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Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit X-From: "Ronald Carroll" <rcarroll@bracepatt.com< X-To: <ray.alvarez@ei.enron.com<, <acomnes@enron.com<, <daniel.allegretti@enron.com<, <dfulton@enron.com<, <hfromer@enron.com<, <jdasovic@enron.com<, <jhartso@enron.com<, <jsteffe@enron.com<, <linda.robertson@enron.com<, <rsanders@enron.com<, <rshapiro@enron.com<, <smara@enron.com<, <snovose@enron.com<, <seabron.adamson@frontier-economics.com< X-cc: X-bcc: X-Folder: \Richard_Shapiro_June2001\Notes Folders\All documents X-Origin: SHAPIRO-R X-FileName: rshapiro.nsf Content-Transfer-Encoding: quoted-printable Date: Mon, 21 May 2001 08:32:17 -0500 From: "Tracey Bradley" <tbradley@bracepatt.com< To: <afishman@bracepatt.com<,<asettanni@bracepatt.com<, <cingebretson@bracepatt.com<, <cshoneman@bracepatt.com<, <dwatkiss@bracepatt.com<, <ebethune@bracepatt.com<, <gfoote@bracepatt.com<, <ggodley@bracepatt.com<, <jchapman@bracepatt.com<, <jjava@bracepatt.com<, <jschilling@bracepatt.com<, <kcurry@bracepatt.com<, <mhebert@bracepatt.com<, <mpate@bracepatt.com<, <mracicot@bracepatt.com<, <mstroud@bracepatt.com<, "Paul Fox" <pfox@bracepatt.com<, "Patrick Oxford" <poxford@bracepatt.com<, <rcarroll@bracepatt.com<, <rhousman@bracepatt.com<, <rrich@bracepatt.com<, <ssegal@bracepatt.com<, <tbradley@bracepatt.com< Subject: In an Era of Deregulation, Enron Woos Regulators More Than Ever Mime-Version: 1.0 Content-Type: text/plain; charset="us-ascii" Content-Disposition: inline FYI - in case you didn't see this on Friday. Marc Racicot and B&P are mentioned. May 18, 2001 In an Era of Deregulation, Enron Woos Regulators More Than Ever By Bob Davis and Rebecca Smith Staff Reporters of The Wall Street Journal WASHINGTON -- Every energy executive in America would have liked a half-hour with Vice President Dick Cheney as he fashioned the Bush administration's national energy program. Enron Corp. Chairman Kenneth Lay got it. Mr. Lay used the time to set out an eight-point agenda intended, among other things, to head off price controls on wholesale electricity, provide Enron and other energy traders with unfettered access to the nation's electricity-transmission system and remove regulatory obstacles to building new generating plants and power lines. The energy plan President Bush unveiled Thursday reflected many of those same priorities. In an interview last week, the vice president said he also met with other energy executives, but Mr. Lay was the only one he named. Mr. Cheney says he sought Mr. Lay's advice because "Enron has a different take than most energy companies." Indeed, Enron Corp. is a modern paradox. It has transformed itself over the past 15 years from a stodgy gas-pipeline operator into the nation's largest trader of gas and electricity and a formidable player in newer markets such as telecommunications services and emissions-reduction credits. Today, it's the quintessential model of a company dedicated to free markets. Yet as much as any company in the U.S., it has cultivated close ties with government. Since the late 1980s, the Houston-based company, which was President George W. Bush's biggest corporate campaign donor, has beefed up its lobbying staff, boosted its political contributions and sought out friends in the world of politics. Now, with Mr. Bush in the White House, it is in a unique position to see whether those efforts will pay off. Enron's lobbying blitz reflects one of the ironies of the era of deregulation. Just as government created immense telephone, electric and gas monopolies early in the last century, Enron and other players feel they need the government's help in opening up those monopolies and gaining access to once-closed markets. In particular, Enron wants the Federal Energy Regulatory Commission to ensure that energy is deregulated on terms favorable to the company. Rather than having the nation's transmission lines controlled by the utilities, it wants those lines to provide open access for new entrants such as Enron eager to buy and sell power. Mr. Lay is on a first-name basis with a half-dozen members of the Bush cabinet and knows many senior White House staffers from their days in the Texas governor's mansion with Mr. Bush. Before joining the administration, both White House economist Lawrence Lindsey and U.S. Trade Representative Robert Zoellick were on Enron's advisory board, which pays members an annual stipend of $50,000. Under Mr. Lay, Enron has donated nearly $2 million to Mr. Bush during his political career. Since the start of the 2000 campaign, Enron and its employees have contributed $1.3 million to the Bush presidential drive, the Republican Party and the presidential inauguration, says the Center for Responsive Politics. Enron also accounted for $461,000 in contributions during Mr. Bush's two runs for governor, according to the Center for Public Integrity. Mr. Lay, who holds a doctorate in economics, says all he wants from government is a fair shake. Enron supports candidates "you believe in," he says. "You believe in their value system, you believe in their philosophy and you believe they'll do the right things as leaders." But it's clear that Mr. Lay wants more than that from government. For now, he is focusing on FERC, where he worked in the early 1970s when the agency was known as the Federal Power Commission. He hopes to make FERC his ally in beating back the power of utilities. Long dismissed as a regulatory backwater overseeing wholesale transactions by electric and gas utilities, the commission has emerged as the chief navigator of the nation's transition to a fully deregulated energy marketplace. Even before Mr. Bush took office, FERC had begun to rein in the market power of utilities. In December, FERC told the nation's utilities that it wanted them to voluntarily surrender their high-voltage lines -- those that can dispatch electricity across state lines -- to independent grid operators, such as those already in place in California and the Northeast, which would provide open access to the lines. Although it told the utilities to submit plans for doing so, many of them have been reluctant to relinquish control of their lines to such independent organizations. Mr. Lay wants FERC to go further, forcing the utilities to cede direct control of their lines. He also is seeking rules that would end what he calls energy "balkanization" and create "seamless" interstate electricity markets. "Enron is the biggest gas and electric company entirely dependent on the competitive side of the business," says Andre Meade, an analyst for Commerzbank. "To the extent deregulation slows down, their business slows down." Right now it's a lucrative strategy. Enron typically targets tightly controlled markets just as they are opening up, using its financial clout and risk-management savvy to gain a dominant market position. In doing so, it frequently portrays itself as an insurgent taking on entrenched interests. In electricity, for instance, Enron buys the output of generating plants, sometimes days, weeks or years before the power is actually produced. Using sophisticated weather data, it determines the most lucrative market for the power, finds a buyer and then arranges delivery via transmission lines owned by others. It hedges its positions with other contracts. Its wholesale trading volume climbed 55% for natural gas and more than doubled for electricity in the first quarter alone. Such growth pushed Enron's wholesale energy-trading income, before taxes and interest, up more than threefold to $785 million during the first quarter. Between 1996 and 2000, Enron's yearly net income nearly doubled to $979 million and its revenue increased almost eightfold to $100.8 billion. Over the same period, Enron's stock price, adjusted for splits, rose more than fourfold. At the start of the Bush administration, FERC's future was very much up for grabs. Two of the five seats on the commission were vacant, and Enron quickly sought to fill them with activist Republicans. President Bush named a friend of his and Enron's to one of those seats: Texas utility-regulator Pat Wood. Mr. Wood had worked closely with Enron during a six-year effort to open Texas' retail electricity market. Mr. Wood also had shown the kind of backbone Enron wanted in a separate fight over telephone deregulation when he insisted on closely monitoring phone utilities to make sure they opened their networks to competitors. Higher Profile For the second slot, Enron backed Nora Mead Brownell, a Pennsylvania utility regulator. She had come to Enron's aid in 1997 when she voted to block an electricity-market restructuring plan backed by Philadelphia's utility and by GOP Gov. Tom Ridge. Enron argued that the plan would have locked it out of the Philadelphia market. Enron worked to raise Ms. Brownell's visibility by lobbying the House Commerce Committee to include her as an expert witness on energy issues and as a member of an informal advisory group, say Enron and congressional aides. Mr. Lay provided heavyweight support. He says Enron included Ms. Brownell's name on its "priority list" of a half-dozen prospective FERC nominees. And when her candidacy ran into opposition from Pennsylvania officials with bitter memories of her 1997 decision, Mr. Lay says he phoned Karl Rove, the White House's top political strategist, to tell him that "she was a strong force in getting the right outcome" in Pennsylvania." A White House spokeswoman says that a number of individuals and industry groups weighed in favor of Ms. Brownell, but she declined to name any. Ms. Brownell says she was unaware of any concerted Enron campaign on her behalf. She didn't ask the White House who had supported her because, she says, "I didn't want to be beholden." Meanwhile, Enron was using its Democratic contacts to strengthen its ties with Linda Breathitt, a Kentucky Democrat on the commission. Earlier this spring, the company hired two of former Vice President Al Gore's closest friends as lobbyists: Nashville lawyer Charles Bones and Mr. Gore's campaign-finance director, Johnny Hayes. Both had come to know Ms. Breathitt through Democratic politics. Ms. Breathitt says she wasn't very familiar with Enron's interests, but that she accepted when Mr. Hayes invited her to dinner at a Washington restaurant in April to meet Richard Shapiro, Enron's managing director for government affairs. "Everyone likes to get to know the FERC commissioners," Ms. Breathitt says, adding that she always pays for her own meals. Enron has long played this kind of insider's game. Mr. Lay has been friendly with both Democratic and Republican administrations over the past 25 years, sharing time on the links with Presidents Bill Clinton and Gerald Ford. He's been a particularly close friend of the Bush family. In the late 1980s, he ran then-Vice President George H.W. Bush's fund-raising drives in Texas. After the younger Bush became governor, he appointed Mr. Lay to run the influential Governor's Business Council. Mr. Lay also made Enron's fleet of corporate jets available to the new governor and won his help in lobbying officials considering Enron projects. In March 1997, Mr. Lay wrote Gov. Bush to ask that he lobby the Texas congressional delegation to support export-finance credits critical to Enron, according to letters released by the Texas State Archivist's office. In April 1997, when Enron was negotiating a $2 billion natural-gas joint venture in Uzbekistan, Mr. Lay wrote to thank the governor for meeting with the Uzbekistani ambassador to the U.S. Six months later, another Lay thank-you note concerned a phone call Mr. Bush made to Pennsylvania Gov. Ridge to support Enron's plan to enter the Philadelphia electricity market. "I am certain it will have a positive impact," Mr. Lay wrote. Mr. Lay says he hasn't sought Mr. Bush's aid directly since Mr. Bush won the presidency. Last month, he talked with the president briefly at a Houston benefit for the Barbara Bush Foundation for Family Literacy, on which Mr. Lay serves as co-chairman. "It's not a matter of us going off hunting or fishing or sitting around and having drinks," he says. Not all Mr. Lay's initiatives have been successful. When Mr. Bush reneged in March on a campaign pledge to fight global warming by requiring reductions in carbon-dioxide levels produced by burning hydrocarbons, Mr. Lay says he telephoned Mr. Cheney to complain. "The scientific evidence, although certainly not conclusive, is pretty compelling that there could be a climate-change problem," he says he told the vice president. "The administration should still look very seriously at it." Around the same time, Mr. Lay also called Mr. Rove, the White House political adviser, to urge him to talk to Fred Krupp, the head of the moderate Environmental Defense Fund. Messrs. Krupp and Rove spoke briefly but found little common ground. Later, Enron, which has plans to add emission credits to the commodities it trades, joined a coalition urging mandatory reductions in carbon-dioxide levels. But Enron saved its main lobbying push for Mr. Cheney's energy task force. In April, Mr. Lay met with the panel's staff director, Andrew Lundquist, and later, with Mr. Cheney, whom Mr. Lay had come to know well when the vice president was chief of Halliburton Co., a Dallas construction company. "We built Enron Field together," says Mr. Lay, referring to Houston's new ballpark. In both meetings, say Enron and White House officials, Mr. Lay presented a broad agenda for opening up the nation's electrical system and used the gas-transmission system as a point of comparison. In both cases, he argues, pipelines and transmission lines should be like the federal highway system that offers easy access to all. Finding the Bottlenecks The Cheney report uses similar language, describing the electrical grid as "the highway for interstate commerce in electricity." As Enron sought, the report directs the energy secretary to determine by the end of the year whether it makes sense to establish a national grid, and to identify bottlenecks in the transmission system as well as how to remove them. An effort to make the grid national would enhance FERC's power, as Enron has urged. The report is mum on some Enron concerns, such as requiring utilities to join regional transmission organizations, an idea strongly opposed by the utility industry. A White House aide says the task force didn't want to get involved in such battles between industries. As solid as its support in the White House has turned out to be, Enron is worried about the backlash against electricity deregulation in Western states and possibly in New York, should electricity rates surge this summer. Nevada repealed its deregulation law last month, spooked by the way skyrocketing wholesale-electricity prices in neighboring California were undermining the Golden State's economy. California and Oregon are contemplating state-government purchases of major utility assets. Enron's biggest fear is that the political pressure will lead the states, or perhaps Congress, to control prices, which could undermine Enron's business. In response, Enron has formed a coalition with eight other energy marketers in New York, who each have pledged $50,000 to pay for a media and lobbying campaign. It also has hired former Montana Gov. Marc Racicot and dispatched him to court Western politicians. Two weeks ago, Mr. Racicot had breakfast with an old colleague, Oregon's Democratic Gov. John Kitzhaber. After the two chatted about fly-fishing, says Mr. Kitzhaber, "Marc did say he was working to re-energize the discussion about energy and had some ideas for a framework the governors might want to consider." Though Mr. Kitzhaber says he knew that Mr. Racicot had joined the Washington, D.C., lobbying firm Bracewell & Patterson, Mr. Racicot didn't disclose that he was on retainer to Enron -- and the star of Enron's Western states "advocacy team." For his part, Mr. Racicot says he was working "not at Enron's direction but with their knowledge" to advance positions that he, too, feels are important. -- Jeffrey White contributed to this article. Write to Bob Davis at bob.davis@wsj.com and Rebecca Smith at rebecca.smith@wsj.com
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