Lay was Enron Corp.'s first chairman and chief executive officer, taking the helm of the Houston company in 1986. Enron is a leader in the so-called energy merchant sector, where companies trade wholesale electricity and hedge risks by charging its customers premiums to insulate them from price fluctuations. In 2000, Enron's annual revenues surpassed the $100 billion mark, more than doubling its revenue of $40 billion in 1999. Critics charge that Enron earned such record revenues by exploiting the California market. FRONTLINE interviewed Lay on March 27, 2001.

It's probably a crisis in California. It's a problem in other places around the country, but California has allowed itself to get so short on supply, given the growth in demand, that there's likely to be some additional serious interruptions of power service in California over the next few months. ...We could experience some blackouts in other areas, limited blackouts. And obviously, New York is the other area that's of concern.

If we go back over the last 20 years, as a country, we have underinvested in energy infrastructure. That was possible because 20 years ago or 15 years ago or so, we had a lot of surplus capacity. We had a lot more power-generating capacity than we really needed which was really built up under regulated models, where the more you invested, the more you spent, the more profits you made. And so we overinvested in power plants. We overinvested in transmission lines, we overinvested in pipelines. And then, of course, with the deregulation of wellhead natural gas prices, we stimulated a lot of drilling activity. We also allowed supplies to be moved from Canada down to the lower 48 states and around the country in the most efficient way.

And now, particularly with the strong growth in the economy in the late 1990s, the strong growth in demand for electricity from our high technology economy, we have used up that surplus capacity and now we've got to start investing again to keep up with the economic growth.

Some have said to us, as President [Loretta] Lynch did of the California Public Utilities Commission, that California had plenty of capacity for electricity, it's just on certain days, all of a sudden, it disappeared, when normally they had it.

I think that oversimplifies the problem. This summer virtually everyone is estimating that California will be at least 10 percent short of capacity. In other words, demand will exceed supply by at least 10 percent this summer. And of course, particularly during peak periods during the day, when peak usage of electricity occurs, that's going to create serious problems.

Now, it could be what she was referring to is that, up until the last year or two, when California did need extra supplies, it could almost pull on supplies outside the state--get more of the hydro supplies from the Northwest or other surplus supplies in other nearby states and bring it in. Well, now that has dried up, because those states are also getting tight on supply. The tightness has been aggravated by something that really nobody had any control over, and that's the weather.

That means the hydroelectricity capacity in the Northwest is significantly reduced, by 25 percent to 30 percent, and in some cases, 40 percent. So those surplus supplies that could be pulled on by California previously have disappeared.

So it's not just a political ploy to blame the weather?

No, it's not. At the same token, prudence would have said, you don't depend on having high hydro season power every year, because that doesn't happen either. And so, to the extent that they've had some very robust hydro years the last four or five years, there should have been some calculation in there, that's probably not something we're going to get every year. And of course, this year, we're not getting it.

...Your company makes money off the volatility of the market or how many transactions you can get involved in?

We basically make money on putting together the transactions, packaging up the supplies--both on the buy side and the sell side, packaging up the supplies, locking them in under long-term contracts, with creditworthy buyers and sellers, and then, of course, arranging to have that delivered to our customers.

You know people have called this your "black box." It's a mystery in here.

I've heard that, but again, I think that also kind of introduces some mysticism into it [that] doesn't really exist. It's no more a black box than what goes on every day in all the world's financial markets, whether it be interest rate swaps, whether it be currency swaps. Trillions of dollars every day are being exchanged around the world in all of the financial markets. ...

Today, there are also buyers and sellers of all these energy commodities, just like there are buyers and sellers of food commodities and many other commodities. And when there are a lot of buyers, that means a lot of liquidity, and that means that companies like Enron, through a virtual integrated system--not an actual integrated system--can always arrange supplies that can be delivered reliably, at predictable prices, to customers all over the world.

That's what all these people are doing on the trading floors in this building.

That's exactly what they're doing. ...

We asked [Lynch] about Enron. [She said] "Enron makes money through trading tiny little arbitrage opportunities, and making millions in profits. They are part of a daisy chain of profits, eventually paid by the consumer."

I think it's pretty clear Mrs. Lynch does not understand Enron or the business. ... The Public Utility Commission in California required the utilities not only to buy all of their wholesale electricity through a PX, a pool--in other words, a single buyer, seller of electricity for the whole state--but forced them to buy it on the short-term market, the day-ahead market. ... They required the utilities to buy 100 percent of their supply on the short-term market. They were betting that the short-term wholesale market price would always go down.

Now, for the first two or three years, they were right, because there were surplus supplies, what we talked about earlier. But as soon as you get a shortage, which we have now, that spot market is by far the highest price, because all of a sudden, you have a lot of demand, and of course, the market's very tight, and so it drives prices very high.

Again, in California, if Mrs. Lynch and others would have encouraged the utilities to have a portfolio approach to buying their wholesale supplies-- so they would have bought some supplies, maybe for ten years, some for five, some for three, and then some on the short-term market-- California wouldn't have the problem they've got today. And as recently as last summer, Enron, among others, was trying to persuade some of the utilities to do that. And the Utility Commission discouraged them.

When she says that the real problem here is that electricity is different, that it is in a sense oxygen for modern society, you can't really play with it like any other commodity in the marketplace. Not true?

Well, everything's different. At least, I've observed that over the years. We use competitive markets to arrange for delivery of our food supply. We use competitive markets to arrange for delivery of our shelter, our housing. We rely on competitive markets to arrange delivery of our clothing, and of course, the gasoline we put in our cars, so we can get to work in the morning; the heating oil that we buy in the Northeast and elsewhere to heat our homes when it's 30 degrees below zero. ...

It's always kind of interesting to me how whatever it is that a regulator or maybe a monopolist is involved in is so different that, somehow, it does not conform or comply with the laws of supply and demand, and the competitive market forces. If the rules are right--and they were not right in California--but if the rules are right, electricity, like any other commodity, can be arranged for, can be priced more efficiently by competitive market forces than it can be by regulators and monopolists.

Where are the rules right?

Rules are pretty much right in Pennsylvania, pretty much right in New Jersey, pretty much right in a number of other states. Of course, as you know, Texas is just now beginning to open its market up. And certainly we believe there's reason to believe that the rules in Texas are very much right, and will result in much lower-priced electricity than otherwise would be the case; over time, it will, in fact, provide for reliable electricity. Unlike California, for example, I think something like 25 new power plants have already been built since deregulation was passed in Texas.

But you're creating a situation that existed during the time, as you said, of regulation--surplus in the electricity market. Then you can have competition. But can you have real competition in a situation of scarcity?

Sure you can. Of course, you have competition for people that want to build plants, and of course, move into that market, if you get the rules right. The problems in California have been that it's been very difficult to site and build new power plants. As you know, [during] the 1990s, while the economy grew very strongly, there was so much resistance in many of the communities and so forth to building new power plants. But in the case of Texas, when the rules were set on deregulation, the generators from around the country looked at those rules and said, "That's going to be a good market in which to build power plants, so [we ought] to build power plants."

But Texas is unique. You're self-sufficient, basically, in all your energy needs. You don't have to deal with the FERC, the Federal Energy Regulatory Commission. You don't have to depend on them to set wholesale rates. You can do that here, within the state itself.

First of all, FERC has jurisdiction over wholesale rates around the country, including Texas. Whatever FERC does on wholesale transmission and wholesale rates for electricity, and wholesale rates for natural gas applies equally as much to Texas as it does to California. Indeed, one could argue that the more dependent a state is on out-of-state supplies of energy, then the more liberal its market should be. ...

You're not paying the prices that California is paying here in Texas, you're not paying the prices for natural gas that California is. If you were, your electricity generators would be pretty upset. ...

We're not paying the same price as they are in California. That's because, first of all, we do produce a lot of natural gas in Texas, and we have a lot of pipeline capacity in Texas. But we are paying higher prices. ... Natural gas prices in Texas have also gone up two or threefold over the last several months, and indeed, electricity prices have, too.

Here in Houston, our local utility just announced its second or third increase over the last nine months. I believe that will get the total increase up to 30 percent or so, in electricity rates, 30 percent or so over where it was about a year ago. I think with these latest increases in California, their rates, finally, will be up 30 percent from where they were a year ago.

So if rates keep going up in Texas and California, why do we want to deregulate?

Well, rates would go up whether you deregulate or not, and of course, the rates that are going up right now on the electricity side are still within the regulated framework. We haven't yet opened the market to start something this year, as I said. And indeed, all of the utilities under the old regulated scheme had fuel cost pass-through provisions.

So just like we saw in the 1970s, when oil prices and natural gas prices went higher, electricity rates went up, even though the cost of generating electricity did not change. So you're still going to have higher prices, higher rates. My argument would be that, again, over a reasonable period of time--and that's probably five years or more--you'll still have lower prices. You'll have lower prices under deregulation than you will through regulation.

We haven't had them yet.

Yes, you have.

In electricity?

You did in California for three years.

Until there was a shortage.

That's right. You had three years, when, in fact, rates were lower. ... And then, of course, that flipped around a little less than a year ago. ...

Maybe the best example in deregulation that I can give you would be on natural gas. As you've already indicated, this past winter we saw some big price spikes in natural gas. Move outside of California, the prices were up to maybe $10 or so a million BTU, which is almost fivefold what they were just a year ago, or a little over a year ago.

But with those prices, we finally got back to the prices that in fact we saw back in 1984, in real terms. In the intervening years, consumers in this country have saved $175 billion through competition as prices came down and stayed down. Now, natural gas prices have come back down again to about half where they were last winter. And they'll come down further as in fact new supplies come onstream. Markets are working in the case of natural gas. OK, prices went way up. Today there are 50 percent more drilling rigs out drilling for natural gas than there was a year ago.

People are now talking about opening up the [liquid natural gas] facilities that have been mothballed on the East Coast, maybe building new ones. Markets are responding, and markets will respond more efficiently when you've got hundreds and thousands of different entities looking for the cheapest and best way to solve the problem.

So you see yourselves, as I understand it, as the good guys in what's going on in the current economic marketplace.

We see ourselves as first helping to open up markets to competition. And through competition, reducing costs, and of course significantly reducing prices paid by consumers. Also we see ourselves as being innovators in these new markets once they're deregulated, where we can come in and begin providing a lot of other products and services. ...

You hold up Texas as the example, but the Texas marketplace is going to be regulation. We're not talking about getting rid of regulation; we're just talking about changing the rules.

That's true in all the markets. The transmission systems are still regulated. The distribution systems are still regulated. It's mainly a matter that the generation of electricity--the marketing, the buying, the selling of electricity and natural gas are not regulated. But [that] really puts the pressure on getting the rules right for transmission and distribution, which we haven't done yet on electricity on a national basis, even. The transmission grid needs to be open, so in fact everybody can use it, just like the natural gas pipeline grid is open, so everybody has equal access to it.

The question would come back again. As you said, the rules aren't right, nationally. And what we hear from people is, then why experiment until we get the rules right?

Indeed, we're moving the right direction, though, in most parts of the country. And a number of states ... are doing reasonably well. ...

When your people noticed the price of natural gas going up through the ceiling last summer, and then continuing, leveling off, and then going right back up in the winter, did they think something was wrong? Was that what we call market power?

Our people began, in the spring or so, to sense that the markets were really getting tight. That's pretty easy to measure, because the storage levels were getting low. ... I'm sure many other companies saw the same thing. Of course, once that happens, then people start trying to protect their positions. Obviously, if you think it's getting tight, you want to try to be long and not short in that commodity.

"Long" means you want to have--

You'd rather have a surplus versus a shortage in your position. In the case of Enron, we balance our positions all the time. We're basically making markets, buying and selling, arranging supplies, deliveries. We do not, in fact, speculate on where markets are headed. If we think markets are getting tight, we try not to be somewhat short. We'd rather be somewhat long.

This is the spread in prices, you mean?

No. Just whether in fact you're in perfect physical balance or not. But we have very, very narrow limits on all of our buying and selling of all of our commodities worldwide; different kinds of terms, etc. We try to keep them as close to balance every day as we can. In other words, if we sell a supply to somebody, we go out and buy it, or vice versa. We don't try to just stockpile stuff, because we also know that, no matter how good you are in this business or any business, you cannot predict the market set accurately. ...

In your view, are environmental regulations holding back energy and power production in the United States?

Let's start at near-term, short-term, in the case of California. One reason a lot of those plants are not operating all the time out there is because they run out of pollution credits. Over 60 percent of the power plants in California are over 30 years old. That's another problem when you haven't been building new power plants. You have older power plants that are dirtier power plants, and they put out a lot more emissions. Last year, a lot of the power plants out there ran out of these emission credits, and had to shut down. And the same thing will happen ... it's already happening this year, unless, in fact, some of those emissions credit limitations are waived.

So it could be temporarily, in California, that some of those emissions should be waived while new plants are being built. Then, of course, the new plants over time will displace the old plants, and then you can go back to much tighter emission controls.

Your company and you have been very big supporters of George W. Bush, of his father, and in contributions that you've made to the campaign.

I've been a strong financial and political supporter of, first, President Bush Sr. when he was running for president, and even when he ran for president a time or two and failed. And then certainly when he ran for president and was elected in 1988. [I'm] very close to the family, to Barbara Bush and the kids.

When Governor Bush--now President Bush--decided to run for the governor's spot, [there was] a little difficult situation--I 'd worked very closely with Ann Richards also, the four years she was governor. But I was very close to George W. and had a lot of respect for him, had watched him over the years, particularly with reference to dealing with his father when his father was in the White House and some of the things he did to work for his father, and so did support him.

That's held up as an example of, in a sense, where political power and the private power of the energy industry come together. But in your case, recently, I think Senator Mikulski's staff has rejected your proposals on CO₂ emissions and making a market out of that--right? They've rejected your ideas as to transmission lines and eminent domain to open up transmission lines around the country. What's going on? Was it a bad investment?

No. First of all, I don't look at that as investment. ... It's interesting to me that immediately it's assumed that, if you make a contribution to a political campaign, you expect kind of a quid pro quo, something in return for it. There are a few of us that are still maybe idealistic enough to think that we can support a candidate because we really believe in the individual. We believe in their policies. We believe in the direction they're going to take the country. Clearly, there are going to be times when my views may be different than President Bush's. But I think, overall, he's going to be a great president.

Do you believe in global warming?

The weight of the evidence today would indicate that in fact the probability of that being a problem is high enough that we need to start addressing it. I don't think we ought to embrace the Kyoto agreement. I think there are a lot of things that have been proposed that don't make economic sense. But I think we ought to at least begin addressing the problem.

In California, they say we can't deal with this problem because the real market cop is in Washington--the FERC, the Federal Energy Regulatory Commission--and they're not helping us.

Basically, what they're saying in California is, "We want the FERC to put price caps on wholesale electricity prices." That just camouflages the problem. It doesn't solve the problem. We have a supply/demand imbalance in California--too much demand, too little supply.

... I prefer to let the market sift that out. When the governor put on price caps back in October, we, along with another company, cancelled the construction of a couple of big power plant peaking plants, which would have been available for this summer, because we couldn't justify making those big investments in peaking plants, which will just run a few days during the year. Price caps do not solve the problem, but price caps just require the politicians to decide who's going to be curtailed.

You have faith in the market.

I have faith in the market when we get the rules right.

But the rules aren't right.

They're making progress on that. The governor has moved ahead to put in place some streamlining of the approval processes to build new plants. That's a good step. Now the governor needs to do some other things, I think, on buying down or reducing demand. This recent rate increase will probably take care of a good percentage of that. Such things as peak pricing, where people really understand, particularly big manufacturing companies, what the price of electricity is during those peak periods. And let them kind of move more production out to the non-peak periods.

"Just and reasonable rates." That's the law in the United States-- federal law. You're saying just and reasonable rates will be naturally created by the market and it doesn't need any cop to police it.

In both the wholesale law for electricity and for natural gas, it really gives FERC alternatives. They can rely primarily on market forces as long as they believe there is not any undue exercise of market power. Or they can in fact go back to more of a cost-based, as you say, just and reasonable cost-based-type regulation. Thus far, FERC has decided that we prefer to go with market forces, so long as there's not any undue market power. And thus far they have not found any undue market power.

And "undue market power" means manipulation ... and overcharging.

Right.

But the ISO in California said there was $6.2 million in overcharging since May [2000].

I've not seen any justification of that. I'm sure he's got some justification of that, and I think he previously has filed some things with FERC, including on manipulation. FERC has found that they could not see any evidence of any manipulation. We have disagreements here on facts, as between what the local people here, the ISO president, and what FERC is saying.

FERC Commissioner Pat Wood said yesterday, for instance, in natural gas, he thinks the prices look funny. He said straight out yesterday that there is no cop on the beat in Washington on the issue of market power.

OK. I think that's the way we ought to address the problem. If we think there's market power, if we think there's manipulation by anybody in the industry, either inside the state or outside the state, then that ought to be attacked, and attacked aggressively. But that still doesn't argue necessarily for cost-based rates versus letting market forces make the decisions here. We do know that there are some serious physical constraints in getting natural gas into the state of California.

You don't believe that there is excess capacity that's been withheld in California?

If anybody has any electricity or natural gas and elects not to sell it at the kind of prices they've seen over the last 12 months--that's stupid. But indeed we do have problems of getting any more natural gas into the state. Our pipeline has been running full out, full out. We even somewhat expanded it last May. ...

There are some actual physical constraints here. Just like there's a 10 percent shortage of generation in the state, there's also a shortage of pipeline capacity in the state.

...You guys sit here at your own marketplace here and observe what's going on. So you didn't see any market power being exercised this past winter in California?

We did not. Keep in mind, we are not a generator in the state of California. ... And again, the markets were all working. Every time there's a shortage or a little bit of a price spike, it's always collusion or conspiracy. It always makes people feel better that way. But if there's any evidence of that, then of course people in Washington in particular ought to be looking at it aggressively, and I think they have, a couple of times.

... Around the country, [people have] seen their rates going through the ceiling. They look down at Houston, and they say, "That's where all the money went" ... So it appears that there's some kind of great funnel; the money is all flowing down here to Texas, and you guys are in control.

That's grossly overestimated. There are quite a few energy companies in Texas; there always have been. But keep in mind, first of all, when we talk about the generators, like the generators in California, only two of them are headquartered in Texas and in Houston. That's Dynegy and Reliant. You've got Duke in the Carolinas. And of course you've got the Southern Company down in Georgia. ... You've got Calpine in California. ...

But somehow, [you all] say its coming to Texas. You talk about the natural gas business. We have a large number of natural gas companies in Houston; I'm sure by far the most of any place in the country. But you still have other big companies, like Chevron out in California, or Texaco in New York and so forth that are really big in the natural gas business.

But so far, when we talk to public officials in California, and public officials here ... they all say it looks like market power to them. And you say no, there's no evidence of that.

Thus far, nobody has come up with very convincing evidence that there is. I didn't say that it shouldn't be looked at. ...

As you know, there's been some documents from inside El Paso. These documents say that when they took over control of their own capacity, their plan was to help manipulate the physical spreads. Words like that were used. Is that pretty unusual?

I read the article in the New York Times, and I couldn't quite get the same interpretation you just gave me. There was some reference to widening basis differentials, which is different prices for different geographical regions. Whether they said that they could manipulate those or change those, or whether in fact they were just predicting to their own management that they felt that was what was going to happen because this market was going to be so tight on supply--that I don't know. ...

Before I made any judgment on that, at least individually, and before anybody else would, I think they'd like to see all of the data, and then see what the whole story looked like.

Because from your point of view, from Enron's point of view, it's not helpful if someone is, in a sense, manipulating the market?

It is not helpful. We've been asked that many times. But indeed a market like California is not good for Enron. I mean, we can makes some money on it, like anybody else can. ... But indeed what we'd like to see are well-functioning markets. That is in our best long-term interest. Of course, that has not been a well-functioning market over the last 12 months.

This comes from a utility in California: "What's Enron doing to help California?"

We've tried to get as much supply into California as we can. ... We had a peaking plant ready to be built last October. That peaking plant would have come onstream before this next summer, which we thought the state needed and would provide more supply. But then when the price caps were imposed, we couldn't justify the investment. We have worked with the utilities, particularly PG&E, on a number of their credit issues. I think if you ask PG&E's chairman, that he would confirm this. ... In other words, we've taken additional credit risk as well as working with them to make sure we get as much supply in the state as we can.

I'm going to refer here to Commissioner Pat Wood, and just make sure I understand... He says every market needs a cop in order to insure competitiveness. I assume that you agree with that.

I do agree with that. That's what our antitrust laws are all about. ... If people are abusing the marketplace, if they're colluding, if there's conspiracy, then in fact there are ways to handle that.

And don't you run up against that when you try to use transmission lines?

In the case of transmission, quite often the utility, during peak periods or high usage periods, will shut off access to those transmission lines. And we find even in some cases where they may go off and sell their supply to our customer. That's the reason we think we need much better rules for the transmission grid. But right now, the nationwide transmission grid is not being used efficiently and effectively, because the rules still aren't right.

I want to address this specifically in terms of those people who think that everything is operating like a big cartel or a conspiracy. You're really, in some ways, at war with some of the other energy companies.

We are usually on opposite sides with the monopolists. When you have a monopoly franchise player exercising their market power, then usually we're out on the other side of those issues.

Like Southern Company.

Like Southern Company, sometimes. We seem to have similar views to Southern Company in those markets outside of the Southeast, where they are dealing in a deregulated market. But we have different disagreements with them in their own franchise territory.

Some people have suggested that that's become sort of a political battle, because Southern Company is associated with the Senate majority leader, and you're associated with the president.

I don't think there's going to be any political battle along those lines. I think certainly we will continue to try to get monopoly markets opened up for competition. And then we'll continue to try to get, at a minimum, the interstate transmission grid that has rules such that everybody will have open, nondiscriminatory access.

... The people who control the transmission lines won't let you through.

Won't let us through all the time on a nondiscriminatory basis.

And you wanted to build your own transmission lines, or have the right to.

We would do that in certain cases, too. But the main thing right now is to get the rules right on the transmission grid, even before this summer, if possible, because that means that more electricity can flow through those lines efficiently.

... The restructuring and deregulation of the marketplace, you agree, has been happening in an uneven way, and an unsatisfactory way, from a rules point of view. So we're really experimenting, aren't we, in this whole world right now?

You're always experimenting. People talk about markets in transition. Every market is in transition. Some are more perfect than others; there are very few perfect markets in the world. But again, markets in general do a better job at setting price and allocating resources than regulators or politicians.

But in this case with electricity, people are getting hurt, because they need it. They can't do without electricity.

They can't do without electricity. They can do with less electricity. That is the other side of this equation. To the extent that prices go up 20 percent, if people use 20 percent less, obviously their overall monthly bill is the same. That's exactly what prices are supposed to do. Reduce the demand by 20 percent in California, and the problem's solved. And if you can't do that except through price, I don't think that's necessarily bad, with appropriate safety nets and so forth.

But there are other things... If our food supply dries up for very long, we don't last very long. If our water supply dries up very long, we don't last very long, obviously. If you're in the Northeast or in the Midwest and it's 30 below zero and your heating oil's not there, you've got a problem. There are a lot of things that are very critical to life that, again, we depend on the market to make those decisions. There's no reason the same can't be true on electricity, if the rules are right. And the rules are largely right in some places.

But not nationally.

Not nationally, yet.

And the price for the dislocations in the market is paid by consumers. That's the reason that this is such a big issue--it affects so many people and their lives.

But the savings from deregulation also impacts their lives. Again, I referred earlier to the $175 billion of savings in the natural gas markets from 1984 until this year. That, obviously, spread across the whole economy. In virtually every industry with deregulation, we've seen 20 percent to 40 percent cost reductions. Telephone. In general, those economies, or those savings, are coming back to provide for much stronger economy, stronger job creation, productivity, and all the other things that go with that.

In the reality of what's going on today, is the public really paying too high a price? And wouldn't you agree--because the right rules are not in place, even by your own view?

The right rules are not in place. But again, when you say paying too high a price, how we going to measure that? In the case of California, those problems can be solved, and solved rather quickly, with the right policies. Not to minimize them, but those problems have been developed over a decade and longer, and those problems could have existed even under regulation.

		Editor's note: FRONTLINE conducted a second interview with Ken Lay on May 22, 2001.

Oh, absolutely. It's the high voltage backbone for the electric industries. It's kind of like a superhighway system for electricity. It moves electricity around the states and around the country.

Now you went into the White House to talk to people about this, right? You're in the formulation of the national strategy, is that correct?

I had two or three meetings with various people in the White House on the whole issue of energy policy, and that did include some discussion about, in fact, the interstate transmission grid, and how we thought it could be made to operate more efficiently.

The vice president says he met with you.

He did.

He says he knows you well and you're friends. You helped him build a stadium. What's that all about?

The stadium, I'm not sure how important that is, but I have known Vice President Cheney for a number of years, both from his previous government experience as well as when he was CEO of Halliburton. ...

Did you meet with the president and speak with him about energy policy?

I did not. I've been in a couple of meetings with other CEOs where he's asked questions about the general economy or commented on it, but I have not had any separate meeting or private meeting or telephone conversation with the president about it.

People we've spoken to have said that you brought a list of your nominees, your favorites for the FERC, into the White House.

I brought a list. We certainly presented a list, and I think that was by way of letter. As I recall, I signed a letter which in fact had some recommendations as to people that we thought would be good FERC commissioners.

That went to Clay--

That went to Clay Johnson. ... He is the top personnel person in the White House now.

We understand that you personally interviewed some of the potential nominees, at least on the phone or otherwise.

I'm not sure I ever personally interviewed any of them, but I think in fact there were conversations between at least some of them and some of my people from time to time. And again how much of that was an interview versus them calling, expressing interest, talking about their philosophy, and so forth.

We talked with Joe Garcia, who did not make it to the FERC, and he says he had a long conversation with you on the phone.

And you're absolutely right. I did have a conversation with Joe Garcia.

And--

On the telephone.

His impression was that you were a lot more relaxed than some of your executives in terms of trying to get him to agree with them about issues around open access. ... Mr. Garcia says that he agrees with you on open access but he ... doesn't believe the FERC has the authority to enforce it now, that is, to open up transmission lines. So maybe you could explain what it is you want.

What we've been proposing for quite some time, including the previous administration, is that to make the interstate transmission grid operate more efficiently and thus carry more electricity, we need nondiscriminatory open access to that system, where the local utilities cannot unilaterally decide from time to time just to block access to third parties. [That] makes it very difficult to arrange electricity supplies, particularly when the markets are tight. ...

And you also want access to the retail markets, is that right?

We do. That's a whole separate issue, and for the most part that's handled at the state level. ...

Is that a litmus test for your support of a nominee?

I'm not sure of a litmus test. I think that's one of several things that are very important to us. And when I say important to us, I mean important to making the market work more efficiently.

Mr. Garcia says that you politely thanked him for his views and said that you were going to take up these issues with your friends in the White House afterwards. Did you do that, related to any of the nominees?

Again, I'm not sure what I told him about my friends in the White House, but in fact as I recall Joe Garcia was on our short list of people that we would be quite comfortable with.

So you weren't involved in rejecting him for--

Oh no. Matter of fact, I think he's a very qualified individual, and certainly based upon everything that I knew about him, that others knew about him, we felt that he would be a good candidate.

How often have you spoken with [FERC Chairman] Curt Hebert?

... I think two or three times, and let me say, I think those have all been initiated by him, as I recall. I'm trying to think about that pretty carefully, but I believe those were initiated by him. I think I was responding back to a question he had for me, so at least one of those I initiated.

(Editor's note: For Mr. Hebert's version of these conversations, see his interview.)

You remember talking with him? Because he does [remember talking to you], a few weeks after he was made chairman, and you were laying out to him your desires, Enron's desires concerning open access.

Let me first say also that we recommended to the White House that he be made chairman, because obviously the new administration could make one of the Republicans chairman--

He was the only one at that point, right?

Well, he was. But we did recommend they move ahead and make him chairman. ...

What he says is that you told him ... Enron wanted to establish that the FERC had the power itself, without new legislation, to open the grid, and that he doesn't agree with you on that. He doesn't believe that there is that legal authority. Do you remember that?

That's very possible but, indeed, our lawyers are very clear that they do have that authority and it was granted ... just a little bit less than one year ago.

The reason he says he really remembers this conversation is that he believes that you made it a requirement of your continued support of him being chairman. You implied that you would not support him if he didn't agree with you on these principles.

I suppose Curt's entitled to believe whatever Curt believes. Let me say, Curt's a very, very capable individual. And indeed, I think we talked about several things in that conversation and not just this one issue. I think he's done a superb job in pushing different market approaches to electricity. ... This is an area that we still think is essential if we're going to get the interstate pipeline or the transmission grid working effectively. But I'm quite sure I did not in that conversation, as I would not, say, "If you can't agree to this, then we can't support you." I think I did say in that conversation that clearly whoever became chairman would ultimately be decided by the president, not by Enron, not by anybody else. ...

You remembered this conversation, and he said he was quite upset, offended really, because he felt that there was too close a line between what comes before the commission and the implication of some kind of political quid pro quo.

There was never any intent of that. Again, let me say just a couple of things. First of all, to my knowledge, at that point in time there was nothing pending before FERC with reference to this particular issue. Now, there had been a lot of discussion about it throughout the previous several months. ... Indeed, it's kind of interesting. I do know the trade association heads and others ... occasionally will visit with him ... concerning industry positions on various things. Such as, "Our membership will support this or would support that if y'all decided to go that direction or whatever." That's been true, I think, historically at the FERC. Now there are some very fine lines as to what you could talk to the commissioner about. ...

You don't recall talking with him about your backing him or Enron backing him with the White House or with anybody for him to continue as chairman?

I remember him requesting that we do that, and basically what I told Curt was that again, the final decision on this was going to be the president's, certainly not ours. ... For sure, I did not feel like we were in a position to say, "OK Curt, you will become the chairman."

It isn't true that you're the closet secretary of energy?

I am not the closet anything. ... This administration has some very, very capable people, particularly in the energy area, starting with the secretary of energy but also people like Dick Cheney and Don Evans as well as the president himself. ...

When we interviewed Vice President Cheney, I asked him, "Had you met with any CEOs of any energy companies in the preparation of a national energy policy?"

... Over the years, Vice President Cheney and I have worked on different issues together. We also served on the American Enterprise board of directors for several years, and of course that institute takes up many energy, natural resource and other issues. And I'm flattered that he decided to meet with me and at least hear me out as to some of the things that I thought were pretty important that should be considered for his report.

You understand when people read this in the newspaper ...

I think you need to keep in mind also, for better or for worse, we had a lot of access in the Clinton administration. Certainly [former Secretary of Energy Bill] Richardson called on me and Enron on a number of occasions to at least discuss different energy matters, [I] was asked a few times even by then-Chief of Staff Mack McLarty about various energy matters, and [former Treasury Secretary Robert] Rubin on other matters. As a major energy company in the country doing a lot of international business too, we have a lot of reason to, in fact, talk with different officials in our government just like they have many reasons to talk with us.

... We went to the Edison Institute, for instance, and we asked them, "Did you submit a list, for instance, of nominations for the FERC?" They didn't do it. We asked them, "Have you ever talked to Clay Johnson about anybody being nominated to FERC?" They say they didn't do it. And, "Have you ever had any direct conversations with Curt Hebert about policy questions?" And they say they didn't, they don't do that. ... Do you have a response to that?

Well, I'm very surprised with all those answers.

You don't believe them.

No.

So if Curt Hebert says this was a unique experience, that's not true either?

Well, I don't know about that. And I don't know what you're referring to as a unique experience. Clearly, we had two or three conversations, and like I say, at least a couple he initiated. ... But I didn't in any way say, "Without this agreement or this litmus test or whatever else, there's no way we can support you." Because I didn't think it made much difference whether we did or not. We have a president that in fact has some pretty definite ideas about a lot of things, particularly about what he wants to do on energy.

When we interviewed Vice President Cheney, he told us--and at that time the interview was embargoed, that's why he agreed to give it to us as of that date--that Pat Wood was the new chairman of the FERC.

I'm not terribly surprised, and of course I think, in fact, part of that was in one of those conversations with Curt Hebert, too--that certainly President Bush had been very close to Pat Wood as they worked through the deregulation issue in Texas, and that I would not be too surprised if Pat Wood [ended] up in administration somewhere. I think at that point in time he was also being considered for a position at the Federal Communications Commission as well as FERC. ...

You haven't heard from anyone amongst your various acquaintances who are, let's say, close to the seat of power that once Mr. Wood is confirmed he will be elevated to the chairmanship?

No, no. I'm not terribly surprised about that, just because of the comfort level that I know President Bush has with Pat Wood. ...

You recently had a meeting with Governor Davis in Sacramento?

I did.

Is Governor Davis correct in saying that you told him that things are going to get a lot better because Pat Wood is going to be on the commission?

I think he's told me that. He said he met with Pat Wood and he was convinced that, in fact, things would get better with him on the commission. ... He was convinced that Pat Wood would take a lot more proactive role in trying to help California solve its problem.

And Mr. Hebert, you think, hasn't been as active as he might have been?

I didn't mean that as any criticism of Curt at all. I just said that the way I viewed what the governor told me was that he thought Pat Wood would be more aggressive. Now--

So the governor told you, you didn't tell the governor?

That's the way I recall the conversation. ...

When Mr. Shapiro, one of your executives, spoke, he was very critical of [Hebert] and his unwillingness to admit to open access and the idea that the FERC already had that authority.

Mr. Shapiro has to speak for himself. I basically think Curt Hebert has done a good job. Obviously, in this one area, I think he could have done more, and certainly from my standpoint, based on the legal advice that I get, FERC does have the authority to move ahead and impose nondiscriminatory open access provisions on the high voltage interstate transmission grid.

And you got basically that kind of endorsement in the national energy policy.

I think the general endorsement just was that FERC [should] do everything it can to make the interstate transmission grid more efficient. Again, how they do that is up to them. ...

Do you feel like the national energy policy represents, in a sense, your views as well? Can you endorse the policies that are--

I'd rather say the latter than the former. I'm not going to say they necessarily endorse my views. ...