Conspiracy of Fools (21 page)

For months he had assumed Kinder would take over. But there was such reticence in Duncan’s voice. Perhaps the board wanted him in its back pocket in case Kinder didn’t work out. Perhaps. But there was another possibility. Could the directors be planning to pass over Kinder again?

In the days that followed, a flurry of secret calls and meetings took place between Lay and the directors.

Led by Duncan, the board repeatedly pushed the same message—stay. Enron needed his counsel even if Kinder took over, they said. That couldn’t happen, Lay replied. There should be just one chief. Once someone else took over, he needed to leave.

The conversations evolved into a debate about Kinder. Some directors thought he was more than ready for the job; others weren’t so sure. Yes, Kinder was a hell of an operations guy. But was that what Enron needed? Somebody who could keep the trains running on time? What about somebody with the vision to plan new routes instead?

Kinder, some directors argued, was not the type who would come up with the Next Big Idea, the lofty strategy that would keep Enron chugging ahead with growth of 15 to 20 percent a year. Lay, whose word could have swayed them, was tepid in defending his heir apparent.

Maybe it was the pressure from the board. Maybe it was the meeting with Allen. But as the days passed, Lay’s infatuation with AT&T cooled. Then suddenly, on a weekend in late September, as he sat in his living room with Linda, he made his decision.

“Linda,” he said, “this just doesn’t feel right”

Lay telephoned Duncan that very day. He was pulling out of the AT&T search, he said, and wouldn’t make any personal plans until after year-end. “Thanks, Ken,” Duncan sighed.

The small crowd gathered at the San Diego offices of Science Applications International Corporation, eager to witness a little history. It was September 23, 1996. Right on schedule, Pete Wilson, California’s governor, emerged and took a seat at a table stacked with papers.

After years of debate and fighting, Wilson was about to sign Assembly Bill 1890, the opening salvo for deregulation of California’s electricity markets. New players would be allowed into a power system that for years had been dominated by a small group of utilities.

This was a moment to remember, Wilson told the crowd.

“We’re doing more than signing a new law; we are shifting the balance of power in California,” he said. “We’ve pulled the plug on another outdated monopoly and replaced it with the promise of a new era of competition.”

With that, Wilson picked up the pen and signed his name. California’s brand of deregulation had become law; a new market would have to be ready to go within two years.

“How the fuck did we let this happen?”

Lou Pai was raging about the California law to his fellow Enron executives. This wasn’t deregulation, he shouted, this was Rube Goldberg, some sort of freak hybrid—a bit of deregulation, a dash of regulation, with a dollop of centralized government on the side.

Skilling, Causey, and others in the room weren’t about to argue. Enron had been pushing for a system where any company with power—from its own plants or from trading—could gain access to the transmission lines and compete for customers. Whoever came in with the best prices would win the day. But California had created a mishmash of rules based on market theories that only a politician could love.

The California utilities had, until then, purchased power through long-term contracts. Now they were required to sell their own generation plants and buy power every day, in the spot market, where prices fluctuated.
But the price most consumers paid was cut ten percent from their regulated price, then locked in place for five years. In other words, no matter how much it cost for the utilities to supply the power, the price to consumers wouldn’t change. The approach was based on the idea that changing the rules would cause spot prices to drop dramatically. No escape hatch was written into the law in case the theory proved wrong.

The rules also created a new marketplace—one controlled by two quasi-governmental bodies—to set the wholesale prices for electricity and manage the state’s transmission lines. This wasn’t a setup where the best competitor won, Pai argued. It was all about the rules, figuring out how to best play the system.

Causey nodded his agreement. “These rules are really a disaster,” he said.

Pai shot a look at Steve Kean, a government-relations specialist who had lobbied for Enron out in California. “Why didn’t we get this damn thing changed?” he shouted.

Kean, a calm, professional sort in his thirties, set his hands on the table. “Lou, we did the best we could. This is a political process. We certainly can’t dictate outcomes. All we can do is nudge it one way or the other.”

Sure, Kean said, Enron contributed to California politicians, but so did the utilities, which fought deregulation tooth and nail. And they had the best advantage—large numbers of California employees, voters, living in every district. Campaign cash might buy Enron a seat at the table, but it wouldn’t give the company the right to order the meal.

“Well,” Causey said, “it’s just going to be very hard to make our business work in California.”

“Listen,” Kean said. “I know it’s certainly not optimal, but there should be some way we can get at it.”

That grabbed the room’s attention.

“The one thing you can count on is that if the government set up the market, there will be subsidies someplace,” he said. “And if you can find the subsidies, and offer the people who aren’t getting subsidized a better deal, you’d own that part of the market.”

Nodding, Skilling jumped in. “That’s right,” he said. “If the government sets up the market, it’s going to be done wrong. The only way it’ll be right is by accident.”

He looked down at the row of faces. “Just know the rules better than anybody else. Then you’ll make money.”

By October 1996, the merger agreement with Portland General was still generating plenty of work at Enron. The deal itself wasn’t the issue; rather, its
ramifications were keeping everyone busy. If Enron was really going to buy an electric utility, then federal rules made it essential for the company to sell other assets.

The first on the block were two co-generation plants—Texas City and Clear Lake—that were jointly owned by Enron and Dominion Resources, another energy company. Because such plants convert waste heat into power, they were designated as “qualifying facilities,” requiring utilities not only to purchase their power but to pay higher rates. Problem was, plants owned by a utility didn’t get the price boost. So buying Portland General meant the premium pricing for the co-generation plants would soon disappear, making them less valuable for Enron to own than to sell.

The task of putting together a sale was given to Amanda Martin; she and her team searched for bidders, but soon headaches emerged. The gas contracts for the plants had been struck with Enron at unreasonably high levels. No company would purchase the plants only to be gouged on fuel by the seller. The contracts had to be renegotiated.

That, of course, meant trouble. Using its aggressive accounting, Enron had long ago booked the total, lofty value of the gas contracts as profit. Renegotiating them to reflect more reasonable prices meant decreasing their total worth. What mark-to-market had given, it would take away; the previous profits would become losses—as much as $100 million.

Once she understood the dilemma, Martin reported her findings to Skilling. As she laid out the numbers, Skilling scowled. “I don’t want to take a loss,” he fumed.

It’s not like there’s a choice here
. “We have to take a loss, Jeff,” Martin replied. “Well, it better be small.”

Skilling thought for a moment. Maybe there were alternatives. “I want you to get Cliff involved,” he said. “Fine,” Martin replied.

“Have you met with the accountants?” Skilling asked. “Get them involved. If we have to take a loss, we have to be very careful when we take it.”

Another idea. “I want you also to work with Andy’s group,” Skilling added. “See what they can come up with.”

“All right.” Now Fastow was joining in; this deal would be like old-home week for Martin and her friends.

Ken Lay hung up the telephone and sat in his office for a moment, trying to keep calm.

Rumors had been circulating for weeks that Kinder had struck up a romantic relationship with Nancy McNeil, one of Lay’s most trusted
assistants.
^*

McNeil had been with Lay since Transco and had become a power unto herself, knowing almost everything that happened at the company. Lay had paid no mind to the allegations, but now some directors were calling with word they were hearing the same stories.

The possibility infuriated Lay. This was just wrong for the company, he thought. Even though both Kinder and McNeil had filed to divorce their spouses, Lay believed it set a terrible example. Sure, Lay’s current wife, Linda, had been his secretary at Florida Gas. But they hadn’t started dating until months after he had moved on to Transco.

The only way to deal with this is to confront it
. Lay walked out to the hallway, heading to Kinder’s office. He nodded a greeting to Kinder’s secretary before walking in. Kinder was at his desk. Lay shut the door.

“What can I do for you, Ken?”

Lay stood over Kinder’s desk. “Rich, I’m getting word from people, including some directors, that you and Nancy are having an affair,” he said bluntly. “I need to know. Are you or are you not?”

Kinder didn’t miss a beat. “No.”

Lay paused, eyeing Kinder. “All right, I know these are rumors, but I wanted to check whether they’re true.”

“They’re not.”

“Fine. So I can tell anybody else, including the directors, that this is not true, and I’ll never have to worry later about finding out that it was.”

“No, you won’t.”

A flicker of hesitation. Lay excused himself, heading back to his office. He had his answer; he would call his directors and let them know Kinder had denied everything.

Somehow, though, he feared it wasn’t the truth.

Weeks later, Rosalee Fleming, one of Lay’s secretaries, pushed the “hold” button on her phone, got up from her desk, and crossed over to the doorway.

“Ken, Sharon’s on the phone. Can you take the call?”

Lay smiled. He loved hearing from his younger sister.

“Sure,” he said. “I’ll pick up.”

He reached for the phone and punched the button for the flashing line. “Hi, Sharon Sue.”

“Hey, Ken. How are you doing?”

The siblings chatted for a few minutes about their families. Then Sharon’s tone turned serious.

“Listen, Ken, I just heard something last night that I thought I needed to share with you.”

“All right. What did you hear?”

Sharon spelled out an unpleasant story: She had been out to dinner with a few friends, including Nancy McNeil, the subject of the Kinder rumors. They had all been talking and just having a good time. And then Nancy had dropped a bomb.

“Well, Nancy just starts telling us about what’s been going on inside the company,” Sharon said. “She said that the board was very unhappy with you. And she said they were kind of pushing you out so Rich could take over.”

Lay listened to Sharon’s words, floored. This couldn’t be right. How could McNeil do something like that—in front of his
own sister?
Had she forgotten who Sharon was?

“Now, Sharon, are you sure you heard her right? Maybe you misunderstood what she was saying.”

“No, I talked to another person who was there, and she heard the same thing. That’s what she said.”

Lay assured his sister that there was nothing to worry about. They talked for a few more minutes before saying their good-byes. Lay placed the phone back in its cradle.

For a moment, he glanced out the wall of windows lining his office, turning his sister’s words over in his mind. He had heard rumors like this before—third-hand, fourth-hand. But there was no doubting Sharon.

It all made sense.

Kinder
. It had to be Kinder. All the pieces fit. Rumors of the affair, McNeil talking down Lay and talking up Kinder. McNeil’s comments had to be what she was hearing from none other than Kinder himself, Lay thought.

He had done so much for both Kinder and McNeil over the years, helping them with their careers, helping them find their way. And then
this
. This thankless thing.

Hurtful
. That was the right word for it. And just untrue. Kinder and McNeil didn’t know about the recent escapade with AT&T, or of the board’s efforts to keep him connected with the company. Anyone who knew would have understood that the story Sharon had heard was nothing more than fanciful.

But nobody did. If he stepped down at year-end, Lay thought, rumors would devour him. People would think the board
—his board
—had kicked him out. No graceful exit, no dignity in departure. Just the stench of failure.

Well, the board was on the fence. And thanks to the AT&T discussions, they already knew Lay was willing to stay. Maybe now he just might.

Among top managers of Enron, Lay’s fury at Kinder was no secret, but few understood where it was coming from. Lay began quietly lobbying for the support of executives who had worked with him for years. He didn’t believe Kinder had the skills to represent the company, he told them. Would they, he asked, support him in that point of view?

The managers agreed but weren’t happy about it. Lay and Kinder had been an awesome team. They had brought the company through tough times. They couldn’t help but wonder: would Lay, without Kinder, be as effective?

The Río Piedras shopping district in San Juan was just coming to life, with shoppers peeking through store windows that beckoned with jewelry and knickknacks. It was 9:30 on the morning of November 14. Nearby, a van emblazoned with the name of the San Juan Gas Company, an Enron company, parked on the street. A technician climbed out, carrying a small gas detector with him, and walked to the shoe store on the first floor of the Humberto Vidal building.

A store employee greeted the man, taking him to the building’s east side before heading down into the basement. The gas smell, the employee explained, was getting stronger each morning. Could there be a leak?