Free Lunch (22 page)

A
HEAVY MORNING MIST BLANKETED AUSTIN AS THE MEMBERS
OF
the House of Representatives made their way to the capitol, a Texas-size
building made of a kind of granite called sunset red. They came to end a century of state government regulating the price of
electricity and to create the dawn of what they told the voters would be a glorious new day. They promised that competitive
markets would provide electricity cheaper and more efficiently than utilities regulated by the state government regulators had or
possibly could.

Just outside the massive chamber doors, which stood like the gates of ancient
Troy, each solon met a legion of lobbyists. All had played a role in shaping Senate Bill 7, making deals over this clause and that
comma. All the corporate lobbyists embraced the final deal, but not two others, who stood out that morning.

One was Janee Briesemeister, a policy analyst for Consumers Union, publisher of
Consumer Reports
magazine. Lithe, free of makeup, and on the verge of middle age, she
looked much younger and could have passed for one of the executives but for her plain suit, which even she felt was out of place
among the fine raiment of the finance, legal, and utility crowd.

The other was Tom Smith, the
executive director of Ralph Nader's Public Citizen in the Lone Star state. Smitty was a living icon of a consumer advocate. Short
and trim, with wire-frame glasses, he walked and talked like a sociology professor with a bit of the scold in him. He wore a straw
fedora, with wispy gray bumpers springing beneath the hatband and sprouting wild all the way down to his chin, symbols of his
fiercely independent thinking about politics and power.

On this spring day in 1999
Briesemeister and Smith played the roles of truth tellers destined to be ignored and ridiculed, just like Cassandra and Laocoön in
ancient Troy when the Greeks left their giant wooden steed outside the city gates.

Cassandra
was cursed to always tell the truth, yet never be believed. Virgil recounted in the
Aeneid
that warnings came from within the wooden colossus the Greeks left before seeming
to sail away:

The priest Laocoön thrust a
spear into what seemed like a marvelous gift to expose “a deadly fraud,” only to be mocked (and later killed).

In Austin, a modern chorus of lobbyists drowned out Briesemeister's and Smith's warnings that Senate Bill 7
was not as it seemed. Smith was handing out flyers. One of the legislators could not resist a verbal jab at the man warning of
economic disaster hidden in the bill. “Right, Smitty,” the lawmaker said mockingly, “you're going to take on Steve.”

The reference was to Steve Wolens, Democrat of Dallas, who was in charge of Senate Bill 7, which had
passed the upper chamber two months earlier. Wolens had a reputation for devising creative ways to get impossible bills through
the House, just as Odysseus came up with the idea of the Trojan horse to slyly enter Troy.
Texas
Monthly
magazine once described Wolens this way: “Mesmerizing in debate, indefatigable in preparation, incisive
in analysis, he is the House's most dreaded foe and most welcome ally.”

By fiat, Wolens was
about to transform electricity into a competitive business, or at least transform part of the electricity industry into what appeared to
be a competitive business. This moment did not arrive by popular demand or by accident. The debate under the capitol dome in
Austin, like those in half of the other state capitals, was the product of years of buying political influence by one man and the
company he created: Ken Lay and Enron.

Lay sent teams of executives to meet privately with
politicians and with executives of large companies that consumed electricity by the power plant. Its publicists beguiled journalists
and stock analysts with equal fervor. Enron supported seemingly scholarly studies that advanced its cause. Enron's message
excited the big industrial users, who had complained for years that they were charged too much. They said the prices set by state
utility boards forced them to subsidize residential customers and small businesses. They had a point. In some states big
customers not only were denied discounts for buying in volume, they were hit with premium prices.

The Enron executives promised that if they got their way, electricity would flow plentifully, and with lower
prices, to these big buyers. How? The magic of markets. At the same time, Enron said, profits for the makers and sellers of electric
power would rise, drawing new investment to build more power plants. It was a message that big business wanted to hear. It was a
promise that, ever since
downsizing
entered the lexicon, had become all the rage in
corporate America: more from less.

The problem was how to make politicians care. Voters did
not care much. No candidates were whipping up voter rage over electricity prices, which had been falling for decades until they
started to creep back up in the seventies. Hardly anyone cared about the arcane issue of how costs were split among industrial,
commercial, and residential customers. Among the voters, no one was clamoring for competitive electric markets.

Enron offered a solution. It paid politicians to listen. Remember, as every politician says, his or her vote is not
for sale. All that donations buy is access to officeholders: time to make a pitch and to get the donor's concerns in the forefront of
the politicians. There is so much demand for contributions, and so little time to listen, that hardly anyone gets heard for
free.

To make sure its voice was heard, Enron and its executives poured $5.4 million into
campaigns for Congress and the White House in the last half of the nineties and the 2000 races, three-fourths of it to Republicans.
Enron money flowed freely to state officials, too, especially in Texas, where Enron was confident that it could remake the rules by
which electricity is sold. After all, Governor George W. Bush counted among his loyal friends the Enron leader he called Kenny
Boy.

Donations also flowed from those paid by Enron, as well as companies currying favor
with it. This made Enron's support even more valuable than the numbers about its own giving suggested. From his first run for
governor of Texas in 1994 until he reached the White House, Enron was the single largest supporter of George W. Bush, donating
$736,800. Of the next six biggest contributors to Bush, four were connected to Enron. Among them was Vinson & Elkins, the
Houston law firm on which Enron relied most. Another was the parent of the Arthur Anderson accounting firm, which during the
Depression rose to national prominence through diligent examination of an electricity industry scandal. In a few years the firm
would come to its end because of its work for Enron in a remarkably similar scandal.

Lay also
sent teams to meet with utility executives and leaders. Enron hoped to win them over. If they resisted, it tried to scare them into
retreat.

One who heard their pitch was Jan Schori, general manager of the Sacramento
Municipal Utility District. The burghers and farmers who prospered in the rich and flat lands around Sacramento, long after the gold
rush had panned out, created the power district in the 1920s. They wanted an electric utility that would be responsive to their
needs, focusing on reliable service at the lowest cost so their businesses would prosper. The utility district's prices typically ran a
third lower than Pacific Gas and Electric Company, the corporate-owned utility with a monopoly in most areas of Northern
California. As part of the utility district's tradition of service, Schori takes meetings with almost anyone seeking to do business with
the agency, which collects about $6 billion from customers each year. One day, about the time of the Texas vote, Enron came
calling.

Thinking the Texans wanted to sell some new financial service, Schori invited Jim
Tracy, the utility district's chief financial officer, to join them. They gathered around a long table with metal legs painted black in an
office that looks down on a grove of flowering cherry, ginkgo, and other trees, a sample of the thousands of shade trees that the
district has given away over the years to help cool the area in summer and thus reduce demand for electricity.

The Enronites entered as if they owned the place. Years later Schori remembered thinking that they were so
incredibly well dressed and so young; so very young and yet so confident, it was arresting. They said times had changed, that the
smart move was to switch to Enron management.

Schori explained that the utility district was
not a soulless business that could be bought, but a local government agency with directors elected by the people. The Enronites
shifted their approach. They presented themselves as corporate Cassiuses inviting their hosts to join in a conspiracy to overthrow
the dictates of regulation. A market revolution was necessary, the Enronites whispered behind the closed doors, for the good of
the people.

When Schori made clear that there was no interest in joining this cabal, the
Enronites turned to threats. “They told us that we had better turn our business over to them or in a few years they would come
back and take us over,” she recalled.

Tracy, the district's finance guy, marveled at the hubris.
“They sat there and told us they could run our utility better than we could because they knew more than we did or ever could about
electricity and markets.”

Schori and Tracy felt neither intimidated nor angry, just bemused at
the arrogance of the young plotters in their Dolce & Gabbana suits. They thought that these pups without a wrinkle among
them had not a clue about the steady, solid work it took to actually provide reliable electricity at all hours in all kinds of weather no
matter how much demand surged and fell from one minute to the next. And they were certain their guests, the ink barely dry on
their masters of business administration diplomas, gave little thought to how much planning and judgment went into making juice
flow every time a switch is flipped not just today, but a decade or two in the future.

While the
Enronites had failed to intimidate the public servants in Sacramento, they struck fear deep in the hearts of Texas utility executives.
By the time the Texas lawmakers gathered to vote on Senate Bill 7 it had become apparent that Lay and Enron had vast political
capital to spend, especially with Governor Bush. Utility executives understood this sooner than most because their careers
depended on winning the cooperation of government to set prices as profitably high as was politically possible.

Floyd LeBlanc, the chief spokesman for Centerpoint Energy, the utility once known as Houston Lighting
& Power, put it best: The utilities fought Enron until they realized that Enron would win. Then they cut the best deal they
could. It was a story repeated in state after state, from Maryland to Maine to Illinois and out on the West Coast.

Within a few years 26 states embraced the Enron way, passing laws that switched electricity to a competitive
business, or at least creating the appearance of a competitive business. The specifics varied widely, except for one common
element known as
stranded costs.
The utilities were guaranteed that power plants built
under the old monopoly laws, but not yet fully written off on their books, would be paid off, typically by allowing the utilities to
borrow the money and then add the cost plus interest to monthly electric bills for years to come.

Guaranteeing payments was a strange way to initiate competition, which by definition means winners and
losers. It was as if the landlord of the only apartment building in town, confronted with new apartments under construction,
persuaded the city council to force his tenants to pay off his mortgage even if they decided to move into newer
quarters.

As Briesemeister and Smith saw it the utilities wanted to eat their cake and have it
too. The utilities wanted the potential benefits of a competitive market, but with the guaranteed payments that came from a
regulated monopoly. To the modern Cassandra and Laocoön this was not competition, but sheltered capitalism with guaranteed
profits.

As events would unfold it would turn out that their predictions understated the
economic damage that would soon be done not just to Texas utility customers, but also to millions of people and businesses from
Chesapeake Bay to Puget Sound. There would also be a lucky few who made enormous fortunes.

It was stranded costs that Smith and Briesemeister warned most about that day in Austin. Just days earlier a
House committee had taken up Senate Bill 7, the Enron bill, and more than 100 amendments were put forth, including some dealing
with that guarantee the utilities wanted.