Jonathan Levy

Enron (2001)

From his birthplace of Huntsville, Texas, Captain James A. Baker (1857-1941) moved to Houston in 1874.  Right away, he joined the Houston Light Guard, a militia company organized by ex-Confederates to “redeem” the South from northern Republican rule.  There, he met fellow member William March Rice, a former owner of slaves, and soon a wealthy investor, who would be the benefactor of Rice University.   In 1877, Reconstruction drawing to close, Baker co-founded the law firm known today as Baker Botts.  Rice was his leading client, followed by railroad corporations.  A century later, Baker’s grandson James Baker III (1930-), also a lawyer, would serve in multiple  capacities to his Houston friend, President H.W. George Bush, including as his Secretary of State.

In 2002, not too long after Baker had successfully guided George W. Bush through his victory over Al Gore during the contested 2000 presidential election’s Florida recount, I was working as a paralegal for Baker Botts, now a firm with a global reach, but still headquartered in Houston’s One Shell Plaza.  In the mornings, I would walk a few blocks out of my way in order to pass by and gaze at Pennzoil Place, before arriving at the headquarters of Reliant Energy, a corporation founded after the 2000 deregulation of the Texas consumer electricity market.  In a windowless room, I listened to tapes of energy futures traders’ transactions for possible evidence of the illegal manipulation of the deregulated California energy market.

The California energy crisis of 2000-1 was a series of electricity shortages, brownouts, and blackouts, which saw prices spike in the Pacific states by as much as 800 percent.  Clearly, drought conditions and California’s unwillingness to build new power plants, due to environmental concerns, were partly to blame.  I listened to hours upon hours of energy futures traders talking on the phone in order to eliminate conversations about children’s soccer games or marital squabbles so that the real lawyers could then focus upon the trading to ascertain if corporations had manufactured artificial power shortages.  In this market, the largest company had been Enron.  Had been, that is, because Enron had declared bankruptcy in 2001.

Jeffrey Skilling was yet another transplant from the deindustrializing Midwest to Houston.  In 1990, a Houston-based McKinsey & Company consultant, Skilling departed for Enron. Led by CEO Ken Lay, Enron had until then mostly been taking advantage of the ongoing deregulation of the natural gas industry – long a poorly regulated market, which deregulation was serving quite well.  Second in command by 1997, Skilling quickly set about transforming Enron into a financial services and self-styled “tech company.” 

The business plan for the new Enron was to “make markets” for new energy products, including “synthetic” energy derivatives, which are essentially predictive constructs of data.  The giant atrium of the company’s downtown headquarters became a showcase trading floor.

1500 Louisiana St., Houston, Texas. Photo: Capital Realty Group.

At the turn of the twentieth century, the company’s success was inescapable in Houston.  It was the late 1990s, the era of the dotcom stock market boom.  So success meant a higher and higher stock price.  Enron stock, trading at around 40 into 1998, nearly hit 90 by the end of 1999.  At Enron Field, opened in 2000, home to the Houston Astros, in addition to balls and strikes the scoreboard scrolled the spot price for West Texas Intermediate Crude.

7 Apr 2000: Pitcher Octavio Dotel #41 of Houston Astros throws the first pitch during opening day in the game against the Philadelphia Phillies at Enron Field in Houston, Texas. The Phillies defeated the Astros 4-1. Credit: Ronald Martinez /Allsport.Energy systems are physical infrastructures, of drills, platforms, rigs, and pipelines, through which human populations tap flows or stocks of energy.

Enron’s stock price soared, however, not because – in the midst of market deregulation – it had brought about new efficiencies in the physical production and delivery of energy.  It had not.  In California, it turned out that the firm, and others (including Reliant) had in fact manipulated markets by shutting down power generation plants in order to drive up both the spot and forward price of electricity.  Much more than that, however, Enron was a late 1990s financial success because it had convinced Wall Street that it was a New Economy company.  “Enron Online,” an online trading platform, arrived in 1999.  The company constantly spoke of New Economy “innovation,” “flexible networks,” and “optionality.”  But all it really did was to enable financial markets to constantly price and re-price the future.  It brought future market prices into the present.  It did not so much deliberately shape the future.  Enron had a division that built actual power plants (in India especially).  But it had stopped talking much about the physical realities of energy. 

In 2000, the business journalist Bethany McLean wrote a famous piece in Fortune questioning how, exactly, Enron made profits.  It turned out the firm created the illusion of profit, by shifting trading losses into accounting gimmick “Special Purpose Entities.”  Their technical architect, CFO Andrew Fastow, went to jail.  So did Skilling, while attributing his downfall not to malfeasance but rather to the fact that “the market did not like” him.  Lay was bound for jail, but had a heart attack and died first.

I recall listening to those tapes.  There was the brashness of the energy traders.  Most of them were men.  They were jocular, at times juvenile.  They did not talk like grownups.  The kind of chatter reminded me of the banter of the baseball teams I played on in high school and college.  But there was a form of magical thinking going on.  Somehow, the market pricing of the future would make for a more efficient physical energy infrastructure.  But how, exactly?  No one could really say. 

Since the Paris Agreement of 2015, a number of financial institutions have tried to find ways to quantitatively assess the physical effects of climate change, if only, as one investment officer puts it, “from a cash flow perspective.”  Decades ago, when the risks of climate change were already well known, Enron had succumbed to the postindustrial (post-physical?) fantasy that all risk could be financially traded, perfectly hedged, and completely eliminated.  This happened in Houston of all places.  Meanwhile, a carbon-based energy system, of industrial vintage, was further and further entrenched.    

Platts map illustrating the area’s crude oil storage and distribution projections.


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