Conspiracy of Fools (68 page)

“I’ll think about it,” Baxter said. “But I doubt I’m going to change my mind.”

Days later, he returned with the news. He would leave in a couple of months. Skilling was devastated.

Appearing stiff, Gray Davis stood in the Assembly chambers at the state Capitol, delivering his third State of the State address.

“We will regain control over the power that’s generated in California and commit it to the public good,” he said. “Never again can we allow out-of-state profiteers to hold California hostage.”

Davis listed a series of hard-nosed solutions: forbidding generators from conducting unscheduled maintenance, making it illegal to withhold power from the grid, expanding his emergency authority, prosecuting evildoers.

“The remedies I am proposing tonight are reasonable and necessary,” Davis said. “There are other, more drastic measures I am prepared to take if I have to.”

After all the advice from the free-market evangelists, Davis had chosen another path—all-out war.

Rick Causey’s voice was icy.

“Enron does not want Carl Bass consulting on anything involving the company anymore,” he said.

Steve Goddard, the Andersen partner who had run the Enron accounting team before Duncan, tried to sound conciliatory. “Well, Rick, why don’t you tell me what the problem is,” he said.

The
problem?
Bass had been an impediment in several deals. He had forced LJM2 to put more cash into Fishtail. He had argued that the video-on-demand venture wasn’t a real business yet, and then tried to use that position to stop Braveheart. The man had no creativity, Causey said.

Goddard asked for some time to think about the request. Maybe there was something they could do. Andersen had a new chief executive, Joe Berardino, the man who had forged the rules compromise with Arthur Levitt. He’d be down in Houston in a few weeks. Maybe Andersen’s new top diplomat could negotiate a solution with Causey, too.

But if Causey was insistent, there was little doubt what would have to be done. Enron was Andersen’s biggest client, paying more than forty-nine million dollars in fees that year, with thirty-five million dollars of those payments from consulting. Clients like that could expect to be kept happy. So if Enron didn’t want Carl Bass anymore, Carl Bass would have to go.

———

In Washington, Dick Cheney, the Vice President-elect, was on the telephone with Ken Lay.

Months of uncertainty had followed the November presidential elections, with the Bush and Gore campaigns fighting it out in court over the razor-thin margins of victory in Florida. Now, with Bush declared the victor, the Administration was assembling its Cabinet.

A number of candidates had already been selected—including Don Evans, the campaign’s national finance chairman and an old friend of Lay’s, to serve as Commerce Secretary. Lay himself had interest in one particular job, which was why Cheney was on the phone to Houston this day.

“Ken,” Cheney said, “I’m sure you know, we’ve been seriously considering you for Treasury Secretary.”

Lay could already tell the news wasn’t good.

“The President has decided that with he and Don Evans and I all from Texas, all from the energy business, things were getting too top-heavy. Nominating a fourth person that was in the energy business and from Houston would probably just create too many problems.”

“Well, I certainly understand, Dick,” Lay replied.

Lay wasn’t all that disappointed, though. He didn’t lust for Washington. He was happy staying Enron’s chairman.

Vince Kaminski, Enron’s top risk analyst, examined the data on the latest request out of the finance division with amusement. It was just another bit of foolishness.

For more than a year—since the troubles related to their opposition to LJM—Kaminski’s group had basically been ignored by finance. But now that Fastow and his crowd were struggling, they were coming back, trying to get somebody to bail them out of one of the messes they had created.

These silly Raptor structures were the problem. This was LJM all over again, a hedge in name only that offered no real economic protection. And now, with losses from the hedges piling up, the Raptors couldn’t cover them. Finance had asked Kaminski’s group to analyze what would happen if all of the Raptors were pooled together permanently.

The answer was pretty simple—nothing. Kaminski’s analysts concluded that the Raptors were so far underwater that combining them wouldn’t help. Plus, because three of them were capitalized with Enron stock, they all had exposure to the same risk. Kaminski contacted finance and let them know their idea wouldn’t work. Then he forgot about the Raptors. Surely the losses would just have to be recognized. There was no other logical alternative.

———

Usually, the final weeks of a presidential Administration are like the last days of high school. Nothing much gets accomplished as years of belongings are packed and people prepare for the next stage of life.

So by early January, with George Bush preparing to move into the White House, members of the Clinton Administration might have been expected to be kicking back. Instead, Treasury officials decided to take one last shot at fixing the California electricity mess. They tried to bring everybody together—the energy producers, the Secretary of the Treasury, the governor—for a final bargaining session.

But Davis refused to return to Washington and rejected efforts to meet halfway in Kansas City or St. Louis. Everyone, Davis said, needed to come to California, but the Clinton Administration officials declined.

Instead, this crucial meeting—the last chance for the Democratic governor to obtain help from a Democratic Administration—would be handled by conference call.

On January 13, a series of officials made their way down a hallway deep in the Energy Department. They were all dressed casually, not surprising for a Saturday. Summers, the Treasury Secretary, led the pack, followed by members of his department. Clinton’s National Economic Adviser, Gene Sperling, joined the group, along with an assortment of executives from some of the nation’s leading energy companies.

They arrived in a secure room filled with flashing monitors and high-tech communications devices designed for use in a national energy emergency. The government’s conference call with Gray Davis was about to begin.

About that same time, Ken Lay, Steve Kean, and Rick Shapiro, a company lobbyist, found seats around a conference table in Davis’s Los Angeles office. Lay greeted the other industry executives in the room, including Steve Bergstrom, the president of Dynegy, a top Enron competitor.

The video hookup with Washington was switched on. Larry Summers appeared, sitting at the head of the conference table in the Energy Department’s secure room. They could see Sperling from the White House, as well as the rest of the officials, staffers, and executives.

Everyone on the call was ready to get started, but the sound was left on mute. Governor Davis hadn’t arrived.

Minutes passed.

In Washington, Summers fumed. He didn’t want to sacrifice the weekend
with his family waiting around for Davis to show up. He switched on the sound.

“Do we know where the Governor is?” he asked. A voice responded. “No, but he’s expected soon.”

Lay watched Summers on the video screen. The answer from the Governor’s aide had clearly annoyed him.

He turned to chat with some of the others at the table, then glanced back at the video screen.

Summers was gone.

After five minutes out of the room, Summers walked back in and switched on the sound. “Okay, anybody know where the Governor is?” he asked. Again, no real answer.

Back in Los Angeles, Lay leaned toward Steve Bergstrom from Dynegy. “If the Governor doesn’t show up soon,” he said softly, “no matter what we talk about, this isn’t going to be a good meeting.”

After thirty minutes Davis walked into his conference room. Aides scurried to be sure that the sound was on.

“Okay,” Davis said. “Let’s go.”

He offered no apologies or explanations.

Summers kicked things off, reviewing a series of recent recommendations. Long-term electricity prices needed to be stabilized, the market calmed, so California could enter into long-term power contracts. Announcing plans to temporarily suspend the environmental studies required to build a power plant would be a big step forward.

Some analysis had already been conducted, one industry executive said. The companies agreed that long-term prices could be locked in at just under seven cents per kilowatt hour. That was a little more than a penny above the current mandated retail price. A small rate hike, and the utilities could be back in financial health.

Davis looked straight into the monitor.

“That’s all very interesting,” he said. “But as I said in Washington, I cannot agree to any rate increase. And no environmental waivers for the power plants.”

The energy executives spoke up. They had gone as far as they could. Lay
suggested that they dig through the numbers to show how closely everything had been shaved.

On the television screen in Los Angeles, Larry Summers looked like he was about to jump out of his skin.

“Governor,” Summers said, fixing his eyes on the screen in front of him, “it appears to me that these guys have done a pretty good job figuring out what the markets will do if the political leaders in California make the tough decisions to get things stabilized.”

The numbers were close, and certainly would help circumvent disaster. “We have to do what’s doable,” he said, “and not just what we want politically.”

Lay watched Davis stiffen.
This isn’t working
.

“The political reality is that I cannot agree to any rate increase or any environmental waivers,” Davis said. “We’ve got to find some other way to solve the problem.”

The answer should be price caps, Davis said. Just knock down the amount that the energy companies could charge. Some of the other state officials in the room agreed.

Summers’s voice rang through the room. “Price caps are just something temporary while we put together a bigger packet of reforms. It would distort the market.”

The Clinton Administration had allowed California to impose temporary caps, but it would be up to the Bush Administration to decide if those continued. And in the long term, Summers said, they were destructive, because they would push energy producers out of the California market.

The discussion meandered around the table. Neither side would budge. The attitude of some energy-industry executives was almost detached, as if they were indifferent to the prospect of a financial collapse in California.

About thirty minutes had passed. Then, without explanation, Davis abruptly left the room.

With Davis gone, the conversation continued for several minutes. Finally Summers spoke.

“I see the governor hasn’t returned,” he said. “I think we should suspend the conversation until he does.”

Everyone sat in silence for ten minutes. Finally Summers stood, signaling for some of the industry executives to follow him to a nearby anteroom. Sperling from the White House and several Treasury aides followed.

———

Away from the camera, Summers lectured the energy executives. They couldn’t just shrug the crisis off as California’s problem. They needed to bend over backward to find a way out. Their business was on the line.

“Do you guys understand the political reality?” Summers asked. “If you don’t agree to something that works for California, they are going to come at you with every political and legal gun blazing.”

Sperling agreed. “Without some arrangement, they have to come after you. You may think you’ve done nothing wrong legally. We don’t know. But they have to come after you.”

The executives objected. They had worked hard to make a deal work, they said, but the Governor refused to budge.

“It doesn’t matter!” Summers snapped. “Regardless of whether it’s a bad system, or whether they need a price increase. They are going to dig into your companies, upward, left, and right. You’re going to be the demons.”

In fact, Summers said, if this was handled badly, the prospects for deregulation were going to dim. “The whole trend could go the other way,” he said.

One executive started to argue that California’s system wasn’t real deregulation.

“You’re missing the point!” Summers shot back. “What state legislature is ever going to consider deregulation again if this problem isn’t solved?”

Davis hadn’t returned. Lay caught the eye of Bergstrom from Dynegy and signaled they should head out into the hall. They huddled outside the doorway. “This is really strange,” Bergstrom said.

Lay agreed. “You can’t make any progress when one of your principals keeps leaving the meeting.”

“I’m not even sure it was worth coming.” Bergstrom shook his head. Maybe Davis just wasn’t serious. There was all this talk about him as a top contender for the Democratic presidential nomination in 2004; maybe he was just setting up a showdown with the Bush Administration.

“Well, one thing’s for sure,” Lay said. “He’s got a better chance of solving this with these guys than he will with the Bush Administration.”

Davis returned about thirty minutes after he had left. Someone told Washington to find Summers, who was still lecturing energy executives off camera. A minute later, Summers returned. He took his seat, furious.

“Governor,” he said sharply, “a lot of us here have given up our Saturday afternoon to make progress on this problem. Some of us have commitments tonight. We’re willing to keep working if we can make some progress.”

He pressed his hands against the table. “But if we can’t make any progress, we really shouldn’t waste time,” he said. “Let’s just decide now we’re not going to get this solved, certainly not in this Administration’s lifetime.”

Davis looked unruffled. “Larry, I really appreciate what everybody’s trying to do,” he said. “But I have made it clear from the beginning that I cannot and will not agree to any solution that increases rates to consumers in California or requires any type of environmental waiver.”

He glanced around the room. “And if all of you think that’s the only way we can solve this, then we might as well go in a different direction,” he said.