Mr. Natural Gas

“In the staid natural gas industry,” Business Week reported in 1986, “Kenneth L. Lay stands out like a well flaring in the night sky.” While at Transco Energy, Lay testified before Congress on energy issues. As chairman of the Interstate Natural Gas Association of America (INGAA), the trade group representing companies piping 90 percent of the nation’s gas, Ken Lay brought a new approach. Instead of confrontation, Lay sought collaboration; instead of seeking legal recourse to pipeline transition-cost problems (as he had at Transco), he now saw them as negotiable, solvable business issues that would create difficulties for his competitors.

Skip Horvath, first as policy director at INGAA and later as president of the Natural Gas Supply Association, remembers Lay as “the most highly educated person on our board, and arguably the smartest,” a CEO whose “forceful personality and persuasive manner of putting an issue forward helped establish the agenda for the gas industry.” Lay “kept pricking imaginations and pushing the envelope,” getting people to think and behave differently. Horvath elaborated:

By and large, Ken broke the mold. He was an idea man. He liked talking about ideas with people. And if you were someone who could throw a ball back at him as fast as he threw it at you, he would talk to you. He was personable, not condescending, and interested in getting the job done rather than people’s station in life, which was quite refreshing for those of us on staff at the time.

The stature of Ken Lay, INGAA’s chairman in 1989, would only grow. “He’s really become the spokesman for the industry, and a very good one at that,” reported a Wall Street Journal publication in 1992. In his farewell column at Natural Gas Week, John Jennrich put Lay first in his list of best speakers with the comment, “like the voice of God, with a sense of humor.” In fact, Lay would achieve a position in his industry unmatched by anyone before or since: Mr. Natural Gas. Such a pedigree in the business history of the US energy industry was held by a precious two: petroleum’s Rockefeller and electricity’s Insull. That was high company, however brief Lay’s reign would turn out to be (less than two decades versus twice as long for the other two).⁷

Mr. Natural Gas did not come out of nowhere. Lay was first noticed as the bright young CEO of Continental Resources Company, the parent of Florida Gas Transmission Company. His reputation surged at Transco as he creatively grappled with its gas-oversupply problem. In his first six months as CEO at Houston Natural Gas, he repositioned the company from a regional powerhouse to a national player.

Beginning in 1987, Ken Lay was challenging the coal industry on political, economic, and environmental grounds in a way that no other representative of the fragmented gas industry had ever done.⁸ The prize, he knew better than anyone else, was gas-fired power plants capturing not just a majority but the great majority of the new generation capacity to increase demand and strengthen wellhead prices for a stronger industry.

Enron’s business model was all about natural gas, reflecting a fertile confluence of events—deregulatory, regulatory, technological, and market—that positioned methane as the fuel of choice in stationary markets. (Natural gas for transportation was a niche market that Lay would push too.⁹) But gas was hardly on automatic pilot to achieve this. Much had to be done politically and in the marketplace to get electric utilities to commit to long-lived gas plants.

External issues needed to be championed for his company and his industry. In Lay’s mind, wellhead gas prices had to rise for short-term profitability and longer-term supply. Electric utilities had to be weaned away from their rate-base mentality, which put relatively capital-intensive coal plants in front of gas plants on their want list. Utility regulators needed to confront the gas-versus-coal issue to ensure that management would do the right thing for their ratepayers in the monopoly-franchise world.

Another high card to play was the environmental advantage of gas over coal, even if the proposed coal facilities were in compliance with existing regulation. Ken Lay wanted utilities and regulators to think about environmental quality beyond compliance and next-generation regulation now.

Ken Lay’s multifaceted challenge began with sweeping away failed gas-shortage-era regulation. Enron then joined mainstream environmentalists against traditional pollutants where neutral regulation would hurt coal relative to gas. This was soon joined by Enron’s full embrace of the nascent global-warming, climate-change movement to bring carbon dioxide (CO₂) into the emission-control mix. There, natural gas beat oil but particularly coal.

Talking Up Prices

Forecasting the end of the “gas bubble” was an exercise in futility. He who looks into the crystal ball will eat shattered glass, Enron executives liked to say. Economist and industry wise man Ken Lay proved to be no exception.

In early 1985, Lay predicted market balance in the “not too distant future.”¹⁰ But a year later, collapsing oil prices brought gas to rock bottom too. “The most thoughtful forecasts we look at show an annual surplus continuing out for the next five years,” Lay now admitted. He frustratingly told the US Senate the next year, “this 18-month/2-year gas bubble has been about to burst for eight or nine years.”

Lay’s optimism returned in 1988 with a touch of strategic alarm. “We are very, very close to the balance between supply and demand,” Lay stated at a Gas Daily conference. However, “the industry’s security net is being eroded,” he added, warning that “a small shortage can cause very large price increases.” A year later, Lay reiterated his view that the market was balancing—but cautioned that “some fairly short supply situations … are likely over the next two or three years.”

But not only would Dr. Lay’s prognostication prove errant; he was also mixing his messages. Just four months before sounding his Gas Daily alarm, Lay complained before the Natural Gas Supply Association that “producers are always forecasting that the next shortage is 18 months to two years away,” thus encouraging “utilities and end-users to make commitments to coal and nuclear power.” Then, before a different audience, the good doctor warned against “a real shock and very severe dislocations throughout the industry” with “damaging repercussions.”

Such two-sidedness was not confined to the microphone. It was part of Enron Gas Marketing’s sales pitch behind closed doors to end users to lock in long-term, fixed-priced deals. EGM’s presentations would begin with a McKinsey & Company hard-landing (price-spike) forecast, followed by Enron’s in-house robust projections about the gas-resource base. The message was: Lock in now, be at the front of the line, and your gas will be there. The extra cost—the price premium to the then-going spot price—will be worth it.

As it would turn out, gas deliverability remained high relative to demand. The industry was drilling less but finding more, thanks to new technology and wellhead tax preferences. Gas reserves were increasing, reversing an eight-year decline, in the face of weak wellhead prices.

Having been disappointed for a decade about the gas glut, Ken Lay lost his patience on Wednesday, February 7, 1991, at the annual meeting of Cambridge Energy Research Associates (CERA), hosted by Daniel Yergin in energy-capital Houston. Lay’s was “easily the hardest-hitting address at the two-day conference attended by more than 400 people.”

Complaining about “economically irrational behavior,” Lay accused the major oil companies—the biggest gas producers—of engaging in predatory pricing, where wellhead sales at prices below the cost of replacement were distorting the market. Predatory had a clear meaning in economic theory and under antitrust law, and Lay’s words were clear: The pricing practices of deep-pocketed integrated firms were destroying small rivals to create a less competitive future in which fewer companies and less supply would send prices up.

“Selling below cost is particularly difficult to understand when many of these same companies could scarcely wait 24 hours after the Iraqi invasion of Kuwait to increase gasoline prices so that they were not selling their gasoline inventories below replacement costs,” Lay charged.¹¹ “I strongly doubt that it has been intentional,” Lay allowed. “Rather, I expect it is a breakdown in communication between those people in some of the larger companies charged with replacing or expanding natural gas reserves and those people in the same companies charged with aggressively marketing their natural gas production.”

As evidence, Lay pointed to the current Gulf Coast spot price of $1.30/MMBtu, the lowest same-month, inflation-adjusted price since 1976, a period of stringent federal price controls. He cited the statistic that 3,000 independents, or almost a fourth of domestic gas producers, had left the industry in the last five years in the face of depressed prices.

Lay came in for some heat, in fact more than he had ever experienced from an address to the industry. “This does not appear to be vintage Lay,” an industry compadre told the Houston Chronicle, without attribution. A major company representative rebutted Lay with an economics 101 explanation of sunk costs and profit maximization. This was not about gas sales where marginal revenue was below marginal costs, after all.

Lay’s cannon shot was chalked up to frustration. “You’re seeing here what you saw when oil prices went to $10 a barrel a few years ago,” commented Mike German of the American Gas Association.

But Lay was not only distorting economic theory with his predatory-pricing charge. He also was the pot calling the kettle black. Open-access competition and EGM logistics were lowering gas prices from the wellhead to burner tip, as Jeff Skilling knew. (Lay would champion this fact five years later, when Enron lobbied for similar open access for electricity.) Enron Oil & Gas Company (EOG), 86 percent owned by Enron, secured a tax break for tight-sands production, which effectively increased the wellhead price by $0.80/MMBtu, a boon for Enron and a driver of excess production (compared to a tax-neutral situation).

EOG, a top independent, was shutting in (not producing) some of its deliverability from shorter-lived gas wells in the belief that higher future prices would justify the delayed revenue. Lay was probably upset because of EOG’s having to do just that. Nevertheless, EOG was highly profitable in the low-price environment with its negative tax rate, discussed in the previous chapter.

In fact, EOG had just completed a banner year with its average finding cost of $0.82/MMBtu and a combined finding and acquisition cost of $0.95/MMBtu.¹² EOG’s Forrest Hoglund was telling shareholders: “This year [1991] is shaping up to be another exciting one with significant opportunities for EOG in spite of early indications that natural gas prices will be lower than desirable.” Lay’s point about the industry liquidating itself by selling gas below replacement cost was not happening with EOG, which was increasing reserves even after its record production.¹³ Technology was bringing finding (replacement) costs down.

But there was a method to Lay’s madness. His accusation—which he sugar-coated as only a “possibility” raised only with “great reservations”—affected the psychology of the industry. Natural Gas Week reported (“When Lay Speaks….”) that Louisiana producers were no longer selling their gas below $1.45/MMBtu, their estimated cost of replacement.

Ken Lay had the megaphone of his industry. And he was speaking not only to the market but also to state regulators, who were under pressure from some in the industry to use their authority to reduce production to an alleged market demand. Market-demand proration, as it was called, was about increasing wellhead prices in the name of reducing “economic chaos,” as the head of the Texas Independent Producers and Royalty Owners Association put it. EOG and Hoglund supported the political capitalism of mandatory proration to go along with their own voluntary shut-ins; Lay less so.¹⁴

But economics was economics. Rapidly improving drilling technology, coupled with very generous new tax credits for tight-sands drilling, were increasing deliverability at a time of stagnant gas demand. The surplus, estimated by EOG’s Hoglund at between 5 and 30 percent (depending on the season), could not be jawboned away by Lay or even himself. (“Buyers of natural gas are a whole lot smarter than the sellers,” Hoglund complained at an industry gathering hosted by the Texas Railroad Commission.)

Gas prices reached a nadir in the summer of 1991. National wellhead prices fell to a dollar—and some reported spot sales fell below $0.50/MMBtu. This was happening despite voluntary shut-ins by EOG and others—and mandatory wellhead proration. State agencies in Texas, Oklahoma, and elsewhere, by limiting production to a calculated market demand, were keen to raise prices for their political patrons.¹⁵

Ken Lay had a vibrant business model, not to mention a robust ego. He really did not want anyone to feel too sorry for him or his company. So Lay let himself brag a bit in a feature interview with Natural Gas Week eight months after his accusatory CERA speech. “Basically, whatever natural gas prices are, we think we can do well,” he informed his industry. Natural Gas Week news reports, meanwhile, had headlines such as “Lay Predicts Solid Growth for Enron for Next 2 Years” and “Enron Sets High Earnings Goal Despite Low Natural Gas Prices.”

Still, Enron could use higher gas prices, not only for EOG but also to improve margins for the company’s very large transmission and marketing operations. But EOG was going to get a $0.80/MMBtu effective price increase from a special tax provision whether or not wellhead prices rose. Before Lay’s CERA bomb, Enron secured passage of a tight-sands tax credit that would reap more than $200 million for the parent in the next seven years. That same provision was helping to create the very supply glut that Lay decried.

Technology, too, was at work. “The headline is basically our ability to add natural gas at fairly low cost is relatively substantial,” explained William Fisher of the University of Texas Bureau of Economic Geology. The wellhead bonanza made natural gas its own best friend to beat coal and keep nuclear sidelined. Enron’s Outlook said as much.

In a speech the next year, Lay retreated from his predatory-pricing insinuation made at Yergin’s CERA conference. Independents, not only majors, were selling “below replacement cost—certainly some of the time.” He was now “totally convinced” that predation was not at work, since “the [retrenching] majors … have driven themselves out of the [domestic gas] business.” In his address at the annual meeting of the producers’ Independent Petroleum Association of America (IPAA), Lay changed the subject from supply to demand in order to address the industry’s woes.

The gas-price rebound in 1993 quieted Lay’s price crusade, one that he would not revisit when prices again weakened. This reversal ruined EOG’s price hedges, which had worked so well in the previous low-price years. Still, Ken Lay, the PhD economist, had some peculiar notions of sunk costs, operating costs, and the oil-major business strategy, which raised questions throughout the industry about his professorial view of markets versus real-world markets.

Fighting Oil

In 1982, Transco Energy president Ken Lay had called for an oil-import fee. Transco Exploration needed higher prices, and Transcontinental Gas Pipe Line was losing business to fuel oil in industrial and power plant markets. Lay’s position was that of his boss at Transco, CEO Jack Bowen, who was partial to government quick fixes.

At Enron, Lay continued to make energy-security arguments for reducing oil imports—and reducing oil usage per se. But he stopped short of calling for an import tax, even after the 1986 oil-price plunge hurt EOG and reduced pipeline volumes and margins.¹⁶ Oil tariffs were a hard political sell, and Lay kept his powder dry. Still, Enron pushed the belief that natural gas as “a reliable, clean domestic fuel … should sell at a premium price”—and belittled oil on grounds of balance of trade, national security, and domestic jobs.

Ken Lay elevated his gas-for-oil offensive in 1990 and 1991 in response to the Gulf Crisis and subsequent war. Lay had two additional company reasons. One was the need to expedite FERC approval of Transwestern’s oil-displacement-themed expansion to California.¹⁷ The other was Enron’s entry into the compressed–natural gas refueling market to compete against gasoline and diesel. Lay, who cautiously backed a carbon tax in 1990 (“INGAA Opposes Carbon Tax but Lay ‘Not Quite as Negative’,” one headline read), began making a case for an oil-import levy.

The Exxon Valdez oil spill in Alaska in Spring 1989 stained petroleum, not only Prince William Sound. Commenting on the development, Lay pointed to global warming as an even bigger driver of future gas demand. The “operating and environmental benefits of gas” should—and would—be “reflected in gas prices,” stated Lay. Compared to about $1.60/MMBtu at the wellhead, Lay estimated a full-value gas price at between $3 and $4 per MMBtu.

To get gas prices up, given gas-on-gas competition at the wellhead (including from tax-advantaged EOG), other fuels needed to be made more expensive. Even before advocating an oil tariff, Lay supported a “heavier tax on dirtier fuels,” aka an environmental surcharge.

At an Aspen Institute Energy Policy Forum, Lay contended that oil policy must go beyond energy security to also confront environmental and domestic supply issues. On all three grounds, Lay recommended a tariff for the first time in his Enron career.¹⁸ “An oil import fee would essentially act as a price premium, captured by the market, to reflect the national security externality,” he reasoned in July 1991.

Lay characterized his proposal as “market based” because it changed price signals in one fell swoop, as opposed to the mishmash of oil price and allocation rules enacted by the 1970s’ “massive government intervention.” But was imported oil really an externality to penalize consumers, and could he as philosopher-king really know the right tax? In any case, Lay’s tax proposal did not take into account self-help toward future price uncertainty, such as oil hedging, something Enron pioneered with natural gas internally and externally.

Enron’s natural gas vision had been all about power plants, not much else. Now, with oil policy front and center, the vehicular market was targeted too. “Any policy to reduce the potential harmful economic impact of oil shocks must include measures to diversify transportation fuels,” Lay opined.

Enter Enfuels, an Enron-led joint venture capitalized at $10 million, to open natural gas refueling stations in Houston. As part of the project, launched in 1992, Enron and partners would convert some of their company vehicles as well.¹⁹

“Three or four years ago, I was an agnostic at best,” Lay told a panel convened by the National Association of Regulatory Utility Commissioners. “Since then, I’ve become a true believer.” Natural gas vehicles (NGVs), Lay added, could account for 1.5 trillion cubic feet per year by 2005, about 5 percent of total demand. Next to electric generation, transportation was seen as the major growth market.²⁰

Lay’s gas-for-oil ethic was part of his energy-sustainability view. “I would maintain that the end of the oil era has either occurred or soon will occur” he pitched. “Natural gas will increasingly substitute for oil and coal and will be the primary growth fuel used to bridge the ultimate transition to renewable energy, probably sometime in the second half of the next century.”

In early 1993, Lay went public with a political proposal to levy a $5 per barrel tax on imported oil as an alternative to the Clinton administration’s Btu tax to reduce the federal budget deficit and to (politically) redirect energy usage. In an article for the Petroleum Economist, Lay calculated that replacing one million barrels per day with natural gas (2 Tcf) would generate 160,000 new US jobs, $37.5 billion in new investment, and a $7.5 billion decline in trade deficit. If this was good energy and economic policy, free-trade economists from Adam Smith to Milton Friedman had been completely mistaken.

Independent producers were about the only industry segment on board with such a proposal, and Lay was looking for political help to stimulate an Enron-estimated $75 billion in annual upstream investment needed to increase gas production by 20 percent (to 22 trillion cubic feet) in the next seven years. More government fiddling, in the form of a payroll-tax rebate, was recommended by Lay to soften the effects of a “short-term negative [price] effect.”

Lay’s oil-import tax was premised on a perceived social cost (negative externality) of such imports. Yet government intervention to replace internationalism with protectionism would have to consider more than the allegations of market failure. There were also questions of analytic failure, a false prescription (by Lay himself in this case), and of government failure, the suboptimal implementation of the desired policy. There were also unintended consequences, a defining characteristic of such protectionism. But such arguments would be for another day; this PhD economist was driven by the bottom line, and sooner rather than later.

Lay’s antipetroleum philosophy and politics created a tension within Enron. The company’s international power plant projects burned fuel oil when the economics of natural gas did not work. The just-signed North American Free Trade Agreement (NAFTA), behind which Lay had put Enron’s full muscle, and for which he testified as chairman of INGAA in 1993, made protectionism illegal with Canada and Mexico, the two leading oil suppliers to the United States. Effective the first day of 1994, NAFTA made US oil tariffs economically unworkable, short of a three-country protectionist bloc, something that Lay did not address.

Warring Against Coal

Decades before it became a cause célèbre with Barack Obama, Ken Lay declared political war on coal. Enron’s crusade began after Lay left coal-positioned Transco and turned Houston Natural Gas into a pure natural gas play. It continued even after Enron decided to enter into coal trading and then to acquire coal reserves in its last years.

Lay had once been coal-too. “Coal will inevitably be a growth business over the next two decades despite itself, and a well-rounded energy company should attempt to gain a position in it,” the director of corporate planning at Florida Gas Company wrote in 1974. “Over time we as a nation, and the world for that matter, will have to increasingly rely on coal as one of our basic energy fuels, along with oil and gas,” the Transco Energy president opined eight years later.²¹ But at both corporate stops, Lay resented the fact that procoal regulation had unnecessarily and unfairly hurt natural gas.

The first order of business at Enron was to convince lawmakers to repeal coal-biased legislation. The mentality of electric utilities and state regulators also had to change, given the demonstrable economic and environmental superiority of gas. Both fronts, while political, were market oriented, quite different from anticompetitive rent-seeking (in the jargon of political capitalism).²² “From the standpoint of natural gas,” in Lay’s words, “it’s a matter of removing barriers.”

The next phase, beginning in the late 1980s, when global warming became an international issue, was to price (regulate) CO₂ emissions politically, to disadvantage coal (and oil) relative to natural gas. Enron’s Washington, DC, office pushed the climate issue to Republicans in particular—and no one more than George H. W. Bush. Alliances were formed with environmental groups to promote natural gas at the expense of its fossil-fuel rivals. Unlike before, this was proactive rent-seeking, not a quest for fairness.

There had been no love lost between natural gas and coal, and few companies were big enough in both to broker a truce. Coal had started the politicking many decades before when (coal-derived) manufactured gas began to face natural gas delivered by pipelines, first near and then from afar. Facing displacement by a cheaper, cleaner fuel, incumbent coal interests—the mining companies and their unionized workers, as well as the coal-hauling railroads—delayed the entry of natural gas in any governmental forum available.²³

Coal’s major weapon was Section 7(c) of the Natural Gas Act of 1938, which required federal certification of new or expanded pipelines crossing state borders. That gave rival fuels a political forum to delay, if not prevent, gas projects that otherwise linked willing buyers, sellers, and financiers.

In the 1930s, as discussed in chapter 2, coal interests delayed the entry of Northern Natural Gas Company, whose product would displace inferior coal gas. Two decades later, as chronicled in Bradley, Edison to Enron, Florida Gas Company had to overcome fuel oil and coal interests in federal hearings to introduce natural gas to the Sunshine State. This was a national story: “With their participation rights secure, alternate-fuel interests intervened regularly in FPC hearings in the 1940s, 1950s, and early 1960s, eager to forestall displacement of coal by cost-competitive, clean-burning gas.”

And in the 1970s, with natural gas short and coal abundant, the Powerplant and Industrial Fuel Use Act of 1978 (Fuel Use Act), as well as a provision of the Natural Gas Policy Act of 1978 (NGPA), hurt gas demand in its most price-sensitive market.²⁴ A political “holy war” predictably ensued between coal and gas in the 1980s; Ken Lay and Enron would be right in the middle of it.

“The Natural Gas Standard”

Enron carefully researched and marketed the key environmental statistics of natural gas relative to coal, per unit of electricity produced. A table in Enron’s 1988 annual report showed these reductions for gas: 99 percent for sulfur dioxide (SO₂); 43 percent for nitrogen oxide (NO_x); 53 percent for hydrocarbons; and 96 percent for particulates (PM₁₀).

How could low gas prices, rapid improvements in gas-to-electricity technology, and across-the-board emission reductions win the competition for new power capacity? Education, public relations, and politics were called for.

In March 1992, Ken Lay unveiled the natural gas standard for new power plants. Lay’s letter, adjoined by an Enron press release, read:

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:

produce electricity cleaner than gas combined cycle plants;

produce electricity cheaper, per [kilowatt-hour], than gas combined cycle plants;

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.

Lay’s analytics came from Bruce Stram and Mark Frevert at Enron, working with consultant ICF Resources. Using realistic assumptions, the levelized cost of electricity from a state-of-the-art gas plant was about one-third below that from a best-technology coal plant. The gas unit could be sited and built more quickly. There was less financial risk for gas, given fixed-priced contracts by Enron for up to 20 years. Guaranteed supply at floating prices was available for 30 years, about the expected life of a new facility.²⁹

Pollution reduction was a big political plus across the board. Updating earlier estimates, a gas unit emitted virtually zero sulfur dioxide (SO₂) and solid waste (ash or scrubber sludge). And when Enron compared gas to coal with regard to the emission of nitrogen oxides, it decided to up its carefully researched estimate from 43 percent lower to 80 percent lower, per kilowatt-hour.

Then there was the politics of the greenhouse gas that was in the news: carbon dioxide. Gas-fired generation emitted about half the CO₂ of a coal plant for the same electricity generated.

On the speaking circuit, Lay sold the Gas Standard as a win-win, free-lunch, no-regrets strategy for better economics and a better environment. “In the case of electric power production, cleaner can be cheaper,” Lay explained.

The old paradigm suggests just the opposite: If you want a cleaner environment, you have to pay for it through higher electricity prices. Not true: cleaner air and lower levels of pollution are “free” when a natural gas fired power plant produces electricity, because natural gas power production is generally 30 percent cheaper, per kWh, than coal fired power production. A cleaner environment is a byproduct of choosing the least costly economic alternative.

Meanwhile, Enron’s president and COO Richard Kinder urged state regulators in a meeting of the National Association of Regulatory Utility Commissioners to facilitate, and even force, electric utilities to end their coal bias. Kinder insisted that regulators had a responsibility to ensure that utilities fairly weighed all costs, capital and operating, as well as preapprove long-term gas agreements that locked in cost savings up front. Regulators should also resist the practice of favoring indigenous coal in certain coal states, Kinder added.

Coal pushed back. Richard Lawson of the National Coal Association (NCA) wrote a four-page letter, even screed, to the American Gas Association and INGAA (the two gas-industry trade groups of which Enron was a member). Potential pipeline explosions and a “notorious historic record of gas prices to spike on any pretense” were among the “substantial and as-yet unremedied weaknesses” of gas, Lawson warned. A Natural Gas Standard could lead to a “Solar Standard” or a “Wind Standard”—and “more regulation than even Eastern Europe’s unemployed central planners dreamed.”

Lawson also reminded gas interests that they were fossil fuels too: “Those who would live in the figurative greenhouse shouldn’t throw stones from inside to those outside it; they are likely to be thrown back sooner or later.”³⁰

“We have 300 years of coal and know we can sell it without a lot of price volatility,” another NCA official told the press. “Coal is still the cheapest fuel on a Btu basis and with clean coal technology, it can be burned cleanly to meet all the new emission requirements.”

This rebuttal ducked the let-the-market-decide call of the Natural Gas Standard. Enron’s long-term, fixed-priced offerings allowed coal and gas investments to be economically assayed up front. (“I repeat,” Lay would say, “Enron is now prepared to guarantee gas supply and gas prices for fifteen years, even under contracts starting two to three years from now.”) Fuel costs might still be cheaper for coal than for natural gas, but the higher up-front costs for a coal plant had to be factored in. Enron had done this math, using realistic assumptions.

The Natural Gas Standard was the start of Enron’s move from reactive to proactive messaging and politics. But the standard itself was about removing malincentives in public-utility regulation that worked against free-market consumerism.

Environmentally, the standard was about best-technology to meet existing law and what might legislatively or administratively come next. And that could involve not only tightening standards for criteria pollutants but also expanding the regulated list to include CO₂ emissions, where gas handily beat coal.

Getting Gas to Green

Enron’s two-front civil war within the fossil fuel industry had natural gas warring against coal on the one side and petroleum on the other. But Ken Lay’s well-researched, ably orchestrated effort inspired another split, this one within the hitherto anti–fossil fuel, anti–industrial environmental community.

“Natural gas, until recently, tended to be lumped in with the bad guys,” wrote natural gas scribe Daniel Macey. “Now the question is whether to let natural gas into the environmental camp.” Behind the rethink? “Natural gas executives are trying to turn the blue flame green as they find in environmentalists a new marketing tool for their ‘clean-burning fuel’.”

The most notable gas-is-green convert was Worldwatch’s energy specialist Christopher Flavin. Flavin took a liking to Lay and vice versa. Flavin understood not only that natural gas was environmentally superior but also that industry infighting could break hydrocarbon’s grip on government policy. “A major political realignment in the energy world could lead to enormous policy changes and, ultimately, to a new energy system,” Flavin strategized. Ken Lay, he knew, was a powerful industry friend, a change maker, for the Environmental Left.

The National Wildlife Federation also looked to gas. “Considering natural gas as a bridge fuel means just that,” stated president Jay Hair. “Accelerated work has to go forward on renewables and efficiency so that the bridge gets us where we want to go.”

Not so fast, retorted Greenpeace. “Natural gas is paving over these clean renewables and efficiency programs,” stated Fred Munson of the organization’s global-warming campaign. “Natural gas is not clean and is not any better than oil and coal as far as emissions go,” referring to methane leakage in particular, a potent greenhouse gas.³⁴

The natural gas–environmentalist alliance was an example of the Bootleggers-and-Baptists lobbying strategy, whereby profit seekers (bootleggers) ally with public interest groups (Baptists), such as, in this case, environmental groups organized as the National Clean Air Coalition, to win a special regulation, a tax provision, or public money.

Compromise and short-sightedness were necessary. Gas interests sold out their fossil fuel brothers to join environmental pressure groups that might later turn on them; environmentalists had to embrace the least-polluting fuel for the time being. This alliance was the result of the planning and salesmanship of Ken Lay.

The alliance reflected something else: the demotion of ad hoc, command-and-control policies by environmental groups in favor of holistic emission fees and tradable permits from which decentralized choice would result. “In shifting more to market-oriented solutions,” Lay noted, “environmental leaders are speaking the businessman’s language.” The Environmental Defense Fund, in particular, would champion setting an overall allowance cap for trading the right to emit carbon dioxide emissions, joining air-permit trading for SO_X and NO_X legislated in the 1990 Clean Air Act.

Enron as a market maker for emissions was more interested in cap-and-trade policy than in a carbon tax. Enron-ex Jim Rogers, who was eager to convert his electricity units from coal to gas to receive CO₂ credits to sell, was even more partial to cap-and-trade. Rogers, like Lay, was waging civil war with his fellow electric utility executives, using Lay’s political capitalism model.

Getting gas to green needed a fractious industry to come together for common goals. In late 1991, the major gas trade groups (AGA, INGAA, NGSA, IPAA) united to form the Natural Gas Council. Its $15 million advertising budget was intended to improve methane’s image and increase annual demand 13 percent in five years (to 22 Tcf by 1996).³⁵

“The gas industry has talked for a long time about burying the hatchet and then burying coal, and this council seems like the right thing to do,” an industry analyst opined in the Wall Street Journal. A somewhat skeptical John Jennrich reminded his National Gas Week readers that this was new territory. “Competition within the gas industry is just as keen as interfuel competition,” he remarked. “History has seen members of this new Natural Gas Council at each other’s throats in courtrooms, commission hearing rooms, and legislatures all over the land.”

But incremental cash flow was a great peacemaker, and the gas industry writ large—facing low prices and squeezed margins on one end and disgruntled customers on the other—would give it a try.

Getting Bush to Rio

President Bush was a moderate Republican, not the second coming of Ronald Reagan. When it came to environmental issues, Bush the elder wanted applause from the green-colored intelligentsia and media. And some of his trusted advisors, such as EPA head William Reilly and White House Counsel C. Boyden Gray, liked the progressive nature of the global-warming issue.

Bush restored federal subsidies to the Carter-era renewable-energy and energy-efficiency programs that had been cut under Reagan. All-Things-to-All-People Bush also signed the Clean Air Act of 1990, which took the acid-rain scare at face value, a signal about his openness towards the global-warming issue to come.

Bush needed a push on climate given the tepid support or outright hostility of his political party. It came from Bush’s go-to business executive on energy and related environmental issues, Ken Lay, whom Bush had appointed to advisory committees with the Environmental Protection Agency, the Department of Energy, and the Department of Commerce. Lay was chosen for the President’s Commission on Environmental Quality as well.

Lay’s embrace of climate-policy activism made him a natural to be chosen as the founding chairman of the Business Council for a Sustainable Energy Future (1992), later Business Council for Sustainable Energy (BCSE). The group was composed of firms out to benefit from CO₂ regulation. Joining Lay in leadership roles were Arkla CEO Thomas “Mack” McLarty, soon to become White House Chief of Staff in the Clinton administration; Michael Baly, head of the American Gas Association; and Senator Tim Wirth (D-CO). The Business Council’s advisory panel was headed by Christopher Flavin, vice president of research at Worldwatch Institute, whose work was central to the sustainability views of Lay.³⁶

The environmental movement had its business-friend-in-a-high-place with the Bush administration. And Lay did not disappoint when he went all out to persuade a conflicted George H. W. Bush to attend—to legitimize—the Earth Summit in Rio de Janeiro in June 1992, which kicked off a global effort to address a global-commons issue of manmade greenhouse gas emissions.

“I am writing to urge you to attend the upcoming United Nations Conference on Environment and Development scheduled for early June in Brazil and to support the concept of establishing a reasonable, non-binding, stabilization level of carbon dioxide and other greenhouse gas emissions,” Lay wrote Bush on April 3. “This stabilization level should serve as a useful public policy guide, not a policy mandate,” the letter continued. “Moreover, I believe a market-based policy approach is the most cost effective and environmentally beneficial method to achieve greenhouse gas stabilization.”

Getting the president to Rio was no small task for a political party that was highly suspicious of the global-warming scare and a UN-led global governance push. Lay’s letter sought to stake out the middle ground.

“The demagoguery on both sides of this issue has been extraordinarily fierce.” Lay allowed. “Frankly, I do not believe the oceans will boil in a few years if we don’t address greenhouse gas emissions, but I also do not believe the U.S. will suffer from economic ruin if prudent steps are taken to reduce CO₂ emissions in order to protect the global environment.” Then came his no-regrets pitch:

In fact, if pursued through market-based policies, a reduction in greenhouse gases should result in a cleaner environment, cheaper electricity, and more American jobs.

Among other industries, I am convinced that America’s hard-pressed domestic natural gas industry would benefit substantially from a market-based approach to reducing CO₂ emissions. Natural gas is our cleanest fossil fuel and through its increased use in electric power generation could play a major role in reducing CO₂ emissions and delivering lower electricity prices to consumers….

Natural gas electric power generation is not only cleaner, it is cheaper—at least 30 percent less costly than coal-fired electricity generation over the life of the plant using long-term natural gas prices currently offered by Enron and others. Natural gas power plants have also proven to be significantly more reliable than coal or nuclear power.

The letter ended:

I urge you to provide leadership on this important global environmental issue. Not only will many U.S. industries benefit from measures to reduce greenhouse gas emissions, including the natural gas industry, but with the appropriate market-based policies, the measures will result in a cleaner environment, cheaper electricity, more American jobs, and a reduced trade deficit.³⁷

Bush went and spoke. Although environmental pressure groups wanted more, the president gave the global-climate negotiations a beachhead. “The United States fully intends to be the world’s preeminent leader in protecting the global environment,” he stated. “Environmental protection makes growth sustainable [as recognized] … by leaders from around the world [at] … this important Rio Conference.”

Bush signed the Framework Convention on Climate Change Treaty at the Summit, which the Senate unanimously ratified, given its voluntary—not mandatory—greenhouse-gas GHG reduction goals. The issue was now joined, with tens of thousands of intellectuals, campaigners, and government representatives working on the next steps to override market choices with edicts.

Enron’s involvement with the global-warming and climate-change issues would only grow in the years ahead. Existing profit centers were aligned to benefit from mandatory carbon-dioxide reductions, and new profit areas would be added. Superpolitical Enron would work behind the scenes for national and international government policies to ration (price) emissions of this otherwise unregulated nonpollutant.³⁸ The Lay-led effort would lead one expert to declare Enron “the company most responsible for sparking off the greenhouse civil war in the hydrocarbon business.”

From Bush to Clinton-Gore

“Lay said he does not consider himself a Republican,” wrote Kyle Pope in his Lay profile in 1991. Indeed, Lay had supported a variety of Democratic candidates and office holders, and some of his most important issues had more Democratic than Republican attraction. Still, Lay remained all-in with his friend in the White House, George H. W. Bush.

Lay had chaired the Bush-Quayle Houston Finance Committee in 1988 and was a member of its National Steering Committee. At Bush’s request, Lay was the force behind the Economic Summit of Industrialized Nations, hosted by Houston in 1990. Lay helped plan the Presidential Thank You Celebration in Houston in the same year.

Bush reciprocated, appointing Lay to the President’s Council on Environmental Quality, as well as the President’s Export Council. Lay was on the advisory board to the Secretary of the Department of Energy, and DOE head James Watkins invited Lay to continue serving on the National Petroleum Council.

What Lay did not do is join the Bush administration, despite an opportunity to succeed Robert Mosbacher as Secretary of Commerce. “I did meet with the president, and I told him that I’m not ready to leave Enron for a variety of personal and professional reasons.” With four children in college and many other financial obligations, as well as a growing worldly perch in Houston, few found his decision surprising or difficult to make.

Come reelection time, Lay chaired the host committee for the 1992 Republican National Convention, held in Houston. Enron donated $250,000, and Lay raised much more, just as he had four years earlier. But Bush had real competition on the energy front, and Ken Lay found himself in the middle of it—partly for reasons of his own making. With presidential candidate Bill Clinton and mainstream environmentalism buying into natural gas as a bridge to energy sustainability, and with the upstream industry struggling in a low-price environment, Lay had some shoring up to do for the incumbent. The civil war within the fossil fuel industry was now a civil war between political parties in a presidential election.

Gas executive Robert A. Hefner III called Clinton “the first candidate ever to run for president who really understands that natural gas is different from oil and what natural gas can do for our country.” And Clinton’s running mate? “Al Gore has been a long-term friend for the natural gas industry and helped pass the Natural Gas Policy Act to get the deregulation of natural gas on the road.” But it was more than Hefner. Shell, Texaco, the American Gas Association, Enron, and others were splitting their contributions evenly between the political parties.

Lay answered Hefner in Natural Gas Week. “The good news is that both the Clinton-Gore team and the Bush-Quayle team say they are strong supporters of natural gas.” But, Lay continued, Bush’s first-term victories for gas were decisive. Bush enacted the Clean Air Act Amendments of 1990, which helped gas politically at the expense of coal. Bush’s National Energy Strategy, much of which was about to become law as the Energy Policy Act of 1992, streamlined natural gas pipeline permitting; amended the Public Utility Holding Company Act of 1935 to facilitate independent power production (such as by Enron); subsidized compressed natural gas to break into the commercial transportation market; and provided alternative minimum-tax relief to independent drillers. Comparatively, Lay added, it was Democrats who were behind most of the 1970s energy legislation, including the infamous Carter-Mondale Fuel Use Act of 1978.

“Let me conclude by saying that I am also putting my personal support into the re-election … for what I am confident they will not do,” Lay closed. “They will block by veto or otherwise any attempt to reimpose wellhead price or other regulation on our industry as markets continue to tighten up.”

This debate attracted other vigorous voices. Warned Vinod Dar, former head of gas-marketing pioneer Hadson Gas Systems: “The gas industry should ponder carefully before rushing to embrace groups who claim that the organizing principle of the world today is the environment.” Industry gadfly Edwin Rothschild, the energy policy director of Citizen Action, begged to differ. Noting how the Bush administration had lost opportunities to help natural gas, Rothschild predicted “a natural gas industry revitalized by a Clinton-Gore administration.”

As Election Day approached, Hefner took a page out of Ken Lay’s playbook to argue in Natural Gas Week:

Clinton and Gore believe that by meeting global carbon dioxide goals we will not lose jobs (as the Bush administration insists we will), but will increase domestic employment as well as enhance our economy…. [They] believe all of this is possible because of their belief in the American people and their great spirit, ingenuity, and technical ability.

He closed: “Vote for Clinton and Gore—the natural gas industry’s Dream Team.”

In his final defense before Election Day, Ken Lay called Bush the “energy president” for his 100-proposal National Energy Strategy, “the most comprehensive and balanced energy policy I have seen in over 25 years in the energy industry.” Lay concluded: “President Bush not only knows energy policy, he has lived it. George Bush is the ‘energy president’.”

Although Clinton-Gore won the election, the contest in the gas industry was a virtual tie. Natural Gas Week‘s Jennrich summarized the tickets on election eve: “In the end, energy appears to be an important part of Clinton’s economic plan, and within the energy spectrum, natural gas seems to be Clinton’s major fuel of choice.” The verdict? “He deserves the natural gas community’s vote.” Industry elders George Mitchell and Oscar Wyatt also declared for Clinton.

Bipolitical Enron was ready for either outcome, given Lay’s concurrence with the Clinton-Gore administration on the global-warming issue. Still, after the election, the Lay-Bush relationship continued. Lay fundraised for the George Bush Presidential Library Foundation, although his choice of the University of Houston (where Lay received his doctorate) was bypassed in favor of Texas A&M University as depository.

Soon, Bush fils would become the object of Lay’s entreaties. George W. Bush would be elected governor of Texas in 1995, whereupon Lay would be (re)-appointed to the Governor’s Business Council. Tellingly, it was Democratic Governor Ann Richards who had first appointed Lay to the council.

Enron favorably described to employees the prospects of a Clinton-Gore administration. “President-elect Clinton has said that the cornerstone of his national energy policy will be the increased use of domestic natural gas, both to reduce imported oil as well as to clean up the environment.” The November 1992 newsletter added:

There probably will be a great deal of attention devoted to global warming and a strong push for limitations or reductions of CO₂ emissions. Senator Gore has been an avid proponent of a strong global warming policy and has advocated reducing CO₂ emissions to 1990 levels by the year 2000. This should provide a real opportunity for gas since it emits 1/2 less CO₂ than coal and 1/3 less than oil.

Inside Enron, Terry Thorn was the big winner from the election. The former president of Mojave Pipeline and then Transwestern Pipeline, the quasi-academic with business sense and an affable management style, the core Democrat and Friend of Bill, had a new title: Senior Vice President, Government Affairs and Public Policy. Operating from Houston, Thorn would oversee the busy Washington office led by Joe Hillings and Cynthia Sandherr.

The regime change was hailed by the natural gas industry. “Natural Gas Industry Sees New Ally in Clinton” read the headline in Natural Gas Intelligence. “Oklahoma Cheers ‘Dream Team,’ Sees Gas as Priority Issue” reported Natural Gas Week. INGAA and AGA gushed positively, while gas producers were supportive but concerned about drilling policies under Gore.

“New Energy Secretary Good for Gas” read another headline when Clinton tapped Hazel O’Leary as Secretary of the US Department of Energy. Enron’s Thorn wasted no time inviting O’Leary to Houston to explain the Clinton administration’s energy agenda. “Quite frankly, you are an unknown quantity for many people in the industry and few are aware of the aggressive and innovative initiatives you are pursuing at DOE,” he wrote.³⁹

Meanwhile, Rich Kinder reached out to O’Leary’s number two, Deputy Secretary of Energy Bill White, a Houstonian who would now learn energy on the fly as a Friend of Bill. “You are exactly the type of dynamic, hard-charging person we need in federal government today,” Kinder wrote. Many more missives would come from Enron’s Washington office as Lay’s political vision of natural gas atop the environmental and economic agenda took shape.

At the 1992 Rio Earth Summit, President Bush signed a 178-nation agreement called Agenda 21 (as in 21st century) calling for the international community to take a “more integrated approach to decision making … to facilitate the integrated consideration of social, economic and environmental issues” for sustainability. Pursuant to this agreement, and on its first anniversary, President Clinton created the President’s Council on Sustainable Development (PCSD) to “develop and recommend to the President a national sustainable development action strategy that will foster economic vitality.” The crucial term sustainability was defined as “economic growth that will benefit present and future generations without detrimentally affecting the resources or biological systems of the planet.”⁴⁰

Ken Lay was appointed to the 25-member group, joining energy CEOs Kenneth Derr of Chevron and Richard Clark of Pacific Gas & Electric. The rest of the group was from the Environmental Left, with administration officials and such pressure-group leaders as Fred Krupp (executive director of the Environmental Defense Fund) and John Adams (executive director of the Natural Resources Defense Council). A few other corporate representatives were mixed in with mostly nonprofit advocacy representatives—but none from the free-market side.⁴¹

“There has to be an increased dialogue between the private sector, environmentalists, and the government,” Lay told the press, “if we are to solve some of these environmental problems … in ways that are economically efficient.” Clinton himself commented on the new task force: “America can set an example by achieving economic growth that can continue through the lifetime of our children and grandchildren because it respects the resources that make that growth possible.”

PCSD was Al Gore’s pet creation. “We must make the rescue of the environment the central organizing principle for civilization,” he had stated several years before in Earth in the Balance. “Whether we realize it or not, we are now engaged in an epic battle to right the balance of our earth, and the tide of this battle will turn only when the majority of people in the world become sufficiently aroused by a shared sense of urgent danger to join an all-out effort.”

Ken Lay, privately, was not a big Al Gore fan. But he was happy to let Gore arouse concerns for natural gas to exploit. “In my judgment,” Lay lectured to environmentalists, “natural gas will play a dominant role in helping us achieve ‘sustainable development’—not only in the U.S., but around the world.”

Environmental Enron

“At Enron, we always had a sensible environmental ethic,” reminisced Mick Seidl five years after the company’s collapse. Lay’s former president at Houston Natural Gas and then Enron explained:

We tried to be as green as possible. We were pushing natural gas as an alternative to diesel fuel and coal, which are heavier polluters…. We always cared and talked about the environment because we thought it gave us a competitive advantage.

“I’m not an apologist for capitalism, nor am I an apologist for the environmental movement,” he concluded. “I’m an apologist for good common sense.”

Lay too favored reasonableness in the abstract: “What we really need in this country and others is to prioritize our environmental goals based upon some good cost-benefit analysis” instead of “a fairly emotional and ad hoc basis.” Indeed, as a large vertically integrated energy company, Enron had many environmental issues that were more about EPA command-and-control than efficient environmental remediation. Lay mentioned toxic-waste remediation, whereby cheaper cleanup alternatives were foregone. Transwestern Pipeline was at the center of a multimillion-dollar PCB cleanup that was not of Enron’s making.⁴² Lay heard the stories from the field, where zealotry trumped science and common sense. He wanted reasonable regulation, the natural gas advantage aside.

Both before and after Seidl’s exit in January 1989, Enron was playing its high cards—and exercising its fiduciary responsibility. But when Lay’s lobbying went from reactive to proactive, from removing regulation to imposing it, from promoting market neutrality to rent-seeking, Enron crossed a major public policy line.

Lay’s oil-import fee was problematic legally, practically, and intellectually. Enron’s all-in climate crusade controversially accepted one interpretation of physical science as decisive and ignored the hard political-economy questions of how to regulate carbon dioxide effectively and economically. When it came to CO₂, it was Enron first, and energy consumers and taxpayers last.

Lay’s climate crusade also positioned Enron for what would soon come: investments in solar power, wind power, and energy-efficiency services. “The energy company of the future has to be very much involved in three energy forms: natural gas, renewable energy, and conservation,” Lay opined. But none of Enron’s forthcoming investments in these areas would prove profitable, quite unlike Enron’s coal bet later in the decade.⁴³ Enron’s forays into wind and conservation also took business away from natural gas. On the transportation side, Enron’s modest NGV investment would be lost, and the company badly overplayed its hand with its MTBE bet. Still, natural gas had plenty of politics going for it, and green imaging helped ENE as a momentum stock. Lay, in other words, had his reasons.

Politicking Elsewhere

Enron’s multitudinous political interactions kept its founder busy elsewhere, as it did the company’s growing government affairs staff. Business-unit executives were not immune. At Lay’s urging, and by setting the example, virtually all executives donated to Enron’s political action committee (PAC), which in 1992 dispensed $281,000 for federal political races.

Politically powerful consultants were signed up. Gulf War hero Thomas Kelly, who briefly joined Enron’s board of directors after retiring from the military in 1991, was hired to push a gas-fired power plant project in Kuwait. In 1993, Lay hired former Secretary of State James A. Baker and former Secretary of Commerce Robert Mosbacher to push negotiations in the Middle East (Mosbacher briefly joined Enron’s board). Not much would result from Lay’s “Big Shot buying binge,” but press releases about early negotiations kept Enron in the news.

A risk-taking, first-in mentality made Enron the leading recipient of taxpayer-backed financing from the Overseas Private Investment Corporation (OPIC) and the Export-Import Bank (Ex-Im), as discussed in chapter 6. When OPIC and Ex-Im funding was threatened by Congress, Lay and Enron’s Washington office went on red alert to counter fiscal conservatives and some environmental groups.

Tax Policy

Ken Lay’s negative-externality argument against oil and coal relative to natural gas led to his advocacy of differentiated tax policy. An oil-import fee was a border tax, better known as a tariff. Lay also advocated a carbon tax, although he preferred cap-and-trade regulation of CO₂ emissions (a back-door tax) to give Enron another commodity to trade in air emissions.

The Clinton Btu tax proposal in early 1993 was relatively advantageous to natural gas, with a 13 percent price increase ($0.26/MMBtu) compared to oil’s 18 percent ($3.47 per barrel) and coal’s 26 percent ($5.57 per ton). Renewables, as well as methanol/MTBE and ethanol/ETBE were not covered.

Lay’s support, however, evaporated when the Treasury Department decided to tax natural gas at the city gate, not at the wellhead, which severely impaired negotiation of Enron Gas Services’s term deals between February and July of that year. EGS, Enron, and the entire gas industry united in opposition.

“BTU Tax Is Dying Death of a Thousand Cuts as Lobbyists Seem Able to Write Own Exemptions,” read a midyear headline in the Wall Street Journal. The tax proposal died. “Our industry stopped the Btu tax by making our voices heard,” crowed Ron Burns, now vice chairman of EGS. But with so many losers and so few winners, the verdict was virtually predestined.

In his role as chairman of the ad hoc lobby group Coalition for Competitive Capital, Ken Lay lobbied for a permanent 10 percent investment tax credit (ITC) in place of a one-year credit as proposed by the Treasury Department. Lay justified his request before Congress as an “economic recovery strategy” and a requirement for “international competitiveness.” Equipment used to produce and transport energy, of which Enron had plenty, explained Lay’s interest.

Lay warned against increasing the overall corporate tax rate to offset the ITC revenue loss (estimated to reach as much as $17 billion annually). He also recommended reducing the capital-gains tax rate as “another potentially significant spur to our economy.” Lay also urged lawmakers to extend the Section 29 tax credit for tight-sands gas, the top public policy priority of Enron Oil & Gas.

An Energy Philosopher?

The private-public dynamo with such titles as Mr. Houston and Mr. Natural Gas was All Enron, All the Time. Mighty Lay and Mighty Enron was the gist of Kyle Pope’s profile. How else to explain the man who was doing so many things in so many places with so many constituencies?

With his academic credentials, a novel strategy that split the fossil fuel industry in three, and deft lobbying of pragmatic environmentalists, Lay donned the mantle of energy expert and big thinker. Whereas other energy executives thought in terms of quarters and the upcoming year, Lay’s messages had a social-good, longer-term quality that seemed to set him apart.

The Age of Oil was about to decline, Lay declared. Natural gas would bridge the fossil fuel era to a renewable-energy epoch. “I would guess that, within a century or so, we are going to see a big share of our total energy needs served by renewable energy,” Lay stated. A complete transformation to 100 percent renewables was forecast in the range of 200 to 300 years.

But was Enron’s architect an energy prophet—or a faux philosopher sanctimoniously promoting his bottom line? Ken Lay certainly read Christopher Flavin, the most thoughtful of the environmental energy activists. Flavin’s books and booklets championing a government-directed transition to renewables were worth study.⁴⁵ But the Worldwatch expert assumed rather than justified his fossil-fuel alarmism. His lawyer-like briefs did not carefully consider opposite views. His footnote-laden work was glorified advocacy, not true scholarship.

Lay did not consider the fundamental physics behind consumer energy choices. Conventional energies were cheaper and more reliable than politically correct renewables (wind and solar) because of their density (versus diluteness) and built-in storage (versus intermittency). William Stanley Jevons explained the difference in his 1865 tome The Coal Question (described in chapter 7 of Capitalism at Work). Vaclav Smil and others explained the why behind market choices in Lay’s time, if he had really wanted to know.

Dr. Lay (as he liked to be called in public) was a corporate executive in a big hurry, not an analyst. Rather than work from consumer-driven market reality out, he worked inward from politics and imaging. “To [Lay] knowledge was a means to an end,” remembered Terry Thorn. “He lacked what I would call an intellectual curiosity, by which I mean acquiring knowledge outside what you specifically benefit from.”

Natural gas was Lay’s niche, and he did not despair going from his high cards (gas for electric generation) to the low cards (compressed gas for vehicles). Lay was not satisfied with gas’s emission advantage with the politically defined criteria pollutants; he was ready to indict what had hitherto been deemed a nonpollutant, carbon dioxide, to help natural gas at the expense of oil and particularly coal.

Lay was fork-tongued at times. He was all for lower electricity prices when it came to natural gas in power generation (“cheaper electricity means economic growth and job creation”). But he was for higher prices when it came to pricing CO₂ for fossil-fueled electricity generation, not to mention higher gasoline, diesel fuel, and fuel oil prices from oil tariffs.

The PhD economist forgot his education when convenient. Lay’s complaints about “irrationally low natural gas prices” and accusations of predatory pricing by integrated major oil companies contradicted the basic economics of variable-cost production and opportunity-cost decision making.

The balance-of-trade argument—which reasons that nations gain greater wealth from money coming into the country (because of exports) than from money going out of the country (because of imports)—had been refuted by economists since Adam Smith’s time. Yet Lay deployed it to urge the use of natural gas instead of oil. “The U.S. balance of trade deteriorates as America’s growing dependence on foreign oil increases,” he opined, not recognizing that imports pay for exports and that trade per se was good. A negative trade balance for Texas or Houston versus its neighbors, after all, meant nothing. The statistics were not even collected.

Compared to Lay, Samuel Insull (of Edison to Enron) was an intellectual and truth-seeker despite the flaws that overtook him late in his career. “Insull was authentic … hands on … realistic”—a true company builder and leader in his prime. Insull was a Samuel Smiles man; Lay was otherwise, and thus imprudence came to envelop his corporation. That would make for a risky, rough road ahead. So would a political capitalism model of management that contradicted the epithets bestowed on Lay: “the philosopher-king of energy deregulation” and “Enron’s free-market visionary.”