House of Cards

Enron's collapse may have been engineered from the top, but low-level employees played parts, too

Then again, Buy in particular had a mandate to ignore reality when necessary. Consider this clause from Enron's risk assessment manual: "Reported earnings follow the rules and principles of accounting. The results do not always create measures consistent with underlying economics. However, corporate management's performance is generally measured by accounting income, not underlying economics. Risk management strategies are therefore directed at accounting rather than economic performance."

In his interview with the Powers committee, Lay said he began to prepare Skilling for the CEO position some months before the transfer of power in February 2001. Lay said Skilling "appropriately slowed the flow of information" to his former boss, who remained chairman of the Enron board of directors. Meanwhile, Lay told interviewers, he began focusing on other areas of Enron's business, problems in California in particular.

For Lay and Enron, California was like the entryway to the Garden of Eden, the first substantially deregulated power market in the country. And thanks in large part to Lay's political stroke and largesse--Enron's officers, directors and employees gave millions in campaign contributions individually and through a political action committee--it certainly wouldn't be the last. Pennsylvania, New Jersey and Delaware had banded together to create a deregulated market on the East Coast, and two dozen other states, including Texas, were moving toward giving consumers a choice between private energy companies and public utilities.

Margaret Ceconi suspects Enron was bankrupt for two years before its December collapse.
Deron Neblett
Margaret Ceconi suspects Enron was bankrupt for two years before its December collapse.
Diana Peters had to take the first job offered to her after Enron's collapse. "I want somebody to go to jail," she says.
Troy Fields
Diana Peters had to take the first job offered to her after Enron's collapse. "I want somebody to go to jail," she says.

Enron Online made a mint selling megawatt-hours on the spot market in California, where rates at one point were several hundred times the norm and a series of rolling blackouts darkened areas of the state. Earnings for Enron Wholesale Services increased from $12 billion in the first quarter of 2000 to $48.4 billion during the same three-month period a year later. According to several lawsuits filed last year, however, those profits were the result of price manipulation by Enron and other energy companies, including Reliant and Dynegy.

Enron could never hope to sustain those profits in any event, especially after the Federal Energy Regulatory Commission imposed price caps in California. There was also increased competition from other energy companies whose trading operations were starting to cut into Enron Online's market share. Where Enron had really hoped to distinguish itself in California and elsewhere was in retail power-management contracts.

Enron Energy Services was supposed to be Enron's most promising business unit, the crown jewel of the corporation in the eyes of some. In reality, it was a bust right from the start. The idea was that because of deregulation, the CEOs and CFOs of businesses that consume a lot of energy, such as manufacturing plants, shopping malls and apartment complexes, would look for the best deal on electricity and natural gas. But could they find it? That's where Enron came in. EES would handle everything--purchasing, delivery, metering and billing--and guarantee significant savings to boot. This was an extremely appealing offer, says Margaret Ceconi, who negotiated such deals at EES.

Compared with off-balance-sheet financing, Ceconi's experiences at Enron--which she has shared with the SEC and expects to someday share with the Department of Justice and Congress--have the dual virtues of simplicity and clarity of intent. And they speak volumes about the company Ken Lay so awkwardly called "one of the best places to work in the world."

EES had about 2,000 employees, a couple of hundred of whom, like Ceconi, worked directly on generating clients, negotiating contracts and ensuring the service was delivered. The pitch was that, based on Enron's expert assessment of supply and price trends, a company could expect its energy costs to go up over the long run.

Enron would assume that risk by buying power for whatever the market charged, while guaranteeing delivery to its customers at a predetermined price for 10 years. Sound good? There's more: Enron would reduce the price it charged by, say, 50 percent for the first few years and adjust the annual bill accordingly in the later years of the contract.

It's called "tilting the curve," and Ceconi was able to illustrate the peculiar logic behind it with a few strokes of a ballpoint pen. Seated at a conference table in her attorney's office, Ceconi sketched a standard two-line graph, added a few numbers, then drew a line, left to right, that stays constant for three years, then suddenly bellies down before rising again in about year seven. The finished drawing was an approximation of Enron's internal pricing curve, which purportedly represented what Enron calculated the price of energy would be over the next 10 years.

"This was something you would die for," Ceconi said when she finished. "Other companies couldn't figure out how Enron made money at this, because when they tried to do it, they couldn't figure out how to make money at it."

Truth was, Enron couldn't figure it out either. But it hid that fact by using a pricing curve that, contrary to what EES was telling CEOs around the country, projected that prices would drop dramatically. This allowed EES to show, on paper anyway, that its long-term power contracts were going to be enormously profitable. Moreover, using marked-to-market accounting, EES's accountants booked the projected 10-year value of the contract as earnings the day the deal was closed. The problem was that it hardly reflected the reality of EES's financial situation.

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