May 25, 2001
Power Trader Tied to Bush Finds Washington All Ears
By LOWELL BERGMAN and JEFF GERTH
urtis Hébert Jr., Washington's top electricity regulator, said he had barely settled into
his new job this year when he had an unsettling telephone conversation with Kenneth L. Lay,
the head of the nation's largest electricity trader, the Enron Corporation.
Mr. Hébert, chairman of the Federal Energy Regulatory Commission, said that Mr. Lay, a close friend of President Bush's, offered him a deal: If he changed his views on electricity deregulation, Enron would continue to support him in his new job.
Mr. Hébert (pronounced A- bear) recalled that Mr. Lay prodded him to back a national push for retail competition in the energy business and a faster pace in opening up access to the electricity transmission grid to companies like Enron.
Mr. Hébert said he refused the offer. "I was offended," he recalled, though he said he knew of Mr. Lay's influence in Washington and thought the refusal could put his job in jeopardy.
Asked about the conversation, Mr. Lay praised Mr. Hébert, but recalled it differently. "I remember him requesting" Enron's support at the White House, he said of Mr. Hébert. Mr. Lay said he had "very possibly" discussed issues relating to the commission's authority over access to the grid.
As to Mr. Hébert's job, Mr. Lay said he told the chairman that "the final decision on this was going to be the president's, certainly not ours."
Though the accounts of the discussion differ, that it took place at all illustrates Enron's considerable influence in Washington, especially at the commission, the agency authorized to ensure fair prices in the nation's wholesale electricity and natural gas markets, Enron's main business.
Mr. Lay has been one of Mr. Bush's largest campaign contributors, and no other energy company gave more money to Republican causes last year than Enron.
And it appears that Mr. Hébert may soon be replaced as the commission's chairman, according to Vice President Dick Cheney, the Bush administration's point man on energy policy.
Mr. Lay has weighed in on candidates for other commission posts, supplying President Bush's chief personnel adviser with a list of preferred candidates. One Florida utility regulator who hoped for but did not receive an appointment as a commissioner said he had been "interviewed" by Mr. Lay.
Mr. Lay also had access to the team writing the White House's energy report, which embraces several initiatives and issues dear to Enron.
The report's recommendations include finding ways to give the federal government more power over electricity transmission networks, a longtime goal of the company that was spelled out in a memorandum Mr. Lay discussed during a 30-minute meeting earlier this spring with Mr. Cheney.
Mr. Cheney's report includes much of what Mr. Lay advocated during their meeting, documents show. Both men deny discussing commission personnel issues during their talk. But Mr. Lay had an unusual opportunity to make his case about candidates in writing and in person to Mr. Bush's personnel adviser, Clay Johnson. And when Mr. Bush picked nominees to fill two vacant Republican slots on the five- member commission, they both had the backing of Enron, as well as other companies.
Mr. Lay is not shy about voicing his opinion or flexing his political muscle. He has transformed the Houston-based Enron from a sleepy natural-gas company into a $100 billion energy giant with global reach, trading electricity in all corners of the world and owning a multibillion- dollar power project in India. He has also led the push to deregulate the nation's electricity markets.
Senior Bush administration officials said they welcomed Mr. Lay's input but did not always embrace it: President Bush backed away from curbing carbon-dioxide emissions, an effort supported by Enron, which had looked to trade emission rights as part of its energy business.
"We'll make decisions based on what we think makes sound public policy," Mr. Cheney said in an interview, not what "Enron thinks."
The Bush-Lay bond traces back to Mr. Bush's father and involves a personal and philosophical affinity. Moreover, Enron and its executives gave $2.4 million to federal candidates in the last election, more than any other energy company. While some of that went to Democrats, 72 percent went to Republicans, according to an analysis of election records by the Center for Responsive Politics, a nonprofit group.
"He's for a lot of things we're for," said Mr. Johnson.
But when it came to deciding on nominees for the commission, Mr. Johnson said that Mr. Lay's views were not that crucial. The two most important advisers, he said, were Andrew Lundquist, the director of Mr. Cheney's energy task force, and Pat Wood 3rd, the head of the Texas public utility commission.
As governor, Mr. Bush named Mr. Wood to the utility commission. This year, when the White House filled the two Republican slots on the federal agency, Mr. Wood was the first choice, Mr. Johnson said.
Consumer advocates and business executives praise Mr. Wood. But Mr. Lay also had a role in promoting him. Shortly after Mr. Bush was elected governor in 1994, Mr. Lay sent him a letter endorsing Mr. Wood as the "best qualified" person for the Texas commission.
In all, there are five seats on the commission, two held by Republicans, two by Democrats and one held by a chairman who serves at the pleasure of the president. Mr. Hébert, who became a commissioner in 1997, was named chairman by Mr. Bush in January.
The Federal Energy Regulatory Commission's mandate to ensure fair prices in wholesale electricity and natural gas markets makes it crucial to sellers like Enron as well as consumers.
The movement toward deregulation sometimes leaves the commission caught in a tug of war: power marketers like Enron are trying to break into markets and grids controlled by old-line utilities, which operate under state regulation. The commission's chairman has considerable latitude in setting its agenda.
As part of its oversight of the wholesale electricity markets, the commission ordered several companies to refund what it considered excessively high prices this year in California. One lesser offender named in the commission's public filings — $3.2 million, of a total of $125 million — was an Enron subsidiary in Oregon.
Enron owns few generating assets, but buys and sells electricity in the market. Many of those transactions resemble the complicated risk-shifting techniques used by Wall Street for financial instruments.
Mr. Hébert, after he became chairman, initiated an examination into the effects those techniques have on the electricity markets. "One of our problems is that we do not have the expertise to truly unravel the complex arbitrage activities of a company like Enron," he said, adding, "we're trying to do it now, and we may have some results soon."
William L. Massey, one of the agency's two Democratic commissioners, said he supported the inquiry but had not been aware of it — an indication of the chairman's ability to set the commission's agenda.
Finally, the commission is trying to speed the pace of electricity deregulation by opening up the nation's transmission grid, much of which is owned by privately owned utilities that enjoy retail monopolies. Some Enron officials say the commission has been moving too slowly to open the grid. They attribute some of the problem to utilities. But they also fault Mr. Hébert.
"Hébert still has undeserved confidence in some of the vertically integrated companies coming to the table and dealing openly" with transmission access issues, said Richard S. Shapiro, an Enron senior vice president.
The utilities, however, maintain that they provide cheap and reliable service for their customers. Washington lobbyists for one Southern utility said that Enron was really interested in focusing on the utility's big-business clients, which under state regulation pay higher rates than residential customers.
Since 1996, about half the states have moved to open their retail markets to competition, and the commission has begun to make it easier for outsiders to use the nation's transmission grid. But the promise of cheaper rates has been largely unfulfilled. So the push for more deregulation, in which Enron has been a leader, has slowed, especially when California's flawed program led to skyrocketing rates and chaotic markets.
Mr. Hébert is a free-market conservative who favors deregulation but also recognizes the importance of state's rights. A former Mississippi regulator, he is a protégé of Trent Lott, the Senate Republican leader from Mississippi. Mr. Hébert said Mr. Lott was instrumental in his nomination to the commission in 1997 by President Clinton.
President Bush elevated Mr. Hébert to chairman on Inauguration Day, a move Mr. Lay said he told the White House he supported.
Mr. Johnson, the White House personnel chief, said that Mr. Lott and Mr. Hébert had both been told that Mr. Hébert could remain chairman at least until the administration's nominees — Mr. Wood and Nora Brownell, a Pennsylvania utility regulator — are confirmed by the full Senate. The Senate energy committee voted earlier this week to approve the two nominees, after a hearing last week indicated strong support.
It is widely expected that President Bush will name Mr. Wood to replace Mr. Hébert as chairman after the Senate acts.
In an interview for a forthcoming episode of "Frontline," the PBS series, Mr. Cheney suggested as much. "Pat Wood's got to be the new chairman of the F.E.R.C., and he'll have to address" various problems in the electricity markets, he said.
Mr. Hébert said that no one had told him he was being replaced. If someone else is named chairman, Mr. Hébert can remain a commissioner until the end of his term, which expires in 2004.
It was a few weeks after President Bush made him chairman that Mr. Hébert said he spoke by telephone with Mr. Lay.
Mr. Lay told him that "he and Enron would like to support me as chairman, but we would have to agree on principles" involving the commission's role in expanding electricity competition, Mr. Hébert said of the conversation.
A senior commission official who was in Mr. Hébert's office during the conversation said Mr. Hébert rebuffed Mr. Lay's offer of a quid pro quo. The official said that he heard Mr. Hébert's side of the conversation and then, after the call ended, learned the rest from him.
Mr. Hébert said that he, too, backed competition but did not think the commission had the legal authority to tell states what to do in this area. Concerning the issue of opening transmission access through the creation of regional networks, Mr. Hebert supports a voluntary process while Enron seeks a faster and more compulsory system.
Mr. Lay said that while he might have discussed issues relating to the commission's authority concerning access to the grid, "there was never any intent" to link that or any other issue to Mr. Hébert's job status.
The commission is a quasijudicial agency, so decision-makers like Mr. Hébert must avoid private discussions about specific matters pending before the commission. Mr. Hébert and Mr. Lay both said that line was not crossed, but Mr. Hébert said he had never had such a blunt talk with an energy-industry executive.
Mr. Lay added that his few recent conversations with Mr. Hébert were nothing special. "We had a lot of access during the Clinton administration," he said.
And he said that while making political contributions "probably helps" to gain access to an official, he made them "because I'm supporting candidates I strongly believe in."
Last June, Enron executives were asked to make voluntary donations to the company's political action committee. The solicitation letter noted that the company faced a range of governmental issues, including electricity deregulation.
This year, some people who sought but did not get nominations to the commission said that Mr. Lay and Enron had had a role in the process.
One was Joe Garcia, a former Florida utilities regulator and prominent Cuban-American activist. He said he had been "interviewed" by a few Enron officials, including Mr. Lay, who he said had not been as "forceful or insistent" as the other Enron officials.
But in their conversation, Mr. Garcia said, Mr. Lay made clear that he would be visiting the White House, adding that "everyone knew of his relationship and his importance."
Mr. Johnson, the White House personnel chief, could not cite another company besides Enron that sent him a list of preferred candidates for the commission, but he remembered hearing the views of Tom Kuhn, who heads the utility industry trade group, the Edison Electric Institute. Mr. Kuhn was a classmate of Mr. Johnson and Mr. Bush at Yale.
As for his conversation with Mr. Garcia, Mr. Lay said he was comfortable with his candidacy but "I'm not sure what I told him about my friends at the White House."
-- Anonymous, May 26, 2001