EVERYBODY HATES ENRON: The politicians, the media, the employees, the shareholders. That Enron deserves its public shunning few—including me—would dispute. Yet in our collective eagerness to exact vengeance against the wrongdoers, we run the risk of making some misjudgments of our own. Before it became known as the Crooked E—a reference to its tilted-letter corporate logo—Enron was known for the enormous wealth it created for management and shareholders, for the deregulation of electricity it preached, and for the political contributions it made. All of these activities have a sinister connotation today, the result of guilt by association with Enron. Yet all of them—even corporate executives getting rich—can produce useful economic benefits. My purpose is not to defend Enron’s actions but to defend the ideas behind them.
Let’s start with those greedy corporate executives. Ken Lay and other Enron executives tied their compensation to the performance of their company’s stock. They took advantage of options to buy Enron stock at a predetermined price, then resold it at its then-current (and much higher) market value, to the tune of hundreds of millions of dollars. Critics of stock options argue that the chance for huge paydays encourages hanky-panky with the books. As New York Times columnist Paul Krugman wrote, “… as we watch top executives walk away rich while the companies they ran collapse, … it’s clear that we should also think about the incentives of the managers themselves. Ask not what a high stock price can do for your company; ask what it can do for your personal bottom line.”
People have short memories. Twenty years ago, the problem was not that corporate executives had too much stake in their companies but that they had too little. Another Texan in the energy business changed all that. His name was Boone Pickens, and in 1982 he tried to take over Cities Service, a mid-size major oil company. His gospel was, as Joseph Nocera later wrote in this magazine, “how companies had become bloated and uncompetitive; how executives treated these companies as their own fiefdoms, even though they were merely caretakers for the shareholders; how they lived the high life while their shareholders took it on the chin.” Pickens regarded CEOs as bureaucrats who were content to haul in seven-figure salaries while their companies stagnated. They didn’t care about the stock price because they seldom invested in their own company’s securities. As Pickens would write in his book, Boone, the CEOs’ “absence of financial risk is inconsistent with the free enterprise system.”
Pickens didn’t succeed in his takeover efforts, but his attacks on the status quo did help change American business. Today, the bottom line and the stock price are the foremost concern of CEOs, whose compensation, not coincidentally, is tied to stock performance. Even Krugman concedes that this is a good thing: “A high stock price,” he wrote, “helps a company grow; it makes it easier to raise money, to acquire other companies, to attract employees, and so on.” He might have added that it puts an emphasis on making companies more competitive, which makes the entire American economy stronger.
I called Pickens to ask if Enron’s collapse had changed his mind about his idea that executives should be shareholders. It hadn’t. But he did want to make a distinction between his position and the Enron case, one that bears remembering. “I said that executives should buy their company’s stock and hold it,” he said. “Cashing in stock options isn’t the same thing as investing your own money.”
Arguing for the upside of corporate greed is a hard sell, and I suspect that my next effort—making the case that electric deregulation, Enron’s great cause during the nineties, is good public policy for Texas—will be no easier. But here goes:
Traditionally, electricity was supplied by regulated monopolies like Reliant Energy (formerly Houston Lighting and Power) and TXU (formerly Texas Utilities). Your electric bill was determined by rates set by the state Public Utility Commission. The commission started with a company’s expenses, known as the rate base, and added on a profit margin, a percentage that was typically in the low teens. This sounds simple enough, but in practice utilities dumped all sorts of questionable expenses into the rate base—fishing trips for legislators to a fabled place known throughout the Capitol as the Honey Hole, corporate jets, batteries of lawyers and lobbyists, even new power plants that might not be needed right away—knowing that customers would pick up the tab unless the PUC said otherwise. Consumer advocates challenged the expenses, and the result was a never-ending series of contested hearings and lawsuits.
Along came Enron to argue that deregulation would bring about lower electric rates. Companies that spent lavishly on politics or entertainment would find themselves unable to compete with rivals that were lean and mean. Deregulation would also open the field to new power producers—in particular, industries along the Houston Ship Channel, which have long wanted to generate their own electricity (using steam that would otherwise escape into the air) and sell the excess on the open market. The industrial plants would make more money and become more competitive, which is good for them, and the power companies wouldn’t have to build expensive new generating plants that drive up rates, which is good for us. All this sounded so good that the Texas Legislature embraced deregulation in 1999. It will take full effect in 2005.
Enron saw an opportunity to make money: Markets need traders to work, and Enron was the biggest trader. But as we all know, the market for electricity didn’t work in California. Does this mean that Texas should abandon its commitment to deregulation? I hope not. We should go ahead, avoiding California’s mistakes. The basic argument for deregulation is sound. Just because Enron was its chief proponent doesn’t mean the argument was wrong. Shoot the messenger, but spare the message.
Now, about those political contributions. You know the argument: “Enron … exploited relationships with elected officials … to pursue policies narrowly tailored to benefit Enron’s