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Date: Mon, 21 May 2001 08:32:17 -0500
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Subject: In an Era of Deregulation, Enron Woos Regulators More Than Ever
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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