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The Quiet Man Who's Jolting Utilities


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THE QUIET MAN WHO'S JOLTING UTILITIES

CEO Kenneth Lay is getting Enron ready for open electricity markets and shaking up a staid industry

He doesn't make a striking impression. Short, soft-spoken, with the big hands of the Midwest farm boy he once was, Kenneth L. Lay is unlikely to be taken for an energy mogul. Yet even though he's little known outside the insular natural-gas business, Enron CEO Lay is becoming the most visible and feared advocate of opening the nation's $215 billion retail electricity market to competition.

Bringing to his task a missionary zeal for electric deregulation and the confidence of a master strategist, Lay, 55, has already maneuvered Houston-based Enron Corp. past the nation's largest electric utilities in wholesale markets, which were deregulated three years ago. Selling primarily to utilities and municipalities, Enron saw its power revenues jump 236% last quarter, compared with a year earlier. Altogether, Enron expects electricity revenues to climb from $1.2 billion in 1996 to at least $3 billion this year, equal to a quarter of the revenues it makes in its core gas-trading business. That has put Enron in the catbird seat for the coming electric free-for-all: The company is by far the biggest player in the wholesale market; its 19% share is almost double that of its nearest rival.

Now, Lay wants a clear shot at the far larger retail market selling electricity directly to homeowners, businesses, and industrial consumers. This market has been the preserve of utilities since its inception. But traders such as Enron want to start buying cheap surplus power from utilities around the U.S., supplementing it with power from their own plants, and selling it in pricier markets.

So Lay is making the biggest gamble of his career, trying to supercharge the sputtering pace of deregulation even as he transforms Enron--a company that caters to a few big customers--into a consumer-savvy energy marketer. If deregulation roars ahead, the payoff could be huge. With the combined markets for retail gas and electricity estimated at $320 billion, Donaldson, Lufkin & Jenrette Securities Corp. analyst Curt N. Launer figures that by 2000, Enron could add $300 million a year to its profits for each 1% share of the retail market it gains. Enron, now a $13.2 billion company, could easily triple in size.

A deregulation slowdown would be costly, however: Enron is spending heavily on services and infrastructure. The head of one rival expects Enron to spend up to $500 million to develop its retail business. "If it takes 10 years to open a sizable residential market, [Enron is] toast," he says. "It'll cost too much."

"RENAISSANCE MAN." Lay's gambit comes at a critical time for the company. Setbacks in Enron's push overseas have already cooled its profit outlook, and its spending to move into electricity has forced Lay to abandon a 1995 pledge to lift profits 15% annually through 2000. Enron shares, now trading at about 40, have significantly trailed the Standard & Poor's 500-stock index for the past two years. So far this year, Enron is off 6%, while the index is up 15.5%.

Deregulation, meanwhile, moves one step forward, two back. After a strong start in California, which will open its $20 billion electricity market next January, efforts nationwide appear to be faltering. On May 20, passage of a federal law mandating open markets was declared dead for this year by the bill's sponsor. The same day, Texas lawmakers suspended work for two years on a bill to open that state's electricity market.

Pointing out that seven states have approved legislation to open markets next year, Lay is characteristically upbeat. "If anything, [deregulation is] going faster than we thought," he says. "There's no longer a debate on if it'll happen--it's when it happens." Such talk has made him and his company the btes noires of the utility world. "To listen to CEOs in the electric industry talk about Enron, you'd think they were talking about the devil incarnate," says James E. Rogers, CEO of Cincinnati gas and electric utility Cinergy Corp. and a former Enron exec. "There is genuine fear."

In nearly every state, Lay is facing off with utilities that are trying to avert or delay competition. In Texas, Enron's 10 lobbyists tangled with an army of 70 utility representatives. If opponents fear Lay, it's because no one else is pushing as fast or as hard--and because he's trying to repeat history. In the mid-1980s, Lay forced the pace of gas deregulation, then beat rivals into new markets, turning debt-laden Enron into the nation's biggest, most profitable buyer and seller of gas.

One of three kids in a Missouri farm family, Lay, who started hiring himself out as a part-time hand to local farmers at the age of 12, "learned to think on the back of tractors," says Oliver G. Richard III, CEO of Columbia Gas Systems Inc. and a former Enron executive. "I asked him once where he got his good ideas. He says, `It's riding around on a tractor in the flat plains of Missouri."' But Lay is no country bumpkin: Texas Senator Phil Gramm, a longtime Republican friend for whom Lay has worked as a fund-raiser, says there's "an element of the Renaissance man" about the well-read Lay, noting that he's "as comfortable talking about the ancient Greeks as he is the competitive selling of electric power." Gramm also credits Lay, who has a PhD in economics, with an ability to separate the important from the trivial. "He has the ability to step back from an issue and see the big picture, something that I don't see in a lot of people in business," says Gramm.

GAS "BANK." Lay also displays an unshakable confidence tempered by more than a decade of taking big risks and winning. In 1985, he helped create Enron, the fruit of a difficult merger between two small, struggling pipeline companies, Omaha-based InterNorth Inc. and Houston Natural Gas Corp., of which Lay was CEO. Abruptly named overall CEO because of infighting brought on by the clash of cultures, Lay quickly ended the squabbling by establishing a single headquarters in Houston.

But soon after, oil prices plummeted, siphoning off gas customers. Then the fledgling company lost $85 million in a crude-oil trading scandal. Still, Lay moved Enron ahead, building separate units to find, transport, and market gas. Recalls John M. Seidl, president from 1986 to 1988: "He just stood up and said, `We've got to figure out what's going on here.' He's always calm--asks, `What are our options? Let's figure it out."'

Lay also became known as an inspiring manager. "When you join Ken, you believe you are going to change the shape of the industry--that you're on a mission," says Cinergy's Rogers, who worked for him at HNG and Enron. W.J. "Jack" Bowen, a retired gas executive who employed Lay in two earlier energy posts, first at Florida Gas Co. and later at Transco Energy, says Lay motivates by being visible and giving managers freedom to operate, make mistakes, and grow. He reached out to employees at all levels, Bowen recalls: "He enjoyed getting out on the pipeline, going to compressor stations, talking to people, and making sure he really listened." Lay says he gives managers autonomy because that's what he wants himself: "If you get involved in building things, you tend to like being your own boss and being responsible for it."

After its rough start, Enron took off as Lay created a nationwide marketing presence. A breakthrough was the concept of a gas "bank" enabling the company to guarantee firm, fixed-priced gas contracts to industrial customers in a market where prices vary by the minute and regional prices differ widely. Lay's economic insight was to pool scores of long- and short-term contracts to eliminate the supply risk and minimize the company's price risk. Although the bank itself didn't take off, pooling contracts and tracking their cash flows enabled Enron to turn them into financial instruments that could be agggressively traded. "It was the start of a new industry," says Jeffrey K. Skilling, a former McKinsey & Co. consultant who joined the company in 1990 to develop its trading business and who became Enron president in January.

As natural-gas deregulation hit its stride, Lay's economic training and Washington insider's grasp of deregulation--he had done a stint in the Interior Dept. in the early 1970s--became Enron's greatest assets. "His economics background gives him an extra edge in taking apart a problem, figuring out the risks--and how to make money," says Seidl, an Interior Dept. colleague before he joined Enron. Recognizing early on that deregulation would turn the good-ol'-boy world of gas on its head, Lay snapped up former commissioners from the Federal Energy Regulatory Commission and regulatory lawyers who didn't wear the blinders of the old era.

Then, having triumphed in the U.S. with gas deregulation, Lay turned his attention in the early 1990s to creating new gas markets overseas, building pipelines and power plants in energy-starved countries. The plan was a hit in places such as Argentina and the Philippines. But in 1995, in Dabhol, India, Enron hit a wall. When the company's proposed $2.8 billion power plant there became a symbol of too-lenient terms for foreigners, a new government created obstacles leading to a yearlong construction delay. Enron agreed to increase the project's output and reduce its cost, and the plant, where construction is wrapping up, should begin operation next year.

OREGON DUSTUP. Enron is still developing overseas projects, but other delays and rising competition have put it far behind more focused rivals, such as AES Inc. in Arlington, Va. "AES has just sprinted ahead of Enron," says an international energy analyst who declined to be named. One sign of the letdown: Enron on May 14 announced plans to purchase the outstanding shares of Enron Global Power & Pipelines LLC, taking private the 1994 initial public offering it created to draw profits from its international projects. Lay has responded in typical fashion, emphasizing Enron's backlog of international projects even as he refocuses on the move into electricity.

But he's encountering roadblocks there as well. Earlier this year, Enron's pending $3.2 billion bid for Oregon utility Portland General Corp. led to a bitter fight with state regulators over rate cuts the state sought for consumers. At last Lay intervened to settle the protracted fight, agreeing to compensate consumers at the rate sought by the state--but cutting the payment to Portland General stockholders.

Such dustups notwithstanding, Lay is pulling out all the stops to hasten deregulation. In April, he launched a $25 million-a-year nationwide ad campaign and says he'll spend up to $200 million to argue the merits of free-market electricity. Behind the scenes, he has deployed legislative SWAT teams in front-line states such as New York, Massachusetts, and Texas. Enron lobbyists are joining with retail merchant associations and businesses such as manufacturer Cabletron Systems Inc. based in Rochester, N.H. "It seems there's an Enron person everywhere," says S. William Manteria, a vice-president at the National Retail Federation, another supporter of deregulation.

As he assaults what Enron calls the last bastion of monopoly power, Lay is planning to sell more than gas for the stove and electricity for lights. He's promising energy-management services to help businesses switch among the cheapest fuels, "green" power for environmentally conscious homeowners, and off-peak pricing for those willing to run the dishwasher at midnight. Enron's power would flow over the existing transmission lines now controlled by utilities. But Stephen W. Bergstrom, president of rival Electric Clearinghouse Inc., a subsidiary of Houston-based NGC Corp., warns that on top of deregulation's erratic progress, customer inertia could be a problem. A decade after AT&T's long-distance telecommunications monopoly was broken up, Bergstrom notes, rivals had loosened only a third of the residential long-distance market.

Rather than ally with proven consumer marketers, Lay wants to make Enron a champion retailer. He bought an Ohio retailing outfit in 1994 and last year formed Enron Energy Services, a 600-person unit charged with developing retail services. He is also seeking new talent. In the past two years, Enron has lured 70 MBAs from such B-schools as Northwestern's J.L. Kellogg Graduate School of Management, Harvard, and Wharton. That's up from 10 MBAs prior to 1994.

The uncertainty hanging over all these moves: Will the retail market be the gold mine Lay envisions? "Yes, it's a big business," says Edward J. Casey Jr., president of Louisville-based NP Energy Inc., a wholesale power marketer, "but what if competition is so fierce it does not turn out to be profitable?" Notes Howard P. Kagan, managing director at energy investment bankers McManus & Miles Inc.: "Enron enjoyed some high returns in gas deregulation, but it isn't clear that will be the case here. The prices being paid for assets are very, very high."

D.C. INSIDER. Lay says he'll overcome such hurdles by developing high-margin products and services. Just as phone companies get fat profits from services such as call-waiting, he says, Enron plans to make money on innovative services--rolling energy payments into home mortgage payments, for example, or offering longer-term, fixed contracts to offset the risk of dramatic price changes.

In a way, Lay, a lifelong hard worker, has been training for this drawn-out contest since childhood. Lay's father was a Baptist minister as well as a farmer, and both parents valued education. When Lay's older sister exhausted their savings with one year away at college, they moved close to Columbia, home of the University of Missouri, so the kids could live at home and attend classes. Lay's father went to work for a tractor dealership, his mother for a bookstore. "That shows you the benefit, support, and love we got from the family," says Lay.

Lay entered college intending to major in political science but shifted his sights to economics after taking a course taught by Professor Pinkney Walker, who became his mentor and later, as a federal regulator, a Washington ally. After earning bachelor's and master's degrees, Lay in 1965 joined Humble Oil, the predecessor to Exxon Corp., as an economist. To fulfill his deferred Vietnam service, he entered U.S. Navy Officer Candidate School expecting to be assigned to a supply post. But Walker intervened, and he was sent to the Pentagon, where he was put to work devising a modern accounting system for military purchases. There, he exhibited a will to get his agenda passed, even at the expense of his ego: Because the project required senior officers to work for him, Lay cajoled an older, higher-ranking officer to act as his proxy in dealing with Pentagon brass, and his proposals were adopted. Later, he moved to the Interior Dept. as Deputy Under Secretary for energy matters.

When he left Washington, Lay had an abiding respect for politicians and wide contacts in the world of federal regulation, both of which served him well once he took over at Enron. But his career-boosting assignments were a matter of chance, he says: "I've never had a life plan, or a 10-year or 5-year plan. It's a matter that I've gone through life and a lot of good things happened to me."

These days, Lay recharges by running two or three miles a day, exploiting the solitude of jogging "to get the creative juices flowing." He and his second wife, Linda, kick back in a beach house on Galveston Island, Tex., where he gets away from it all on his 21-foot Boston Whaler. The Lays, who between them have five adult children, also have a winter home in Aspen, Colo., where they hit the slopes at least three times a year.

Since his Washington days, Lay has kept strong ties to players in GOP and Democratic circles. In energy, "we can't ignore our public officials even if we want to," he says. So he's an active visitor in Washington--and an active fund-raiser at home. Among Enron's directors are former Commodity Futures Trading Commissioner Wendy L. Gramm (Phil Gramm's wife) and former Deputy Treasury Secretary Charls E. Walker. Among Democrats, Lay counts Nebraska Senator Bob Kerrey and former Treasury Secretary Lloyd Bentsen as friends.

RELENTLESS. But politics is incidental to the larger field Lay increasingly wants to play on. Electricity could dramatically enlarge the scale of what Enron has been doing. The wholesale natural-gas market Lay helped spawn is now worth $46 billion. Adding retail gas and electricity creates a market more than five times that--the reason why Lay's deregulation campaign is so relentless. For the pivotal California debate, Enron recruited technology giants Lucent Technologies, Hewlett-Packard, and Schlumberger to lobby for suppliers' right to install their own electric meters. Utilities had fought to retain existing meters as a cost savings. But Enron and its allies argued that unless new suppliers could install meters, services such as off-peak pricing or remote reading would be severely limited. They won.

That's the kind of success Lay needs to keep things on track. "We believe in markets," he says. "Sometimes there's an aberration. But over time, markets figure out value." This is one free-market advocate who can't afford to let America's last big monopoly go unchallenged.By Gary McWilliams in HoustonReturn to top


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