Joskow’s focus on energy markets was not solely an academic pursuit. It also animated certain leaders of the energy industry, including Ken Lay, an ambitious corporate empire builder who seized on commercial opportunities presented by deregulation of the natural gas industry and then applied lessons learned to the electricity business. Like Insull, Lay was driven by ambition and adept at seizing the main chance. Through a series of astute corporate acquisitions he gained control of the nation’s largest gas transmission system and renamed his company Enron just as regulatory changes were transforming the natural gas industry. Enron became a player in the natural gas spot market and refined its business strategy when Lay recruited Jeff Skilling, a former McKinsey consultant, who revolutionized the gas market through a gas bank, derivative contracts, volumetric production payments, and tradable gas purchase contracts. These innovations transformed natural gas from a physical commodity to a financial commitment. Deregulation of energy markets and Enron’s command of energy trading came just as financial institutions began to use derivatives and other exotic investment tools. Lay saw electricity as the next energy frontier and became an ardent proponent of deregulation. Using political influence to limit regulatory oversight, Enron became a major middleman, market-maker, and financial intermediary. In just a few years it commanded almost one-fifth of the North American wholesale electricity market and acquired a West Coast electric utility. Between 1996 and 2000, driven by Enron Online, a proprietary energy trading website, Enron’s revenues rose to $100 billion. But the progress, aided by fraudulent accounting, masked huge underlying problems. Lay and Skilling saw the newly deregulated California energy market as a one-off profit-making opportunity and potential salvation for their company. By withholding supply and using exotic techniques to game the California power market, Enron was able to create artificial shortages and drive up prices. Its political influence delayed government oversight, allowing Enron to extract enormous profits from the California market until FERC belatedly imposed a price cap. As the California market returned normal, Enron’s profit gusher subsided, and its ramshackle and fraudulent business headed relentlessly toward what was then the largest bankruptcy in history. In 2006 Lay and Skilling were tried and convicted in federal court. Lay died suddenly while his appeal was pending, and his conviction was extinguished. A soi-disant believer in markets, he proved instead to have been, for a time, a supremely adept market rigger whose rhetoric and practice were violently at odds.
MIT Press Scholarship Online requires a subscription or purchase to access the full text of books within the service. Public users can however freely search the site and view the abstracts and keywords for each book and chapter.
If you think you should have access to this title, please contact your librarian.
To troubleshoot, please check our FAQs, and if you can't find the answer there, please contact us.