Living in a House of Cards

By tilting the curve to give customers an early discount on their energy costs, EES wasn't taking in enough to cover what the local utility companies were charging for gas and electricity. Meanwhile, EES was spending much more than it projected setting up the infrastructure for the retail contracts. For example, it was estimated that changing out an electric meter for one that Enron could track in Houston, whether the building was in Duluth or Chicago, would cost $1,000. It turned out the standard rate was $10,000 to $15,000. Some of Enron's biggest retail clients, such as Simon Properties and JCPenney, to cite just two, required hundreds of new meters for buildings all over the country.

Ceconi, an accountant and former banker, says it took her four months to figure out that EES was booking profits that it could substantiate only theoretically. When she pointed that out to her bosses and co-workers, they told her she simply didn't understand the business. "They said, 'No, this is energy accounting,' " Ceconi recalls. "But they knew these could not possibly be considered real earnings. Did they think they were so smart they could predict the future's curve? To a certain degree, yes, but I heard time and time again, 'Don't worry about it. That's somebody else's problem down the road.' "

Eventually, it became Dave Delainey's problem. Delainey was named EES's chief executive a year ago. The first thing he did was put a stop to the inflated marked-to-market valuations of EES's contracts. The new valuations, Ceconi says, showed that EES was losing millions of dollars meeting the energy needs of more than 31,000 buildings across the country. By May, EES had quit looking for new business. It had also changed the employee compensation formula, which originally paid a commission based on the full projected value of a contract. Ceconi saw her single commission -- deals took more than a year to close -- reduced from $300,000 to $25,000.

Ceconi acknowledges that she was lured away from her corporate job to become a salesperson by the promise of giant paydays. Even though the original commission formula was no longer workable, and rightly so, Ceconi apparently was one of the few who understood that. Most of the staff was furious, especially the seven who had made more than $1 million in 2000.

"Everybody knew this was going on, but nobody knew it was wrong because it was 'innovative and creative,' " Ceconi says. "Because most of the people had spent their whole careers at Enron and they had no basis for comparison. Those of us from the outside said, 'This isn't the way you do things.' They didn't know this was something you couldn't do."

Then again, taking liberties with the balance sheet had become the Enron way. In addition to the other changes at EES, Enron folded the unit's risk assessment desk, which certified the contract values, into Enron Wholesale Services, where they were raking in the profits on the California spot market. That allowed Enron to shift about $500 million in losses off EES's June 2001 financial statement onto the books of a more profitable unit, where they would be absorbed undetected.

Around mid-morning on August 4, 2001, Jeff Skilling paid a visit to an EES "floor meeting." About 100 people attended, Ceconi recalls, and there was no shortage of questions about the unit's future.

"One guy says, 'Hey, Jeff,' " Ceconi recalls. " 'You said the stock price is being penalized by analysts and that we should keep on buying, yet you're selling shares every week.' And Skilling says, 'Well, all executives have to register their stock sales, and I have a plan, and I don't know when it's going to sell, and I'm building a house and my accountant says I need to do some estate planning, and 80 percent of my worth is in Enron stock. But we still think it's a good buy and you guys should be buying.' "

Apparently, Delainey's predecessor as EES's chief, Lou Pai, was doing some estate planning as well. Pai began selling his Enron shares in January 1999 and didn't stop until June 2001. But by the time anyone knew EES was a failure, Pai had made $353 million -- three times the next-highest cash-out: $101.3 million by Ken Lay.

Ceconi says that everyone at the floor meeting knew the earnings reported on EES's June financial statement were bogus. Yet she remembers that Skilling touted EES as Enron's "next star," predicting that the unit would be generating $500 million in income in a year or two.

"I'm thinking, 'What drug is he on?' " Ceconi recalls. "I said, 'Hey, Jeff, what's your strategy for getting us there? I mean, do you know something we don't know? Because we have no product to sell.' He said, 'Oh, you guys are the creative ones. You'll come up with it.' He was totally blowing smoke. We all got laid off later that day."

Less than two weeks after gutting Enron Energy Services, Skilling resigned as CEO, after just six months on the job. A day after Lay announced that Skilling wanted to spend more time with his family, Skilling himself acknowledged in an interview that he had taken personally the steep decline in Enron's share price under his watch.