As director of public policy analysis in my last seven years at Enron, I participated in many legislative and regulatory debates involving electricity, although the public policy thrust of the company was the opposite of what I believed. While I favored free markets, the business model of Ken Lay (a PhD economist with years of Washington regulatory experience) centered on special government favor. Enron, for example, had seven profit centers geared to government pricing/rationing of carbon dioxide (CO 2) emissions. And in the 1990s, the company was squarely behind a Btu tax. Today, Enron would be pushing cap and trade.
Backing Gas
Ken Lay’s political niche began innocently enough with a unique, highly focused natural gas strategy, one that would culminate in Enron’s 1995 self-description as "the world’s first natural gas major." In pursuit of that goal, Lay promoted gas-fired power generation relative to coal. He countered the coal lobby’s contention that the 1970s shortages were the inevitable result of a tiring North American gas resource base. "We had a surplus of regulation, not a shortage of gas," Lay would say, and Enron backed up its claim by offering utilities long-term fixed-priced gas contracts.
Enron also challenged the tendency of electric utilities to opt for coal plants over gas plants because, under public-utility regulation, the former’s higher capital cost created more rate base and thus more profits. Citing new combined-cycle technology, Enron made the case that gas was economically and environmentally superior to coal for new capacity. For example, in March 1992, Enron unveiled "the natural gas standard" in letters, press releases, and speeches. The standard, set forth under Lay’s signature, declared:
The advantages of generating power from a gas fired combined cycle plant are overwhelming: It is cleaner, cheaper, and more reliable than the coal and nuclear options. I propose that electric utilities and state [public utility commissions] adopt the "Natural Gas Standard" for power generation capacity additions. The standard should be applied in the following way — no new coal or nuclear power generating stations should be built unless they:
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produce electricity cleaner than gas combined cycle plants;
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produce electricity cheaper, per [kWh], than gas combined cycle plants;
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produce electricity more reliably than gas combined cycle plants.
I am obviously confident natural gas combined cycle generation will win when all three of these standards are considered.
This challenge was intended for public utility commissioners as much as for electric utilities and was less an attack on fuel-neutral free markets as on perverse regulatory incentives. Lay wanted "a fair field and no favor" for natural gas when competing with coal plants and nuclear power.
But Lay was no free marketeer. He was a pragmatist, searching for first-mover profits from regulatory change. And sure enough, Enron entered into the (government-dependent) solar market in 1994 and the wind market in 1997. Solarex and Enron Wind Corp. would not be profitable, despite a raft of government subsidies. But Enron wanted to be the world’s progressive, "green" company, a hubris that was part of a wider problem that brought down the company. (Ironically, renewables would later tend to replace natural gas as the swing fuel in electric generation.)
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