Enron’s Demise Saps Houston’s Energy

Even for a city as confident and forward-looking as Houston, the demise of Enron Corp. will deliver a painful blow to the local economy, civic pride and its roster of good corporate citizens.

Enron in the 1990s made Houston the world capital of energy trading, and in so doing helped broaden the region’s economy into one that no longer rose and crashed on the price of crude oil. Half a dozen major companies in a brand-new industry--energy trading--today employ about 45,000 people.

A measure of Enron’s importance can be seen in the downtown skyline, where Houston’s first crop of major high-rise office buildings since the mid-1980s is under construction. Three of them are to be named not after banks, insurance firms or oil companies but new-styled energy companies Enron, Reliant Inc. and Calpine Corp.

Enron funneled much of its $100 billion in revenue last year through the local economy. Its payroll of more than 7,000 well-paid employees stirred, shook and lifted the local housing market, restaurant and entertainment industries and retail trade like no other.

Hundreds, if not thousands, of those jobs may simply disappear now that Enron appears headed for the ignominy of liquidation or reorganization in U.S. Bankruptcy Court. The once-highflying company’s doom apparently was sealed Wednesday when its Houston neighbor and competitor Dynegy Inc. bailed out of a proposed $9-billion merger, scared off by Enron’s mounting cash crunch and legal problems.

“The mood is disbelieving, not depressed but dazed. The hope [among employees] is that something could be worked out with the creditors to keep us operating, but the realization is that it might not happen, in which case there could be massive layoffs,” said an Enron employee who asked not to be identified.

Before its stunning fall from grace, it was Enron, more than any other company along Houston’s Energy Alley, that embodied the vitality and prosperity of the nation’s fourth-most-populous city.

And it was one man, Chairman Kenneth L. Lay, who embodied a company simultaneously admired on Wall Street and in local civic circles, and reviled by business competitors and in California, where government officials and consumers put much of the blame on Enron for the state’s energy deregulation debacle.

Craving an enduring legacy, Lay embraced the role of civic benefactor, relishing his status of go-to guy for the city’s educators, arts organizations and government officials in need of a favor.

Lay became the successor to legendary Houstonians Jesse Jones, Roy Hofheinz, Gus Wortham and Ben Love--all big-thinking corporate citizens who helped shape this energetic city, where the civic involvement of big business is gospel and the credo is “Get it done.”

Downtown’s Enron Field baseball stadium, several Lay-endowed professorships at the University of Houston and Rice University and generous Enron gifts to arts organizations, scholarship funds and the Texas Medical Center all testify to the company’s civic involvement.

Local officials already are mourning Enron’s passing.

“It’s a blow to Houston, a blow to our ego,” said Jim C. Kollaer, president of the Greater Houston Partnership, the city’s main business chamber.

“Their philanthropy will certainly be missed,” said Toby Mattox, executive director of Houston’s Society for the Performing Arts, which receives $25,000 a year from Enron. Last year, he said, Enron provided its offices for the society’s use after the group was flooded out by a tropical storm.

Mirroring the connection of Jones to Franklin D. Roosevelt--the Houston financier was an ardent New Dealer--Lay’s golden connections to President Bush as fund-raiser and confidant have given him enormous political clout within and outside the state.

“When we needed help in Washington, we called on him,” Kollaer said. “We don’t call on him that often, but when we do, we get it.”

Widely perceived as arrogant, condescending and given to lecturing nonbelievers in his free-market ideals, Lay, who holds a University of Houston doctorate in economics, has made his share of enemies along the way. And that hubris filtered down to employees.

“Damn it, we were the best. We had the smartest people. Dynegy only wishes it could be Enron,” said the Enron employee.

Because of such arrogance, few in the downtown business district were expressing much sympathy for Enron’s problems last week.

“There are no tears being shed for Enron around here,” said one investment banker. But no one denied the company’s influence on the local business scene--or tried to hide the shock over the company’s rapid fall from grace.

“I’m up in the bleachers watching this. It’s pretty bloody,” said Richard Murray, a University of Houston political scientist and longtime observer of the local scene. “I don’t think anyone in this town saw something like this coming.”

Enron and the other major energy trading firms that have clustered here in the last decade have helped transform Houston’s energy-dominated economy. So has a high-technology revolution that solidified Houston’s claim as the global capital in energy exploration and production methods.

Houston’s employment base was once 82% dependent on energy jobs; today, only half of the city’s 600,000 workers are employed in the energy sector. But higher-paying and higher-technology jobs have made Houston more resistant to the boom-and-bust cycles inherent in the oil business, said Robert W. Gilmer, senior economist at the Houston office of the Federal Reserve Bank of Dallas.

Once an Oil Town

As recently as the 1980s, the city lived and died by the price of oil. When prices were high enough to make oil drilling and production profitable, the vast array of Houston-based wellhead services companies struck it rich. When oil prices were low, as in the 1980s, companies folded and jobs evaporated.

Global recession--and depressed demand for oil--visited enormous distress upon Houston, which lost an astounding 225,000 energy jobs from 1982 to 1987, Gilmer said. But by 1990, when oil prices rebounded, employment returned to earlier levels.

During the 1990s, oil exploration companies in and around Houston became much more invested in high technology, said Barton Smith, a University of Houston economics professor and head of its regional forecasting institute. The companies developed sophisticated seismic imaging techniques that greatly increased the chances of successful drilling.

Horizontal-drilling techniques also developed by Houston companies increased the amount of oil recovered from mature reserves.

Demand for Houston’s exploration expertise grew, Smith said, as countries in Asia, Africa and Latin America sought to attain energy self-sufficiency. That goal overrode to some extent oil’s up-and-down cycles and gave Houston’s energy sector more stability.

During the same period, the rise of energy trading was creating another important employment base in Houston, in large part thanks to the evangelical fervor and salesmanship of Enron’s Lay.

“Lay was one of the people who reshaped energy markets in the United States,” said Michelle Michot Foss, an energy economist at the University of Houston.

Rise of Energy Trading

The concept that electricity and natural gas could be traded on commodities exchanges as efficiently as copper, cotton and pork bellies at first met resistance in an industry in which electricity was generated and distributed through closed regional monopolies.

The national market for gas was inhibited by an incomplete pipeline infrastructure that made it difficult to assure deliveries.

But the deregulation of the gas and electricity industries that eventually swept the country, combined with the growth of the gas pipeline network, made trading of energy commodities through a central clearinghouse feasible, and an industry was born.

The rise of energy trading helped Houston’s economy outperform the rest of the country throughout the 1990s, said Gilmer of the Dallas Fed, beckoning job seekers from around the United States and the world.

As Enron grew, so did Lay’s role in civic affairs. Corporate captains always have loomed large in Houston’s development--partly because of the government’s laissez faire policies on the local and state level, and also because of the example set by the city’s greatest corporate captain of all, Jesse Jones.

“We have always had a close partnership between corporate leaders and the public sector,” political scientist Murray said. “The city has been committed to maintaining the conditions for growth. It’s more like the government has been viewed as a supporting actor to the corporate sector.”

Jones, a banker and newspaper publisher, dominated the local scene for the first half of the last century. His accomplishments, boosted by his close association with FDR, were wide-ranging and considered crucial to Houston’s growth.

“He brought the 1928 Democratic Convention to Houston,” Murray said, “and he helped dig the Houston Ship Channel, along which much of the synthetic-rubber industry grew from scratch after the Japanese cut off supplies of natural rubber in Malaysia and Indochina.”

Jones’ shoes were filled in postwar years by construction magnate George Brown.

Then came Roy Hofheinz, a judge and mayor who pushed for the construction of the Astrodome; insurance tycoon Gus Wortham, who put up 20% of the cost of the downtown performing arts center named after him; and banker Ben Love and real estate developer Walter Mischer, both major arts patrons.

Enron and Lay’s visibility grew throughout the 1990s, partly because of his close ties to George W. Bush in his days as an oilman, and then Texas governor. Lay contributed more than $500,000 to Bush’s gubernatorial and presidential campaigns, and led the Governor’s Business Council, which had Bush’s ear on corporate issues.

Leaving a Vacuum

When the drive to build a new downtown baseball field stalled, Lay led a group that stepped in to privately finance the purchase of the land on which the stadium was built, said Kollaer of the Greater Houston Partnership. That made the financing feasible for what is now called Enron Field.

The company’s implosion is expected to leave at least a short-term vacuum in the civic-corporate partnership, with no obvious candidate to take Enron’s place.

Houston’s economy will feel the loss of jobs, declining demand for office space and a drop-off in high-end residential real estate, said longtime observers of the city scene.

Enron employees face the most uncertainty and direct economic losses. “A lot of people around here have lost their retirement plans,” said one employee. “They are really angry. The anger is directed ... at some bad apples and the smart guys who have spoiled this.”