrr, my forecasts were correct, it was the actuals that were wrong!"
But Leone is in the minority on this one. Deregulation or some form of introducing market forces into the electricity industry is still the prevailing view.
As for Samuel Insull and Kenneth Lay, it's not clear how far the parallel between the two men will extend. Lay could face the wrath of a prosecutor as Insull did. Though he was eventually vindicated in court after four years. But Insull never recovered financially and died penniless in a Paris subway.
The name Enron is almost synonymous with deregulation. The company has championed the marketplace over regulated monopolies ever since its creation in 19-85. But Enron's role in the California energy crisis is leading some to question deregulation.
The crisis caught most experts off guard and left many of them shaking their heads and wondering what happened. In recent months it's become a bit clearer what happened. Electricity Industry Consultant Robert McCullough says energy trading companies most notably Enron were manipulating the market through a series of strategies with unique names.
McCullough: Black widow, big foot, red congo The one I like the best is named after a Enron trader, John M. Forney, and it's called Forney's perpetual loop.
Forney's perpetual loop was designed to take advantage of rules set up to govern the newly deregulated market in California. Large power lines in the state were turned over to an organization called the Independent System Operator. To avoid congestion on the transmission system, the ISO paid companies not to use the lines at busy times of the day.
In order to collect congestion fees, Enron would schedule power deliveries knowing that the ISO would pay the company not to use the lines. It's kind of confusing, but here's an analogy: Imagine you're commuting to work on the freeway
Driver: This traffic is driving me crazy! It's a good thing I only have to drive during rush hour once a week.
(Police siren goes off)
Consultant Robert McCullough says California's congestion fees served a legitimate purpose. But he says no one was checking to make sure electricity traders were being honest.
McCullough: It will only work if we have someone auditing every recipient of congestion fees to make sure that their activities were made to actually deliver electricity in a serious engineering fashion to the ultimate consumer. Otherwise, without those checks and balances, we'll simply be paying people for buying old jalopies and leaving them on the freeway.
Enron also is accused of buying electricity in California at capped prices, sending it North to Oregon and then brining it back into California and selling it at a much higher price. Federal regulators want to know if Portland General Electric participated in any of these questionable trades. PGE Executive Vice President Fred Miller says the utility's traders did participate in a few of the trades but not knowingly.
Miller: I don't expect traders to know that when they buy or sell from someone that they know the ultimate destination or how it's used. And our research showed that they didn't know that or weren't party to anything with a funny name attached to it.
Miller made that statement during a June 24th interview. A day later, PGE filed with federal regulators transcripts of telephone conversations among PGE, Avista and Enron employees that contradict Miller's statement. Miller says he has not read all the transcripts himself there are hundreds of pages but he says PGE's chief lawyer assured him the utility was in the clear.
An examination of some of the transcripts shows that several PGE employees were aware of some of Enron's questionable trades but did not report them to authorities. In April 2000, transcripts show Enron trader John Forney as in "Forney's Perpetual Loop" describing to a PGE transmission employee a plan to send power from California to Oregon and then back into California. That practice was part of "the Loop"
One PGE employee called the plan "squirrelly" another told a colleague at a differnt energy trading company "This is a scam and you know it."
The statements do not show that PGE was "in" on plans to manipulate the California market, but Jason Eisdorfer with the Citizens Utility Board of Oregon says the utility should have reported the questionable trades to regulators.
Eisdorfer: The transmission people knew that something strange was going on; they really could have raised a red flag. One of the reasons they may not have is because Enron is their corporate parent. And that is something, I think, we'd be really interested to learn more about whether or not there was pressure from Enron direct or indirect that caused PGE employees to look the other way.
The final determination on whether PGE traders did anything wrong will be left up to state and federal regulators; both are still investigating.
As for the traders Enron employed, Robert McCullough says they could be facing severe consequences. Some of them now work for UBS Warburg, which declined to comment for this story.
McCullough: Well certainly a number of UBS Warburg employees ex Enron employees should be very nervous. Greg Whaley, the head of the Enron trading is now at UBS Warburg. Uh, Tim Belden John M. Forney A number of others have names that are apparent in these documents and I suspect they will bear questions from the authorities.
Many of the people involved aren't talking openly; they've followed the lead of ex-Enron CEO Kenneth Lay who testified before Congress on his company's collapse but didn't say anything.
Lay: Therefore I must respectfully decline to answer, on Fifth Amendment grounds, all the questions of this committee and subcommittee and those of any other Congressional committee and subcommittee.
Enron and PGE employees who lost millions in retirement savings did testify before Congress and as many do in hard times some have turned to humor. This phone answering machine message made its way across the internet just after Enron filed for bankruptcy.
Enron answering maching: Thank you for calling Enron. Please listen closely to the following options as our menu has changed. If you wish to serve a subpoena on a current or former Enron executive, press 1'. If you are an Enron shareholder and would like to learn how to turn your Enron stock certificates into decorative Origami, press 2'.
Enron parodies also came in the form of song
Enron Song (to the tune of Doo Ron Ron): The accountants said that everything was A-okay at Enron-ron-ron, at Enron-ron. Now the moving vans are taking all the desks away from Enron-ron-ron, at Enron-ron.
While most companies would consider such songs a public relations nightmare Enron has given up on trying to salvage the company's once mighty image. Enron's Portland General Electric, on the other hand, remains a well-respected company with a pretty decent image. PGE Executive Vice President Fred Miller says that's because the local management including CEO Peggy Fowler never had much to do with Enron.
Miller: I haven't been to Houston for over two years I think Peggy hasn't been there for about two years. It's not close contact.
Miller says aside from setting profit targets, Enron pretty much left PGE alone. That's not to say that PGE employees were not aware of their parent company. Many had their retirement savings invested in Enron. For most of the past five years that Enron owned PGE it looked like a good investment. Miller says some PGE workers even got rich from owning Enron stock.
Miller: We had some people who we think of as blue collar who may have had a million dollars in a 401k. And they get to think that's theirs! And when the markets change, obviously that's a real hit.
Class action lawsuits have been filed against Enron hoping to get some of that money back; but with the company in bankruptcy that could prove difficult. But what about PGE? Has Enron's long shadow caused problems for the local utility?
Smith: I would say up until the bankruptcy, no. The bankruptcy has been a problem of major proportions.
Oregon Public Utility Commissioner Joan Smith says PGE's parent company has made the bond markets and rating agencies very nervous about whether the utility is a good credit risk.
Smith: Because we are in uncharted territory here. So they have lowered their bond ratings considerable.
Lower bond ratings mean higher interest rates and those costs are passed onto ratepayers who've already been hit with hikes between 30 and 50% because of the California power crisis. But most think PGE can weather the Enron storm.
Jerry Leone with the Public Power Council says that after PGE's ownership changed in 1997, the company didn't change much.
Leone: The human beings have remained the same and I either respected them or didn't respect them the same as before or after Enron bought them.
Leone does wonder about the future of PGE, though. Some are working to make it a consumer-owned utility just like the ones Leone represents. Since PGE is one of the largest utilities in the Northwest, you might think Leone would be excited about having PGE in her fold.
Leone: I don't know the details of it. I understand there's a push by some East Coast bankers and some lawyers downtown
Leone says there's some ambivalence among existing consumer-owned utilities. They are entitled to cheap federal power but that electricity pool is only so big and if PGE jumped in it would make a big splash.
Leone: There isn't a whole bunch of federal power lying around.
Leone says she does see one positive thing about PGE becoming publicly owned; it would increase the political clout of groups like hers.
Leone: I personally have noticed that consumer-owned utilities get pretty short shrift in Salem in the Governor's office. If PGE were to become a consumer-owned utility I would say there are politicians in Salem who would then have to pay some kind of attention certainly more than they do now to positions taken by consumer-owned utilities.
The decline of Enron has many looking for silver linings. PGE Executive Fred Miller says t