Enron after All: A History of Our Broken Energy Paradigm

Enron, the Houston-based energy giant that fell on the sword of its own greed in the early 2000s, has become a symbol of financialization and corruption. When people discuss Enron today, they think of its stock market implosion and accounting fraud—and now, thanks to Sam Bankman-Fried, crypto. It’s synonymous with con men.

Less attention is paid to the company’s paradigm-shifting contributions to American energy, specifically natural gas, renewables, and elec­tricity restructuring. It was an energy company, after all. Whether we know it or not, we live in a world that Enron helped design and which may now be falling apart under its own weight.

Energy Paradigms: From Timber to Carter

The early American republic used water, wood, and muscle for its energy needs.¹ Timber played an especially prominent role. America’s first sawmill began splitting wood in 1663. “By 1747,” writes Richard Rhodes, “90 such water-powered mills [operated] along the Salm Falls and the Pascataqua, with 130 teams of oxen working hauling logs. Among them, they cut about six million board-feet of timber annually for sale.”² These energy sources, as well as their physical demands and constraints, shaped the American political economy of localized small production. In other words, these resources, along with their acquisition and use, defined the first American energy paradigm.

Coal came next and, with it, steam. The energy density of coal com­pared to wood spared American forests and American muscle. It also spurred the iron horse across the country, culminating with a golden spike hammered into the earth. Railroads then reshuffled America’s political economy in scale, pattern, and concern. Firms of previously unimaginable size rose, broad-shouldered, over their smallholder fore­bears. New techniques in management came with fresh divisions of labor and novel ways of working.³ These together inspired new fights over distribution and control. Coal birthed the modern achievement—electricity—and made the Progressive Age what it was.

Once the British and American navies swapped coal engines for oil, Rudolph Diesel’s engine recast industrial logistics, and Henry Ford’s first Model T rolled off the assembly line, a new paradigm arose. The age of oil, inaugurated by the Spindletop gusher in Texas, undergirded what became the New Deal order. This era saw an incredible uptick in energy consumption—between the late 1930s and the early 1970s, total American energy consumption increased by 350 percent.⁴ Oil transformed American life. Where once we began to leave the farm for the city, oil allowed Americans to quit the city for the suburbs. This way of life spilled forth from the factories that flanked the River Rouge in Detroit and bubbled up from Dupont and other chemical giants. Consumer society reached its zenith. It was an era marked by stability, a truce between labor and capital. Moreover, it was underwritten by the most stable oil prices the world has ever known.⁵

But while oil flourished in this era, natural gas struggled to find its place. Always the bridesmaid, natural gas was a by-product of oil and mostly viewed as a nuisance. Jack Tankerlsey, the former CEO of Consolidated Natural Gas, described the early oil industry’s perspective like this: “During those days, the first prayer of the roughneck was to find oil. . . . His second prayer was not to find natural gas.”⁶ Gas was dangerous, less useful, and less profitable than oil even though many industrial processes needed it.

The natural gas industry had always struggled with supply and infra­structure. The post–World War II boom in pipeline construction resolved the latter.⁷ The former found resolution in the tidal wave of black gold that roared up out of Texas. The country was so lousy with oil it was lousy with natural gas, too. These apparent solutions papered over problems that would start to mushroom in the 1960s and explode in the 1970s.⁸

First, there was the regulatory problem. The suite of New Deal regulations under which natural gas operated had succeeded not in aiding production, but keeping prices artificially low, thus setting the country up for a supply problem in the long run.

Second, advances in seismology started to undermine gas discovery. As seismological surveys became more refined, drillers could dodge gas-heavy spots in favor of those thick with oil. Over time, this meant that gas supplies went unreplenished in the decades leading up to the 1970s.⁹

And third, there was a growing dislocation between supply and demand. In 1950, America produced 5.4 million barrels of oil per day, and the Middle East only 1.8 million. But by 1965, the Lone Star dimmed over Texas—it had barely grown. That year the entire United States produced 7.8 million barrels per day compared to the Middle East’s 10.3 million barrels per day. The trend worsened. Middle East production ramped up to twenty million barrels per day by 1971.¹⁰ Americans were producing less oil and less natural gas as they were consuming more and more of both. Thus, the 1973 Oil Shock pulled the rug from under the economy, rattling American industry writ large. The gas situation worsened for the next few years.

Then, half a week into Jimmy Carter’s first term as president, America’s gas crisis smashed into a record-holding cold winter. In an address to the nation toward the end of January in 1977, President Carter appeared on televisions across the nation to describe the calamity:

Half the pipelines of our country have already curtailed shipments to the major industrial users. Four thousand plants are now closed. Four hundred thousand people have been laid off because of natural gas shortages. Shipments to homes have been curtailed by two major pipelines. And many other homeowners are now threatened with that same prospect, and the forecast for the rest of the winter is for continuing extreme cold.¹¹

The winter of 1976–77 saw one-fifth of firm requirements curtailed across the country, “with the worst-affected pipes delivering only half of promised supplies.”¹² The next winter repeated the performance. The natural gas industry had to change.

Carter’s response marked the beginning of the end of the New Deal order. His maneuvers in energy—the electric utility industry and the natural gas industry in particular—triggered the painful process of reworking America’s political economy, beginning with the National Gas Policy Act of 1978 and the Public Utilities Regulatory Policies Act of 1978. But by the 1980s, oil prices slumped and Carter’s energy deregulation schemes faced headwinds of their own.¹³ Reagan, however, had taken the baton and the regulatory compacts of the New Deal days could not be revived. Instead, a new political order with different assumptions came to the fore: the neoliberal order, which defined itself by prizing “free trade and the free movement of capital, goods, and people” and celebrating deregulation and globalization.¹⁴

For natural gas, the 1980s meant a fitful trek to full commoditization. In 1984, the Federal Energy Regulatory Commission (FERC) Order 380 “allowed local gas distribution companies to buy gas from anyone, anywhere.” The only problem was that it left pipelines trapped under a heap of long-term “take-or-pay” deals made in the ’70s when shortages were common. FERC Order 436, in 1985, opened interstate pipelines to anyone who wanted to use them. Companies had to provide service at a federally approved price even if they lost money doing it. Two years later, FERC Order 500 allowed the pipeline companies to work out partial cost recovery from their take-or-pay contracts.¹⁵ It was then, with the pipelines converted from merchants to service providers, that a natural gas market could emerge.

Natural gas was set to become the hydrocarbon of the neoliberal order. But an enterprising company would have to make it so. That company was Enron.

Banking on Gas

Enron was formed in 1986 out of a merger between two companies—Houston Natural Gas and InterNorth—in order to fend off a hostile takeover. The company’s original name was going to be “Enteron,” but once someone pointed out that the word means “digestive tract,” the name was ditched.¹⁶ They slimmed it down to Enron and made Ken Lay the chief executive officer.

Lay had deep experience in the energy industry. He started out at the Federal Power Commission (now FERC) in 1971 and earned a promotion to undersecretary of the Department of Energy the following year. From there, he went on to Florida Gas in 1974. But once the Continental Group bought Florida Gas in 1979, he jumped ship for Transco and relocated to Houston after two years. And it was at Transco that Lay began to shine as an innovator. While there, he persuaded FERC to approve an industrial sale program, “which allowed producers to sell Transco discounted spot gas on the condition that Transco resell the volumes to customers who would otherwise have been using oil.” Then, Lay convinced regulators to let the company sell discounted gas to a bigger customer base—Transco gobbled up the Washington, D.C., mar­ket as a result.¹⁷ Lay would make one final move to Houston Natural Gas two years before the merger with InterNorth.

One of Lay’s first big decisions as a newly minted CEO was to relocate Enron from Omaha to Houston. Board members met the idea with displeasure. To mediate the dispute and to help the company understand the implications of the move, they hired consultants from McKinsey. One of those consultants was Jeff Skilling, a whip-smart and congenitally hubristic Harvard MBA.¹⁸ Skilling’s impact on the compa­ny would be profound and fatal; his impact on the world of natural gas was inspired and salutary.

When Skilling arrived as a consultant, Enron’s business was asset-heavy and beleaguered. An oil trading scandal had nearly bankrupted the company just after its formation. Lay had both covered up and lied about it, and then walked away from the situation.¹⁹ Rich Kinder, the chief operating officer, had to take it upon himself to drain the swamp of Enron’s pipeline division in 1988. At the infamous “come to Jesus” meeting that kicked off Kinder’s attempt to right the ship, he yelled, “We’re going to get in that fucking swamp and we’re going to kick out all the fucking alligators, one by one, and we’re going to kill them, one by one.”²⁰

Kinder brought sobriety to the company. “Kinder’s obsessions were cash and cash flow,” writes Robert Bryce. “In addition to his fiscal con­servatism, Kinder was clearly focused on Enron’s business model and made sure the company didn’t stray too far away from the businesses—pipelines, exploration and production, and gas processing—that it knew and knew to be profitable.”²¹

But Kinder was no visionary. Though he’d hardened the company’s core business, Enron was hardly a growth dynamo. Slow and steady was the Kinder way. But Skilling saw that the industry was changing: natural gas was inching closer to becoming a true commodity even though stubborn obstacles remained in the way. He had an idea.

In 1989, while working as a McKinsey consultant, Skilling noticed that gas supplies were bountiful, that gas demand was high, and that there was no intermediary that could bring the producers and consumers together. Why couldn’t Enron play that role? Skilling called his idea the “Gas Bank”—producers “deposited” their gas and consumers “bor­rowed” it. The bank gave producers predictable cash flow, which smoothed out the boom-bust cycles around which they planned and budgeted drilling. Consumers, meanwhile, could now predict fuel costs spanning years in the future.²² Enron liked it because it could pull supply from its subsidiary Enron Oil & Gas and because it profited off the spread between the cost of the gas and its selling price.²³

Skilling had no idea if the Gas Bank would work.²⁴ But in the first week, Enron sold $800 million worth of gas and over a billion cubic feet per day. “To put that in perspective,” writes Bryce, “the average American home uses about 88,000 cubic feet of gas per year.”²⁵ Half-way through 1991, Enron had put together long-term deals with over thirty-five producers and fifty consumers, with one of those contracts set for twenty-five years and worth more than $3.5 billion. The next year, Enron secured its crown as the largest natural gas merchant on the continent.²⁶ Between 1991 and 1994, the division overseeing the Gas Bank, Enron Gas Services, saw its income grow from $70 million to $224 million.²⁷

Skilling’s idea so impressed Lay and Kinder that they brought the young gun on board; the Gas Bank had also started to falter as soon as Skilling’s McKinsey team moved on from Enron.²⁸ And that’s because as much as the Gas Bank was a true masterstroke, it came with complex problems. Enron’s volumetric production purchases for “deposits” into the bank bled cash. The solution was to securitize the assets, but that was a practice that belonged mostly to mortgage lending. Skilling had to find someone with the right experience to help him pull off securitization in a new domain: an Illinois investment banker named Andy Fastow, who would play a prominent role in the company’s downfall.²⁹

With Fastow handling securitization, Skilling could turn his attention to the other difficulty that came with the Gas Bank: managing risk. He would have to hunt outside Enron and the gas industry itself for talent. So began Enron’s influx of Wall Street types—people as sharp and capable and as arrogant and ruthless as Skilling himself—“guys with spikes,” as he affectionately called them.³⁰ The new traders handled the Gas Bank’s complexity in a way that made using it easy for customers.³¹ Enron started to change as a result—it was beginning to look more like a finance company than an energy company.

Regardless, in the wake of the New York Mercantile Exchange’s move to trade gas futures based on deliveries to the Henry Hub gas depot in Louisiana, the industry was suddenly awash in trading con­tracts. FERC Order 636, issued in 1992, “required pipeline companies to allow shippers to release their long-term, firm capacity on the open market, in order for that capacity to be used efficiently,” thus bringing natural gas into full commoditization.³² Though Enron played no role in making Henry Hub happen, it did wield its political influence to bring Order 636 into being. And its Gas Bank had inspired a bevy of imitators, which inevitably forced down margins. Enron had altered the gas market forever.³³

The company had even helped bring about substantial investments in natural gas production and combined-cycle gas turbines for electricity production. In 1991, writes historian Charles Blanchard, “Enron com­pleted around $100 million of producer financing.” The next year saw half a billion, and 1994 saw the total for producer financing reach $1.5 billion, “making Enron one of the largest funding sources to producers in the country.”³⁴ As for electricity generation, before Enron, most of America’s electricity came from coal and nuclear power. The Gas Bank, which stabilized prices, made natural gas much more attractive to investors because it allowed gas plant operators to estimate their future fuel costs. Lenders, in turn, felt more comfortable financing new gas generators.³⁵ It’s hard to overstate how huge Enron was. In the 1990s, it controlled 40 percent of all wholesale gas and power markets.³⁶

But Enron did more than help free the natural gas industry from its ossified state. It ushered in its own ideology and vision for American energy.

Enron the Green

Every energy paradigm comes with its own ideological packaging. If coal’s Progressive Era brought history’s managerial march forward, oil’s New Deal era added its commitment to technocracy, corporatism, and consumerism. Energy was seen and used as a means toward these ends. In the neoliberal era, energy became freighted with greater ambiguity as it emerged in the wake of the 1970s energy crises and after the mainstreaming of the environmental movement.

But between the late 1980s and the early 1990s, the environmental movement pivoted to a technophilic, cultural libertarianism that em­braced the free market and saw the world as a spontaneous, cybernetic order mediated by digitalization.³⁷ Out went Malthus and Abbey, in came Hayek and Wiener.³⁸

At the same time, Stewart Brand and the Whole Earth Catalog were breaking into new frontiers in cyberculture.³⁹ The greens no longer feared the market, nor were they still technophobe localists.⁴⁰ Having recognized that their eugenicist and degrowth messaging failed to inspire, eco-austerian vanguardists like Rocky Mountain Institute co­founders Amory and Hunter Lovins realized they had to reposition their messaging to something pro-growth even if their prescriptions remained the same.⁴¹ The movement embraced the Californian ideology—a combination of “the free-wheeling spirit of the hippies and the entrepreneurial zeal of the yuppies” forged in a “profound faith in the emancipatory potential of the new information technologies.”⁴² These technologies would repattern America’s political economy, allowing for great industrial sea changes like containerization and electricity spot markets, the latter of which Enron helped bring to fruition.⁴³

By the close of the 1980s, the environmental movement was experi­encing a significant resurgence. In 1989, the Exxon Valdez crashed on the Alaskan shore, spilling thirty-seven thousand tons of oil. The dark spectacle was beamed into living rooms across the country. The following year, Earth Day celebrated its thirtieth anniversary, and most Americans began to self-identify as environmentalists.⁴⁴ Plus, the greens had discovered a new talking point: global warming as a consequence of carbon emissions. Though these changes created factions within the green Left, the dominant arm adopted free market ideals that fit well with their hostility to the large, centralized power plants erected during the New Deal order.⁴⁵ They wanted smaller, leaner, cleaner energy—wind and solar, not coal, and especially not nuclear. Like Enron, they hopped aboard the “deconglomeration” bandwagon that Ken Lay saw as a “new phase in American capitalism.”⁴⁶

Lay supped from the same green cup. He was something of an eco-visionary, spelling out the primary energy sources we use today and the reasons we use them. “In the interests of environmental stewardship, economic growth and job creation we must commit ourselves, as a matter of national policy, to enhance the natural gas industry’s world leadership position,” he told the Republican Platform Committee in 1992. He’d even sent coverage of this speech to then deputy secretary of energy Linda Stuntz in the lead up to the Rio Earth Summit, writing, “I thought I should make you aware of the attached. As we previously discussed, I am urging the President to attend the Rio conference and to agree to some limitation on carbon dioxide emissions. I realize this may be contrary to DOE’s policy position. But I think it is both good economics and good politics.”⁴⁷

Lay was adamant that natural gas needed to replace coal due to advances in combined-cycle natural gas turbines that allowed it to burn 50–60 percent cleaner than coal.⁴⁸ These turbines were cheaper than nuclear, too. He was also one of the first to argue that natural gas should be seen as a “bridge” fuel to a renewable energy future that could stave off global warming by transitioning the world to “a renewable energy based economy.” Seemingly echoing the Friends of the Earth’s ambition to “set a new agenda for life on earth,” Lay believed a “New Energy and Environmental Order” was in the offing.⁴⁹ Lay’s views were influential. The American Gas Association, the industry’s oldest trade organization, adopted similar messaging.⁵⁰

Aesthetically, Enron maintained a green vision for much of its existence in its annual reports and its iconography.⁵¹ During the late 1980s and most of the ’90s, “The company’s emphasis on a green globalization was well in line with public sentiment and was a large part of Enron’s corporate identity both inside and outside the firm,” writes historian Gavin Benke.⁵² In 1994, the company even adopted an “Environmental Code of Ethics.”⁵³ The “Who We Are” section of its 1997 annual report stated, “We are innovative. We are all about creating energy. We operate safely and with a concern for the environment.”⁵⁴ The Environmental Protection Agency even awarded Enron a climate protection award in 1998.

But while Lay had a close relationship with George H. W. Bush, and Bush was more sensitive to environmental concerns than Reagan, it wasn’t until Bill Clinton sat in the Oval Office that the company’s relationship with the White House started to flourish. “I know we were very cozy with the Clinton administration,” said one senior Enron fi­nance executive.⁵⁵ Lay and Enron’s green bona fides landed Lay a spot on Clinton’s Council on Sustainable Development.⁵⁶

The Clinton years saw Enron branch out of natural gas and into wind and solar. Enron’s Northern States Power Project and its Lake Benton Wind Power Generation Facility, both in Minnesota, were the largest wind facilities in the world at the time. The company also boasted impressive solar fields in Nevada and California. At one point, Enron controlled over 30 percent of America’s renewable energy.⁵⁷ But Enron’s contributions extended beyond renewable energy assets. In 1997, Enron created the Renewable Energy Credit, which birthed the market for carbon offsets.⁵⁸

As a prominent member of the Pew Center’s Business and Environmental Leadership Council, Enron lobbied hard for the Kyoto Protocol, an international treaty that attempted to bind signatories to reduce their emissions in an effort to fight climate change.⁵⁹ The company saw Kyoto as something that could boost its already booming emissions credits trading, which had begun after the passage of the Clean Air Act, for which it had also lobbied.⁶⁰ Enron’s support for these initiatives won it major kudos from the environmental movement. “Through our involve­ment with the climate change initiatives, Enron now has excellent credentials with many ‘green’ interests including Greenpeace, WWF, NRDC, GermanWatch, the US Climate Action Network, the European Climate Action Network, Ozone Action, WRI, and Worldwatch,” John Palmisano, Enron’s Kyoto lobbyist, wrote in a memo.⁶¹

While on the Council on Sustainable Development, Lay also made his own allies in the environmental movement, including the Sierra Club, the Environmental Defense Fund, and crucially, John H. Adams, one of the Natural Resources Defense Council’s founders.⁶² When Newt Gingrich led the Republican charge to reclaim the house in 1994, Lay threw in with Adams and the NRDC against fellow council member Georgia-Pacific’s attempt to work with Republicans to roll back envi­ronmental regulations. This would have benefited Georgia-Pacific’s coal investments. Writing on his alliance with Lay, Adams muses, “I think this in part reflected Enron’s heavy investment in natural gas, which Lay correctly saw as an important component of a future, lower-carbon economy. Unlike Georgia-Pacific, Lay’s company saw no economic gain from rolling back the nation’s environmental laws.”⁶³

Throughout the 1990s, by means of policy innovations, assets, trading schemes, and messaging, Enron formed what’s become the dominant energy paradigm: renewables supplementing natural gas fostered by free markets to solve climate change. All that was missing were the infrastructure arrangements that would benefit those two technologies: electricity spot markets. The NRDC would become an invaluable ally when Enron moved to make power markets a reality.

On the Side of the Angels

The end of the Cold War was part coronation and part revolution. When the Iron Curtain fell, a global conflict ended without mass destruction—an exceptional event. Head honchos at Enron embraced the apparent “end of history,” in more than one way.

In 1999, Rebecca Mark, CEO of Enron International, warned a group of Baylor business students against looking toward the past for guidance. “Obviously,” she said, “the world is not quite what it used to be, and those who believe that history will be a predictor of the future are apt to end up being blocked off.”⁶⁴ Mark’s boardroom rival, Jeff Skilling, agreed. Skilling believed that Enron was capable of intermediating any market and every major industry beholden to obsolete business models. “You are going to see the deintegration of the business systems we have all grown up with,” Skilling told the Financial Times.⁶⁵ Paul Racicot, one of Skilling’s acolytes, put it plainly, “Anything we want to intermediate, we can.”⁶⁶ From management downward, the company had abundant faith in the mutability of infrastructure and the world at large, as well as complete confidence in the ability to sculpt both in their image. In the mid-1990s, Enron channeled that faith and confidence toward one of America’s most vital pieces of infrastructure: the electric grid.⁶⁷

Enron began pushing for electricity deregulation in the late 1980s in an attempt to finalize the process Carter had begun. Starting with the 1992 Energy Policy Act, America continued its march toward electricity spot markets. While industrial consumers wanted electricity deregulation to reduce their energy bills (even if they paid lip service to things like “market efficiency”), and electricity wholesalers saw obvious bene­fits to their bottom line, Enron saw an opportunity for arbitrage. They preferred bilateral contracts and opaque, unregulated electricity auc­tions. Price transparency devalued their services.⁶⁸

Other than that, neither Skilling nor anyone else at Enron knew how the power industry worked, or how it would work once deregulated. But they had estimated that the whole business was worth $91 billion a year—triple the size of the natural gas market. A more urgent impetus was that Enron needed the money. “As early as 1993, profit margins in the gas-trading operations had begun to slip as competitors, such as the Natural Gas Clearinghouse (later renamed Dynegy), El Paso, and a host of others had flooded into the business, establishing their own gas-trading desks,” according to Bethany McLean and Peter Elkind. And Enron wasn’t the only major lender to the industry anymore—banks had rejoined the fray.⁶⁹ Skilling also knew that FERC was going to begin moving the country toward power markets, especially since the Energy Policy Act of 1992—aggressively lobbied for by Enron—had opened wholesale electricity markets to nonutility power plants, mandated open‑access transmission of wholesale power, and vested FERC with the responsibility to transform electricity into a commodity like any other.⁷⁰

Enron committed millions to political campaigns and brought in consultants from inside the regulatory regime, like former FERC chairwoman Elizabeth Moler.⁷¹ Enron also sought exemption from the Public Utility Holding Company Act (puhca), one of the New Deal era’s major regulatory achievements, that gave the Securities and Ex­change Commission jurisdiction over multistate natural gas and elec­tricity utility holding companies. Enron aggressively fought classification as a utility and appealed to avoid SEC oversight. In 1993, the company approached the SEC on behalf of Enron Gas Services’ subsidiary Enron Power Marketing. Enron wanted assurance that the buying and selling of electricity would not force it under puhca, and thus the SEC’s jurisdiction. The SEC caved under political pressure and granted the exemption. Enron now lived in a regulatory vacuum.⁷²

But the electricity business wanted nothing to do with Enron. Utilities, monopolistic hegemons who had by that point survived for over a century, saw deregulation as a threat rather than an opportunity. And unlike in natural gas, Enron was an outsider. “The electricity guys were scared to death of Enron,” Skilling said. “It was very hard to break into the market.”⁷³ Enron’s political contributions hadn’t stretched as far as they’d hoped, either—only in a few states was their influence effective.⁷⁴ To really get into the power business—to actually “wheel” power around—Enron needed a utility of its own.

One of the states where Enron’s lobbying had borne fruit was Oregon.⁷⁵ So, in 1996, Enron moved to purchase Portland General Elec­tric (PGE). Enron offered $3.2 billion to acquire the company.⁷⁶ The price was so high that Enron’s stock price dropped 5 percent on the news.⁷⁷ The Oregon Public Utility Commission, whose approval was needed to complete the purchase, was also unhappy. Enron had been so arrogant and aggressive in its pursuit of PGE that one of the commissioners publicly dressed down the company’s management, with Lay in attendance, for treating the state’s officials like a bunch of suckers. “We don’t ride around in turnip trucks around here,” the commissioner told Enron executives.⁷⁸

Luckily, Enron could call on a friend at the NRDC for help. Ralph Cavanagh joined the NRDC in 1979 and quickly became the organization’s “Boy Wonder.” Cavanagh saw utility reform as the “low-hanging fruit” for moving away from fossil fuels and nuclear energy. He decided that rather than pursue the legal cases that were the NRDC’s bread and butter, he would dedicate himself to sorting out the power industry. To reform utilities, he believed they needed to be exposed to greater competition and focus on efficiency. Cavanagh wanted to decouple utility profits from energy production, and he wanted deregulated power markets.⁷⁹ Like the Rocky Mountain Institute, the NRDC saw deregulated markets as the key to getting more wind and solar on the grid while getting coal and especially nuclear off of it.⁸⁰ So, when Enron met resistance in Oregon, Cavanagh came running. He went to bat for the energy giant before the Oregon Public Utilities Commission. “The Oregonian asks the question, ‘Can you trust Enron?’ On stewardship issues and public benefit issues I’ve dealt with this company for a decade, often in the most contentious circumstances, and the answer is, yes,” he said.⁸¹

Cavanagh’s reputation as a long-time monopoly utility critic who hailed from one of the most reputable green groups in the country gave his testimony extra weight. He also “negotiated a memo of understanding between Enron and Oregon environmental groups involving a transfer of $500,000 of financial support from Enron to the groups.”⁸² With Cavanagh’s testimony and assistance, and the company’s offer of a $141 million rate cut, Enron carried the day.⁸³ To celebrate, Ken Lay, Jeff Skilling, and Keith Harrison of PGE cut a cake decorated to look like the continental United States with miniature power lines stabbed into it. Enron’s logo, piped in icing, covered the entire middle of the country.⁸⁴

Once Enron bought Portland General it gained megawatt-hours to trade “and a copy of the industry’s secret playbook.”⁸⁵ It also won access to the California grid. The Golden State was already looking to deregulate its electricity system, and Enron was happy to help it along.

California had some of the highest electricity rates in the United States—in 1991, its average rates were as much as 50 percent higher than the rest of the country’s.⁸⁶ It was easy to blame utilities—nationwide, they had badly handled the Carter era and had been caught with their pants down when, for the first time in decades, electricity demand had plummeted. In the 1970s, coal and nuclear plants were canceled by the handful, leaving consumers covering the sunk costs.⁸⁷ By the 1990s, someone would have had to convince Americans that utilities weren’t to blame for their high bills. But in California, it happened to be the case that the high rates were Jimmy Carter’s fault, not Pacific Gas and Electric’s. The Public Utility Regulatory Policies Act (purpa) had forced utilities into expensive contracts with independent power pro­ducers in an attempt to pry apart the old regulatory order by exposing utilities to competition.⁸⁸

Yet the high rates still made utilities look bad and made deregulation look promising. Enron cracked open its wallet—cash flooded into political campaigns and lobbying efforts. Lay and Skilling gave stump speeches forecasting the benefits to the state, like saving $8.9 billion dollars the state could spend on cops and teachers instead of electricity.⁸⁹ “We’re on the side of angels,” Skilling assured Californians. “We’re taking on the entrenched monopolies. In every business we’ve been in, we’re the good guys.”⁹⁰

Steve Peace, a San Diego Democrat as well as cowriter and star of Attack of the Killer Tomatoes!, a B-movie satire about bureaucratic corruption, wrangled the legislative goat rodeo that deregulated the Golden State.⁹¹ The arduous process had to factor in far more players than Enron. The grid wasn’t a tabula rasa—it had entrenched interests, existing infrastructure, and a bumper crop of stakeholders. But Peace’s marathon bargaining sessions paid off in the end. The bill, AB 1890, which was longer than the state budget, passed in the fall of 1996.⁹²

Was Enron happy with the final product? No. The state’s major utilities, who’d been locked into pricey contracts, wanted compensation if California was going to move away from basing rates off of their costs. And politicians wanted to show their constituents they’d secured rate reductions—why else would they spend their political capital on it? So deregulation stripped generator ownership from utilities and forced them to buy power on the market everyday. Long-term contracts were abolished. The hope was that the short time frames would induce panic selling that would force prices down. Consumers, meanwhile, had their rates cut and frozen by 10 percent for five years. Enron had wanted a radically open market where entities could make whatever deals they pleased. Instead, they got what reality had to offer: a complicated and potentially compromised market no one involved in its creation had any experience in operating.⁹³

Internally, Enron saw California’s deregulation as a huge opportunity for its renewable-energy arm. Enron’s chief strategy officer, Robert Kelly, gave an urgent presentation in May of 1997 on what deregulation would mean for renewable energy: a $20 billion market for wind and solar that was liable to keep growing. “Enron Needs to Move Quickly to Capitalize on the Market in California . . . and to Be a First Mover Nationwide in Green Power,” read one of his PowerPoint slides.⁹⁴ “We believe that renewable energy resources will be capturing a larger and larger share of the power market within the next twenty to twenty-five years,” Kelly said.⁹⁵ He also cited polling that showed a slim majority of Californians already saw natural gas as green. So Enron leaned into its green side in its public relations campaign. A 1997 press release an­nouncing its partnership with the Northern California Power Agency called for new energy legislation that would honor “California’s commitment to developing diverse, environmentally sensitive electricity sources.”⁹⁶ Perhaps that’s why the NRDC had again come to Enron’s aid and herded other environmental groups behind the company’s deregulation efforts the previous year.⁹⁷

After the new rules kicked in during the spring of 1998, everything ran smoothly. Competition drove wholesale costs down to $33 per megawatt-hour. Electricity was free between 1 and 2 a.m. Enron had become the public face of a seemingly successful departure from how the electricity business had worked since its beginnings. This success must have come as a relief. “If Enron doesn’t do well in California,” read an internal memo, “Enron will have a difficult time convincing anyone outside of California that they are capable of and committed to providing power services.” But Tim Belden, a thirty-year-old “guy with spikes” who traded power out of Enron’s recent acquisition, Portland General Electric, was about to give Enron the difficult time it feared.⁹⁸

Ask Why, Asshole

The opening of the twenty-first century was grim for both California and Enron. The company’s problems were complicated. California’s problem was simpler: weather.

The year opened with a dry handful of months that sapped the Northwest’s hydro dams. Summer blazed in with a heatwave. By May, electricity prices were spiking to $300 per megawatt-hour, a tenfold increase from the average a few months prior. As the heatwave swept into June, the price averaged around $150 per megawatt-hour, spiking to $600 on the hottest days. Without support from the out-of-state hydro dams, the heat wave put all the pressure on California’s in-state genera­tion, which had suffered from underinvestment due to Carter’s purpa-forced IPP contracts.⁹⁹

The pressure exposed the two great weaknesses in the California system. The first was mentioned above: everyone had to buy power on a day-of basis. The second flaw was that rules that kept power plants on standby to provide capacity were flimsy. The flaws reinforced each other: “Knowing that utilities needed to source all of their supplies every day on the spot market, there was a tremendous incentive to withhold capacity, which the weak rules made it easy to do.”¹⁰⁰

The heat wave pushed into September and then broke. The state relaxed. Fall and winter in California usually see demand slump. But right when prices began to fall, power plants started to switch off. By November, ten gigawatts of electricity had gone offline for maintenance—three times the previous year’s amount.¹⁰¹ Enron’s West Coast traders, and their competition, had begun to run blatant schemes to exploit the weaknesses Tim Belden had discovered the previous year.

As soon as California’s new market rules were released, Belden embarked on a marathon of fourteen-hour days to find loopholes. Once he’d found the weaknesses, he ran an experiment. In May of 1999, Belden booked 2,900 megawatts onto a powerline that could only carry fifteen megawatts. Belden received a call from the grid operator as soon as he submitted his bid.¹⁰² She wanted to know why he’d booked an impossible schedule:

“We did it because we wanted to do it,” Belden said. “I don’t mean to be coy.”

“It’s a pretty interesting schedule.”

“It makes the eyes pop, doesn’t it?” Belden said.

“Um, yeah,” she answered. “I’ll probably have to turn it in ’cause it’s so odd.”¹⁰³

The scarcity Belden’s booking induced shot California prices up by 70 percent.¹⁰⁴ The grid operator launched an investigation. In response, Belden’s boss, Greg Whalley, flew to California to lecture the grid operator, using a whiteboard, on why it wasn’t Enron’s fault, but the market’s. Echoing Whalley’s position, another senior Enron executive put it this way: “If they’re going to put in place such a stupid system, it makes sense to try to game it.” Enron paid a $25,000 fine and agreed not to engage in similar conduct again.¹⁰⁵ But by the winter of 2000–1, Belden’s troops were playing the old hits. In one taped recording, they called a Las Vegas power plant operator that supplied power to the California grid:

“We want you guys to get a little creative and come up with a reason to go down,” the trader told the plant operator.

The operator agreed to do it and then asked, “O.K., so we’re just coming down for some maintenance, like a forced outage type of thing? And that’s cool?”

“Hopefully,” the trader said before they both burst out laughing. The next day, a half-million Californians were plunged into rolling blackouts.¹⁰⁶

This was one of a slew of arbitrage schemes that Enron employed, with names like “Fat Boy,” “Death Star,” and “Ricochet.”¹⁰⁷ Blackouts and high prices rolled through the state. The crisis, when combined with the price caps built into AB 1890, bankrupted utilities like Pacific Gas and Electric who were forced to eat all the costs. Gray Davis, then governor, made things worse by ordering the Department of Water Resources to start buying power on the utilities’ behalf, running up a bill of about $20 billion.¹⁰⁸

Neither President George W. Bush nor FERC saw California’s problems as their own. Bush and Vice President Dick Cheney had a close relationship with “Kenny Boy” Lay and were ideologically disin­clined to interfere in California’s problems.¹⁰⁹ Enron had also stuffed Bush’s cabinet with its alumni.¹¹⁰ And FERC was disinclined to sully itself with California’s abortive attempt to follow the commission’s own urgings to deregulate. FERC did launch a tepid investigation during the crisis, but it exonerated Enron of any wrongdoing.¹¹¹

When FERC went back to seriously investigate the electricity crisis years later, it found out that the real culprits were Enron’s competitors in the natural gas industry, like Dynegy.¹¹² But who had heard of Dynegy? Everyone knew Enron, and everyone associated it with de­regulated electricity markets. Plus, Enron had made a killing gaming the California market. Belden’s crew booked $460 million in profits in 2000. Enron’s West Coast gas traders racked up $870 million. The gains had been so unseemly that the company tried to hide the profits, even from its own investors. Belden got a $5 million bonus and a promotion.¹¹³

Even worse, Lay and Skilling were unrepentant. Two months after the traders had called the aforementioned Nevada power plant, Lay had dismissed accusations of market manipulation as “conspiracy theories,” despite Enron’s own lawyers’ concerns about the West Coast traders’ behavior.¹¹⁴ In late June of 2001, Skilling delivered a talk to the Commonwealth Club in San Francisco entitled, “The Arrogance of Regulation,” in which he excoriated the California Public Utility Commission.¹¹⁵ Enron never even owned a power plant in California.

The company’s shenanigans and arrogance soured other states on deregulation. After the California electricity crisis, deregulation froze not just in America, but in other countries where Enron was also lobbying to similarly deregulate.¹¹⁶ America’s energy darling now sport­ed a black eye, and a real shiner at that.

Meanwhile, Enron’s ship had turned toward the rocks. The siren song of greed had beckoned the company toward criminality and even­tually bankruptcy. Ever since Lay had asked Kinder to leave because Kinder had slept with Lay’s secretary and it made him paranoid, the company’s finances worsened.¹¹⁷ Skilling, who had taken Kinder’s place, wasn’t unscrupulous when it came to the company’s numbers; he was delusional. He never wanted to hear about budget problems. And not just because he disliked guardrails—though he did dislike them. Skilling simply thought they were irrelevant. “Cash doesn’t matter,” he once said. “All that matters is earnings.”¹¹⁸ When Kinder left in 1996, the company’s long-term debt totaled $3.3 billion. Skilling doubled it the next year, along with a 44 percent increase in interest expenses. Between 1997 and 2000, Enron’s interest expenses would double from $420 million to $834 million.¹¹⁹

And then there was the cultural problem. The reign of Skilling saw the company slowly become a ruthless pirate ship crewed by cutthroat Harvard MBAs. The firm-handshake, high-trust, pipeline-and-infra­structure days of Kinder’s tenure gave over to struggle-session-style “performance reviews,” ballsy deals, and performance bonuses.¹²⁰ “With traders, it’s rape, pillage, and plunder all the time. They don’t care about the shareholders or the business strategy or the long-term interest of the company,” a former employee said.¹²¹ And those big-money deals with fat bonuses the traders had cut began to sour by the end of the twentieth century.

Rebecca Mark’s Bhopal power plant deal in India, and her water company, Azurix, which had hired non-Spanish-speaking British man­agers to supervise Argentine employees at its Buenos Aires water company (seventeen years after the Falklands War), had bombed and bombed big. Enron’s broadband trading scheme fared similarly.¹²² Fastow had shuffled debts and bad deals off of Enron’s books and into a labyrinthine series of companies that showered him in bonuses and kept the gravy train rolling by buoying the company’s profits and credit rating. Fastow was aided by a change in Enron’s accounting from around when Skilling had brought him aboard: mark-to-market, which allowed Enron to book the entire estimated value of a deal on the day the deal was cut—estimation was, of course, in the eye of the beholder.¹²³ Lay, a consummate people pleaser who avoided both discipline and confrontation, had remained passive about the whole affair.

But by 2000, Fastow’s financial high jinks were catching up with the company. Plus, EnronOnline, which had become the largest trading e-commerce entity on the planet, was making the situation worse. On the one hand, EnronOnline was a many-to-one trading platform, which meant Enron could see who was on what side of which deals, giving its traders an incredible advantage. On the other hand, Enron had all that information because it had to take both sides of every deal. While EnronOnline allowed the company’s trading division to rack up crazy profits, the platform also hoovered money out of the company’s coffers. “In the first six months of 2000, Enron borrowed over $3.4 billion to finance its operations,” writes Bryce. “The company’s cash flow from operations was a negative $547 million.” By the close of June 2000, Enron was shelling out $2 million a day in interest to banks.¹²⁴

As Enron hemorrhaged cash, short sellers smelled blood. In March of 2001, Bethany McClean, a young reporter at Fortune (which had award­ed Enron a Company of the Year award from 1996 onward), published a piece entitled, “Is Enron Overpriced?” Tipped off by a short seller, McLean tried to look into Enron’s impenetrable finances.¹²⁵ How was a company with a sterling reputation, whose shares returned 89 percent, whose earnings increased 25 percent, and whose revenues had more than doubled, reaching $100 billion, so opaque and “mind-numbingly complex” that no one, not even the company itself, could explain what it actually did? “People who raise questions are people who have not gone through [our business] in detail and who want to throw rocks at us,” Skilling told McClean.¹²⁶ McLean’s was the first national ripple of anxiety over Enron’s integrity as its stock began to slide from its high in the $70s.

A month after McLean’s piece, Skilling was two months into his tenure as CEO, having taken the reins from Lay. On a conference call with analysts, he cheerily announced the company’s impressive first quarter numbers: $50.1 billion in revenue; triple that of Q1 2000. But Richard Grubman, whose Highfields Capital Management was shorting Enron, hopped on the line with questions. Why did Enron supply so little information to analysts before these calls? “You’re the only financial institution that can’t produce a balance sheet or a cash flow statement with their earnings” before a call, Grubman said.¹²⁷

“Well, thank you very much,” Skilling said. “We appreciate that, asshole.”¹²⁸

Enron’s traders loved it. The company had recently changed its slogan to “Ask Why” beneath the stilted E of its logo. The traders at Houston HQ made “Ask Why, Asshole” posters for the office.¹²⁹ But to everyone else, Skilling’s curse word had indicated something was rotten in the state of Texas. That conference call “marked the beginning of the end,” a member of one of Houston’s oldest and wealthiest families told Robert Bryce.¹³⁰

In August, Skilling abruptly left Enron to pursue a life of luxury—and to flee the sinking ship.¹³¹ By the end of October, Enron’s share price closed at $16.41. A month later, a share of Enron was worth about a dollar. And in December, the company filed for bankruptcy with a share price of forty cents.¹³² It was the largest bankruptcy, audit failure, and fraud up to that point in American history. Enron’s executives had dumped their stock while encouraging employees to buy more of it in the lead up to the company’s demise. The bankruptcy wiped out the retirement accounts of its twenty thousand employees as Lay and Skil­ling lined their pockets and exited through the gift shop.¹³³

Enron was celebrated throughout its fraudulent foray into asset-lite intermediation, right up until it was too late. “Enron has built unique and, in our view, extraordinary franchises in several business units in very large markets,” Goldman Sachs analyst David Fleischer told McLean in the spring of 2001.¹³⁴ Seven months later, Goldman would downgrade Enron amid the company’s last-ditch attempt to merge with its long-time competitor Dynegy.¹³⁵ Arthur Andersen, the accounting firm that aided and abetted Fastow’s fraud and whose paper shredders’ dull whine supplied the soundtrack to Enron’s downfall, was laid low by its complicity. The firm had risen to prominence in the 1930s when it brought daylight to utility mogul Samuel Insull’s shady books in the lead-up to the Public Utility Holding Company Act.¹³⁶ Other financial institutions lost face too. CIBC, J.P. Morgan Chase, and Citigroup paid out a whopping total of $6.6 billion in settlements.¹³⁷

The record would come to show that Enron was mostly unprofitable. Skilling had sold off many of the asset-heavy businesses that actually made money. Fastow’s skullduggery had been the only thing keeping the company afloat, and he’d been rewarded for it—mostly. In a 2021 interview, Andy Fastow held up in one hand a “CFO of the Year 2000” trophy from CFO Magazine; in the other, his federal prisoner identification badge. “I got both of these for doing the same deals,” Fastow told the interviewer.¹³⁸ In 2006, Skilling and Lay were found guilty on nineteen of the twenty-eight counts with which they’d been charged.¹³⁹

But the end of Enron was neither the end of its influence nor its impact on American energy.

Enron Über Alles

The aftermath of Enron’s scandalous behavior reverberated through accounting, law, financial regulation, and American culture. Not even a year after its bankruptcy filing, Playboy flew photographers out to Houston to shoot the “hidden assets” of some of the younger women who’d worked at Enron.¹⁴⁰ “With men, size matters,” Courtnie Parker, a former Enron recruiter, told Playboy.¹⁴¹ “But with companies, it doesn’t.” Not every Enron alumnus agreed. Rich Kinder, after all, went on to form the oil and gas pipeline behemoth Kinder Morgan. After the bank­ruptcy, former Enron traders poured into hedge funds. One of them would play a game of chicken that would reshape American energy—and the world.

After Enron’s downfall, the hedge fund Amaranth poached alumnus Harry Arora, who had traded electricity and currencies. With Arora onboard, Amaranth grew from $600 million to $4 billion in two years. In 2004, Amaranth hired Brian Hunter and put him under Arora’s aegis. After some savvy plays in the natural gas market, Hunter got his own desk and became a natural gas whale, earning the hedge fund billions—in 2005, his deals made for 98 percent of its earnings. But Hunter would meet his match in Enron’s former all-star Henry Hub trader, John Arnold, who had founded his own hedge fund, Centaurus Capital, after Enron’s bankruptcy.¹⁴²

In 2008, Hunter would take huge and risky bets on natural gas futures. Arnold took the opposite side. When Hunter’s plays started to spoil, he wrote to Arnold asking him to buy out some of his reckless positions. Arnold coolly told Hunter he was about to eat his lunch. By September, Hunter was toast and he had lost Amaranth $5 billion. But the upshot of the Arnold-Hunter tête-à-tête was the capital that kicked off the shale revolution. “Every action has an equal and opposite reac­tion,” writes Banchard, “and in pushing up prices and transferring tens of billions of dollars from consumers to producers, Hunter did as much, if not more, than any other person to hasten the development of shale gas, which changed the face of the industry in the late 2000s.”¹⁴³

While Hunter was bleeding losses from Amaranth’s books, producers were delighted to sell him gas at $11 per mmbtu. That price meant that you could be a lousy driller at a worn-out well and still make a buck. Hunter’s headlong dive into bankruptcy allowed Aubrey Mc­Clendon, who would borrow $30 million from Arnold’s Centaurus in 2008, to turn Chesapeake Energy into a shale gas juggernaut.¹⁴⁴ Not to mention EOG, formerly Enron Oil and Gas until Skilling spun it off in 1999, which became a titan in the Barnett Shale. By 2018, EOG, “the Harvard of Shale,” was valued at $70 billion—more than Enron was worth at its peak.¹⁴⁵ Seemingly overnight, the shale revolution turned America into a gas production king.

Even the greens were once onboard with the shale boom. McClendon, like Lay before him, advertised natural gas’s environmental benefits and its complementary relationship with wind and solar.¹⁴⁶ Environmentalists agreed. Fred Krupp, then head of the Environmental Defense Fund, said the fracking boom was a “potential game changer.”¹⁴⁷ The Sierra Club even took $25 million from McClendon and others in the natural gas business for its Beyond Coal campaign.¹⁴⁸

The natural gas revolution worked. Once FERC grew some teeth in the wake of the California electricity crisis, electricity deregulation seemed to flourish just as much as gas deregulation.¹⁴⁹ Combined-cycle gas turbines (CCGTs) wiped out coal on the grid—between 2010 and 2018, coal shrank from 45 percent to 27 percent of electricity generated in America.¹⁵⁰ Natural gas has cut emissions in the electricity sector by nearly 60 percent since 2005.¹⁵¹ CCGTs’ ability to ramp up when needed made them ideal for spot markets and made it possible to onboard intermittent renewables.¹⁵² Now, 80 percent of renewables in America are built in deregulated market areas, and in the first half of 2022, renewables supplied the grid with nearly a quarter of its electricity. Wind and solar are also the fastest growing source of new electricity capacity.¹⁵³ Enron alumni continued to flourish in the renewable energy sector.¹⁵⁴ Enron’s green energy paradigm, consisting of deregulated electricity markets, natural gas, and renewables, reigned triumphant. Robert Kelly had been right.

But then the Covid lockdowns kicked in. The debt-crazy, drill-baby-drill model of the McClendon era was already weakened, but lockdowns killed it with cratering demand. Prices went negative in 2020. Banks snatched up bankrupt companies, but are reluctant to expand production—unlike wildcatters, they prefer distributing cash to shareholders over drilling. Plus, the top-tier reservoirs appear tapped. Bakken, Eagle Ford, and the Permian Basin may have their best days behind them.¹⁵⁵

Not to mention the political problem. When Michael Brune took charge of the Sierra Club in 2012, the natural gas lovefest ended. A decade after the largely McClendon-funded “Beyond Coal” campaign, the Sierra Club announced “Beyond Natural Gas.”¹⁵⁶ The organization took to challenging downstream infrastructure construction wherever it was built. Moreover, attacking natural gas specifically and hydrocarbons generally became common in American politics as climate apocalypticism became an entrenched political concern.¹⁵⁷ Joe Biden ran on “ending fossil fuels” in 2020 and has threatened the industry with windfall taxes, for instance.

In the world of finance, environmentalists have launched boardroom coups that divest money from fossil fuels and invest money in renewables. This tactic flies under the banner of Environmental Social Governance, or ESG, investing. In 2020, $700 billion was allocated to ESG investments.¹⁵⁸ Hostility toward fossil fuels has cut the enrollment of petroleum engineers in college by 83 percent over the last five years, jeopardizing the industry’s future, and has fostered unwillingness among investors to commit capital to projects that one half of the American political spectrum and part of Wall Street wants to wipe off the face of the earth.¹⁵⁹ It is becoming harder to produce natural gas even as our consumption of it has tripled since the 1970s.¹⁶⁰

These factors spell trouble for the country’s electrical system, especially in the deregulated markets. Electricity restructuring has made the grid more reliant on gas, which made up 38 percent of electricity generation in 2021.¹⁶¹ When gas prices spike, so do electricity prices. Moreover, the renewables push has made electricity more expensive and has depended on, rather than displaced, natural gas.¹⁶² Successive reports from the North American Electricity Reliability Corp. (NERC) have indicated that the changing resource mix—i.e., the massive onboarding of wind and solar—has started to create reliability problems for the American electricity sector.¹⁶³ Grid operators echo NERC’s concerns, as do some FERC chairs.¹⁶⁴ Plus, it appears that natural gas’s methane leaks undercut its emissions reductions.¹⁶⁵ Finally, Enron’s renewable energy credits have enabled companies to inflate their actual emissions reduc­tions, and renewables themselves tend to transfer wealth upwards via the credits that enable them.¹⁶⁶

We live in the house that Enron built, and now the lights are starting to flicker.

This article originally appeared in American Affairs Volume VII, Number 1 (Spring 2023): 17–45.

Notes