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Former FERC chief Curt Hebert Jr. offers his take on one big business story

‘Competitive forces’ behind Enron collapse

Last summer, Mississippi native Curt Hebert Jr. stepped down as chairman of the Federal Energy Regulatory Commission (FERC) after butting heads with Enron chief Kenneth Lay over energy policies.

Since then, Enron has become the world’s largest corporate disaster and the focus of a criminal investigation by the Justice Department. Hebert talked to the Mississippi Business Journal about the events that transpired months before he resigned as one of the most important “power” players in the U.S. and about competition in the energy industry.

“Ken Lay told me he needed me to mandate RTOs for him and I told him I couldn’t because there was no legal basis under the Federal Power Act and because it was wrong for America at the time,” said Hebert, now an executive vice president at New Orleans-based Entergy. “Energy was around 5% of the GDP and if the policy was changed, especially at a time when California was having a crisis, it would have cost ratepayers in America a whole lot of money and the lights would be going out from time to time.”

Perhaps because he was one of President George W. Bush’s largest campaign contributors and a “Texas pal,” Lay had unprecedented input into the makeup of FERC, the agency charged with regulating Enron’s core business. After his resignation, one publication reported that Lay “personally put the screws to FERC chair Curt Hebert in an effort to change his views on electricity deregulation.”

Lay was the only energy executive to meet privately with Vice President Dick Cheney to help shape the administration’s new energy policy. Cheney’s office reported six visits prior to May 17, when a task force issued a sweeping set of policy recommendations including one to break up monopoly control of electricity transmission networks, a longtime Enron goal.

On May 25, The New York Times published an article suggesting that applicable federal criminal statutes or ethics regulations had been violated in a telephone conversation between Lay and Hebert in February, prompting a Senate investigation five days later.

On Aug. 16, a week after Hebert resigned, U.S. Sen. Joe Lieberman (D-Conn), chairman of the committee on governmental affairs, announced that there was no evidence that communications between Hebert and Lay violated criminal statutes or ethics regulations.

When asked whether Lay or Hebert initiated the phone call in question, Hebert told Linda Douglas, a producer for Peter Jennings of ABC News that “if Congress digs hard enough, they’ll get the phone records and see who called who. I did have two people in the room (Hebert’s chief of staff and legal counsel).”

In May, Walter Ferguson, Hebert’s chief of staff, told political reporter Gregory Palast that “(Mr. Hebert) has always been forthright and he’s been a straight-shooter with folks in the industry.”

Hebert, who could have remained at FERC until 2004, said he didn’t resign because of pressure from the White House, but because he knew he wouldn’t have the majority of the commission votes.

“I resigned on my own,” Hebert said. “There was no pressure from Bush or Cheney.”

It was widely known that Lay interviewed FERC candidates and cleared all nominees.

“After two nominees came to FERC with a different mindset than I did, I knew I didn’t have the votes to pursue my policies and move toward the voluntary regional transmission organization and shore up the markets, so I knew it was time for me to go,” said Hebert.

Three months later, Enron’s free fall began after it announced a $638-million third-quarter loss and $1.2 billion in losses on Oct. 16, primarily from irregular partnerships. In November, Enron admitted to accounting practices that overstated profits by $586 million since 1996.

On Dec. 3, Enron’s bankruptcy filing was the largest-ever, with $63.3 billion in assets. More than 5,000 employees were laid off at Enron’s Houston headquarters, and some 20,000 current and former Enron employees watched their retirement accounts evaporate as stockholder value was wiped out while 401(k) funds were frozen.

Days after the Justice Department announced a criminal investigation into Enron’s financial practices Jan. 9, Arthur Andersen, LLP, the accounting firm that audited Enron’s books, disclosed that a significant number of documents were destroyed.

“Enron is not an energy company,” Hebert said. “Yes, they started out that way but the way they made their money was as a trading company.”

Enron dealt with enough commodities in the marketplace and had a large enough share of the markets that when one or two of those markets developed inefficiencies, they profited and could cash flow their business through those markets.

Enron built its fortune trading weather derivatives, natural gas, plastics, coal, broadband, steel and metals, credit derivatives, power, emission allowances, pulp and paper and others.

“What killed them is that they didn’t have any inefficiencies for a while and some questionable partnerships and transactions and their investors and analysts found out about it,” Hebert said. “That’s why integrity does matter.”

Hebert said it was ironic that Enron “was done in by the very competitive forces it worked so hard to bring to the energy markets.”

“They had the lion’s share of the derivatives market and the day they were filing bankruptcy the competitors stepped in their place,” he said. “That’s the good news for America. Competition does work. Not so much as one light bulb was dimmed when Enron failed.”

Hebert, who has been characterized as a proponent of deregulation, was emphatic about saying he was “a proponent of competition.”

“Enron provided a valuable lesson about energy restructuring, with emphasis on restructuring in competition, not deregulation,” Hebert said. “That is, that competition does more than allow companies to make profits. It roots out companies that have questionable integrity and are not operating in the best interest of consumers. It keeps companies honest.”

Hebert’s journey

After a storied rise, Hebert, a native of Pascagoula, former southern district commissioner for the Mississippi Public Service Commission, former state representative and former president of the Southeastern Association of Regulatory Utility Commissioners, was nominated to serve on the FERC commission on Oct. 23, 1997, by President Bill Clinton. On Jan. 22, 2001, President George W. Bush named him FERC chairman.

As FERC chairman, Hebert moved several vital energy policies forward, including the Transco initiative (Transcontinental Gas Pipeline Corporation) to build more pipelines to have more supply and therefore more choices.

When Hebert took heat for not stepping in quickly during California’s energy crisis, he said deregulation didn’t work there because “California wasn’t ready for competition,” he said.

“When you look at any jurisdiction and try to decide if they’re ready for competition, you can’t just look at electricity,” Hebert said. “And even with electricity you can’t just look at distribution or transmission or generation. You have to look at all facets of the industry. California thought they had plenty of capacity because all the states around them had extra energy. As long as they had a lot of rain and snow they did because of the hydropower. When they had less rain and snow they had less hydropower so they had to use more natural gas. That’s fine as long as you can deliver it but they could only get it to the border. They didn’t have the pipes to move it around the state so it wasn’t available to burn and make electricity. < p>

“Some markets are more prepared to bring in deregulation than others. All will be ready when they make the right decisions. The question is when.”

Hebert pointed out that Mississippi was the first state in the U.S. to move towards competition and the first to have performance-based rates th

About Lynne W. Jeter

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