The story begins in 1985 with the merger of two struggling natural gas companies and the creation of Enron. Lay was its CEO. When oil prices plummeted and customers began shifting from gas to oil, pipeline companies burdened with long-term, high-priced contracts with gas suppliers sustained significant losses. Lay advocated deregulating wholesale gas markets. Allow large customers to bypass local gas utilities and buy directly from suppliers. Pipelines would carry anyone's gas. To make his case, Lay later recalled, "I went directly to the FERC commissioners." The Federal Energy Regulatory Commission changed the rules.

With deregulation came higher price volatility. To allow customers to hedge against such volatility, Enron launched perhaps its major innovation -- making natural gas a tradable commodity like pork bellies.

Since one-third of natural gas goes to power plants and Enron supplied natural gas, it inevitably wanted to move into electricity. That required deregulating wholesale electricity markets. Lay went directly to Congress. Congress changed the rules.

In 1994 Enron began trading electricity as well as gas. By 1997 it had become the nation's largest electricity marketer, surpassing federal power agencies like the Bonneville Power Administration.

Why was Lay so successful? The Economist magazine described Enron as an "evangelical cult" with Lay its "messiah." It didn't hurt that Lay was preaching the gospel of deregulation, a gospel widely shared by both political parties.

And this missionary had clout. Lay had worked for FERC and was deputy undersecretary for energy matters for the Interior Department. In the 1980s he became a principal fund-raiser for President George Bush and later his son. His board of directors included Wendy Gramm, wife of Sen. Phil Gramm of Texas. A month after they left office, Enron put former Secretary of State James Baker and former Secretary of Commerce Robert Mossbacher on the Enron payroll. Lay golfed with President Bill Clinton.

"They have the clout and the ability to get the rules written their way," Stephen Naeve, chief financial officer for Houston Industries Inc. said of Enron in 1997. "They play with sharp elbows."

With wholesale markets deregulated Lay began peddling the idea that every household should be able to buy directly from an electricity supplier. He is widely viewed as the key factor in convincing California to adopt retail electricity deregulation in 1996. With that accomplished, Enron launched a $25 million nationwide ad campaign to argue the merits of retail deregulation. Lay "deployed legislative SWAT teams in front line states such as New York, Massachusetts and Texas," Business Week reported in 1997. "It seems there's an Enron person everywhere," said S. William Manteria, vice president of the National Retail Federation.

Like topsy, Enron kept growing, creating global markets not only in gas and electricity but in pulp and paper and, most recently, in Internet bandwidth. In the past two years Enron traders have handled more than $1 trillion in transactions.

At its height Enron was America's seventh largest business, and its CEO, Jeffrey K. Skilling, could boast just one year ago, "There is a very reasonable chance that we will become the biggest corporation in the world."

Now, like a hurtling race car that hits a bump, Enron has crashed and burned. I leave it to Wall Street to do the financial postmortems. More interesting is the postmortem on energy deregulation itself. Kenneth Lay changed the world. But did he change it for the better?

A Ph.D. in economics, Lay undoubtedly will argue that he has improved efficiency. But now middlemen are everywhere in the energy system. A kilowatt hour of electricity can be bought and sold 10 times between the time it is produced and the time it is consumed. As Wall Street has discovered to its chagrin, it is sometimes impossible to understand the transactions of a company like Enron.

Deregulation has torn apart the tightly knit electricity system. Suppliers no longer are responsible for maintaining reliability. Partly as a result, transmission lines are overloaded.

In the last 12 months California alone has lost some $50 billion, largely as a result of deregulation. Enron's collapse represents a loss of $70 billion in debt and equity.

Kenneth Lay turned a sleepy -- even stodgy -- energy system that nevertheless constituted the world's lowest-cost and most reliable energy system into a go-go, take-no-prisoners, wildly competitive system. The culture clash may best be exemplified by Enron's takeover of Portland General Electric (PGE).

Electrical World reported on the clash of culture that occurred. Three generations of the same family might have worked for PGE. "We're laid back, but we get the job done," said PGE employee Scott Guptill. "We don't burn out."

But Enron has. Last year Enron put PGE back on the market. It no longer conformed to its strategic plan. And this month many of PGE's lifetime workers have seen their lifetime savings disappear as their 401(k) accounts, invested primarily in Enron stock, become worthless.

Some would call that the price we pay for progress. But is it progress that Kenneth Lay has wrought in the energy sector?

David Morris is author of ''Seeing the Light: Regaining Control of Our Electricity System'' and vice president of the Institute for Local Self-Reliance in Minneapolis.

© Copyright 2001 Star Tribune

###