How Enron Did Texas
With prospects looking up, Enron stepped up its campaign, buying statewide television and billboard ads hawking competition. The company funded front groups, like Texans for Affordable Energy, to simulate a grassroots call for deregulation. "That was a big joke, because whenever we went to community meetings we never heard a single person voice an interest other than people who worked for the companies involved," Bailey said. In fact, Texas energy prices were trending downward in the late 1990s, a fact that Wood freely admitted at the time. Because the Texas dereg formula called for freezing rates for several years, dereg initially would mean higher rates than if the legislature had simply done nothing. "But it all became this market argument that Enron put out there," Bailey said. "We had to have a free market; a free market will give people choice." Enron was simultaneously lobbying dozens of state capitals, as well as pushing its now notorious proposal for federal deregulation of online energy trading, which led to the California energy meltdown. Enron executive Jeffrey Skilling told the Fort Worth Star-Telegram in 1996 that Texas's average rate of 6 cents per kilowatt hour was "absurdly high." He said, "There's nothing in this market that suggests we won't see the same savings of 30 to 40 percent we've already seen elsewhere." (This was, of course, several years before price spikes and blackouts began hitting California.) The company hosted luncheons for Texas legislators at posh downtown hotels in Houston, where Lay and other executives gave elaborate presentations on the merits of competition. And always there was plenty of campaign cash--and arm-twisting--to back up the pitch.
As Enron made inroads with legislators, the IOUs began to see the writing on the wall. Bush's support for Enron was a big factor. "It was pretty obvious that the Bush/Pat Wood/Rick Perry triangle was Enron-oriented," one Democratic consultant said. "Without that, the IOUs would have run over them." Wood sweetened the deal for the IOUs by suggesting that, as with California's deregulation plan, they might be allowed to recover debts incurred from bad investments, or so-called stranded costs. In a deregulated environment, inefficient power plants, like Texas's two nuclear facilities, would be worth much less than the value their owners currently claimed for them, since they would not be able to deliver power as cheaply as more efficient competitors could. Utilities would thus be forced to write down the value of those plants, and investors would have to absorb huge losses.
In mid-1998 Wood proposed that utilities--under the guise of preparing for competition--be allowed to raise rates temporarily to recover those stranded costs from consumers, a windfall worth billions. When the 1999 session rolled around, the IOUs were finally on board. "It was free money for Texas Utilities and Houston Lighting and Power, so they figured if it was going to happen, they might as well take what they could get," said Janee Briesemeister of the Consumer's Union. (The method of measuring stranded costs was highly speculative, and, as it turned out, the projected losses have largely failed to materialize in Texas. Some lawmakers have called for a refund of much of the stranded-cost money collected by the utilities over the past two years.)
When things looked rocky, Bush was there to shepherd the deal through the legislature. "He never lobbied us directly," Kevin Bailey said, "but his legislative guys worked it hard." Sometimes a little too hard. Bailey recalled one instance in which a House committee had just approved his pro-consumer amendment to assess more of the stranded costs to big industrial customers instead of individual ratepayers. (Convinced that the bill was destined to pass, many progressives reluctantly supported deregulation in 1999, seeking to get what good they could out of the process.) When the governor's mansion got word that Bailey had added a possible deal-killing amendment to the bill, Terral Smith, Bush's legislative liaison, raced over to the committee. "He pulled all the Republicans into the back room and convinced them to vote again," Bailey said. Smith's heavy-handed tactics miffed enough members that Bailey still prevailed by one vote. The amendment didn't kill the deal, but Smith watched the bill like a hawk the rest of the session, Bailey said.
When Bush called Wood to Washington last June to head the FERC, it was Governor Perry's turn to do Enron a favor. (Perry, the former lieutenant governor, came to office when Bush went to the White House; he has yet to face election as governor.) The devil in deregulation is in the details, and the contest was now being fought in the arena of the PUC's rule-making process. Perry's selection in June of Max Yzaguirre, chief of Enron's Mexico operations, to fill Wood's spot was carefully calculated. Documents released by the governor's office in late December show that Perry's staff debated long and hard about how Yzaguirre's nomination would be viewed. State law prohibits anyone who has worked for a Texas public utility or a direct competitor in the previous two years from serving on the PUC. Perry's staff rationalized that since Yzaguirre hadn't worked for any part of Enron that did business in Texas, his nomination adhered to the letter of the law. In any case, Perry figured, with the legislature recessed Yzaguirre would not face the scrutiny of a nominations committee for eighteen months. (The Texas legislature meets every other January for four months.)
Last fall, however, as interest in Enron's financial troubles increased, Yzaguirre amended his application to reveal that he had served as an executive on several North American subsidiaries of Enron, and things began to unravel. As pressure mounted on Perry in the wake of Enron's December collapse, the governor held fast to his appointment, even after the embarrassing revelation that Lay had personally donated $25,000 to Perry on June 14, 2001, the day after the Yzaguirre appointment. Perry called the timing a coincidence. (In a bizarre episode, Perry's bumbling staff also sought to hide Yzaguirre's criminal record--he shot a whooping crane in south Texas in 1989--from Democrats by redacting portions of his official application, which is a public document.) "I think we underestimated how firmly they would stand by Yzaguirre," said Democratic consultant Kelly Fero. "This was a question of a lot of money. This wasn't just a little payback--this was the guy who was going to oversee deregulation and an awful lot of people were going to get rich." Finally, on January 18, Yzaguirre stepped down.