A Visionary Fallen From Grace
A year ago, Enron Corp. Chairman Kenneth L. Lay was on top of the energy world. As a leading fund-raiser, contributor and energy advisor to the Bush administration, he played a key role in shaping the new president’s energy policy. As head of the world’s largest energy trading company, he had an enormous influence on the price of energy in California and across the nation. Enron’s highflying stock helped him cash out $123 million in stock options last year alone.
On Friday, with Enron being saved from financial collapse by agreeing to be acquired by rival Dynegy Inc., Lay’s career and reputation are in shambles. Under the merger, he will be stripped of a management job. His integrity is tattered, with Enron’s controversial financial dealings under federal investigation. Enron investors and employees are chagrined and outraged because the company’s stock lost 80% of its value in recent weeks.
The rapid rise and fall of Lay, 58, is a story of how a brilliant man with innovative ideas and a grand scheme to transform the world’s energy markets was overcome with arrogance, associates and critics say. Under Lay, Enron stretched the limits of the law and took risks that nearly caused its financial collapse, they say. That in turn could have resulted in a widespread disruption in energy supplies.
“Enron’s behavior casts doubt on the integrity of our financial markets. It is a very serious matter,” said Edward R. Muller, an energy investor and former president of Edison International’s Mission Energy subsidiary.
“Nobody denies he’s smart, but it’s a question of integrity,” said Raymond Plank, chief executive of Apache Corp. and an associate of Lay’s in Houston’s vibrant oil and gas industry.
Lay and longtime partner Jeffrey K. Skilling, who served briefly as Enron’s chief executive before resigning abruptly in August, rose to prominence in the last decade through the use of innovative financial techniques designed to exploit a reduction in government regulation of energy.
Lay transformed world energy industries through his vision of new, market-driven ways to finance natural gas and electricity production and transmission.
The financial markets that Lay and his Enron associates created had an enormous effect on California’s disastrous experiment in electricity deregulation. Critics say his influence was excessive and misguided.
“Ken Lay was a mystic,” said state Sen. Steve Peace (D-El Cajon), an outspoken critic of Enron. “Whatever he said had to make sense because he was Ken Lay. It was hero worship. Many of the people working as economists at the Federal Energy Regulatory Commission worshiped Ken Lay. As a consequence, the things Enron promoted and pushed for were never challenged, intellectually and otherwise.”
Lay, who has a doctorate in economics, had modest beginnings as the son of a poor country preacher who did farm labor on the side to raise money for his children’s education. In the Navy in the late 1960s, Lay was assigned to the Defense Department because of his economic acumen. “He allocated Pentagon dollars more efficiently in purchasing for the military,” said Mark Palmer, chief spokesman for Enron.
Lay worked for Exxon and other energy firms in the 1970s, amid soaring oil prices, gasoline shortages and still-regulated natural gas. He headed Houston Natural Gas, a predecessor firm of Enron, in the 1980s as falling prices for oil and natural gas presented grave problems for Houston’s energy industries.
When the federal government allowed pipelines to carry the gas of any producer, Lay turned Enron into a foremost firm in the new, deregulated industry. Still, Enron almost went bankrupt in the late 1980s, with natural gas in oversupply and prices falling.
It was then that Skilling, a McKinsey & Co. consultant, suggested to Lay that the firm trade long-term contracts for gas, promising to deliver the commodity to customers at fixed prices, buying and selling contracts of varying maturities “the way mortgage companies deal with mortgages,” in Skilling’s words.
The innovation started Enron’s rapid growth and rise to prominence as the embodiment of a new kind of energy company. In the 1990s, the federal government called for deregulation of electricity.
Lay saw opportunities. He and Skilling created a market for contracts in electricity in 1994, and by 1996 Enron was the world’s leading firm doing such business.
Lay’s central idea was that, by creating a market of millions of buyers and sellers constantly taking positions, power supplies could be allocated efficiently and prices lowered. Lay liked to lecture, in an avuncular way, about the new economics of energy trading.
“Technology is changing, and there’s a lot more value in flexibility and optionality. Just about in every industry, you can make them a lot more efficient when you have more optionality,” Lay said in an interview in January in his Houston offices overlooking the sparkling new Enron headquarters building, which still is under construction.
As Enron’s business profile grew, so did Lay’s political influence. He served as an energy advisor to both Bush administrations and headed Texas fund-raising for George W. Bush’s presidential campaign. Lay raised $100,000 for the Bush-Cheney campaign, and with his wife, Linda, Lay contributed another $100,000 to help finance the inaugural gala this year.
As the administration prepared its energy plan, Lay gained national stature as a preacher of market economics applied to electricity.
“There’s no way you can centralize a command-control environment and make the best decisions to have an efficient, low-cost, reliable electricity industry,” Lay said.
His sermon was intended for California, which suffered sharply higher prices for electricity last winter, to the point that private utilities fell into or near bankruptcy and the state budget incurred a cost of $12 billion, which Sacramento now is trying to recover through the sale of revenue bonds.
Because Enron, trading billions of dollars a day in power contracts worldwide, had an immense effect on electricity prices, Lay’s preaching grated on state officials. Driven to intemperance, state Atty. Gen. Bill Lockyer said in May that he’d like to “escort” Lay to a prison cell.
But more than economic philosophy was behind Lay’s goading of California. The state’s debacle gave energy deregulation a bad name and chilled deregulation moves by many other states.
That in turn reduced growth prospects for Enron. The promise of continued growth in deregulation had helped make Enron a Wall Street darling. Its stock price, at one point nearly $90 a share versus less than $10 now, pushed up the value of Enron stock options, held by almost all employees but owned in great amounts by Lay, Skilling and other company officers.
Lay cashed in last year, converting options for a gain of $123 million, while Skilling gained $62 million by converting his options. As they cashed in, Enron was encountering other problems. Attempts to set up trading markets in water and broadband Internet transmission were floundering. A major power plant venture in India was in grave economic and political trouble.
But in the last month, Enron revealed that it had reduced the firm’s equity value by more than $1 billion due to write-offs in a hitherto hidden partnership.
Revelations then cascaded. The firm had 33 such partnerships, which had billions of dollars in debt for which Enron was liable. Lay and Skilling piled up debt in hidden partnerships, analysts explain, because the firm needed huge amounts of debt to support its greatly expanding levels of trading in electricity, natural gas and other commodities.
But the firm could not support such debt and still retain its credit rating, growth rate and high stock price. After weeks of gamely protesting that the business was sound and that he personally took offense at investment analysts’ suggestions of impropriety, Lay fell silent.
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Times staff writer Nancy Vogel in Sacramento contributed to this report.
