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Enron's Honcho Answers Some Tough Questions From Readers

Christopher Edmonds

Enron (ENE Quote - Cramer on ENE - Stock Picks) Chairman and CEO Kenneth Lay agreed to answer several questions from readers of TheStreet.com and RealMoney. Here is what he had to say.

Reader: So often companies tell the stories of only their successes and don't disclose or discuss their failures. Can you provide some examples of Enron's failures and what you have learned from them?

Ken Lay: We try lots of things at Enron and we're never happy about failure, but your question gets to the right point. ... What do we learn from it?

Actually, Enron's culture rewards the right kind of failure. If you try an idea, if you've thought about it in the right way, managed risk wisely, not "bet the company" etc., and then fail, that becomes knowledge and often leads to the right answer.

A perfect case in point is our retail [energy] business. At first, we thought that business would have an emphasis on selling electricity to residential customers. In 1998, that strategy failed in California for a number of reasons, principally because the market structure was anti-competitive. From that lesson came a retail business strategy that focused on providing an energy outsourcing service to large commercial and light-manufacturing customers. It was a strategy that was deregulation independent, and the business that sprang from it will sign outsourcing contracts worth more than $16 billion this year and will show operating earnings in excess of $75 million.

Reader: California has been a real problem for proponents of utility deregulation. What do you think of the issues in California and what is the solution?

Ken Lay: In short, California faces a stark supply/demand imbalance. California has not added any new electrical generation despite a 10-year economic expansion. In the face of that, California decided to implement a market structure -- with price caps and a state-controlled transaction bureaucracy -- that chased new supply out of the market.

Thankfully, the Federal Energy Regulatory Commission has stepped in and brought some leadership and solutions to a badly flawed market. We do not think the market will return to a state-controlled monopoly. We do think that if California politicians and regulators let the market work, by allowing utilities to protect consumers' exposure to price volatility and by providing incentives to build new power plants, consumers will get what they want: reliable electricity at competitive prices. If you try an idea, if you've thought about it in the right way, managed risk wisely, not "bet the company" etc., and then fail, that becomes knowledge and often leads to the right answer.

Reader: The spinoff of Enron's water utility operations into Azurix (AZX Quote - Cramer on AZX - Stock Picks) has not performed as expected. What is the future of that business?

Ken Lay: We've certainly been disappointed by its results. Basically the global water privatization market did not develop as we expected. We have made a proposal to the board of directors of Azurix to finance a transaction that would take the company private at $7 a share. As we said in our proposal, we think that would give Azurix more flexibility to restructure its assets and business. The Azurix board announced that it has appointed a special committee and hired advisers to review the proposal.

Reader: What impact do rising energy prices have on Enron's profitability? Does price volatility in oil and natural gas have more impact on Enron's earnings than sustained higher prices?

Ken Lay: Enron's business model lets us do well whether prices are rising or falling. When prices are rising, we generally get calls and, increasingly, clicks [via EnronOnline] from consumers who want to lock in prices at lower levels. When prices are falling, we get calls from producers who want to protect revenues and earnings from the lower price environment.

To read Christopher Edmonds' Streetside Chat with Lay, click here.