The Battle Of Fort Hamilton

Only Enron ultimately stepped forward to bid on the Fort Hamilton project. Much to the disappointment of other utility providers in New York, it seemed only Enron was capable of meeting the Army's requirements. Fort Hamilton officials wanted a utility company that would not only maintain and operate the base's utility plants, but buy them from the government. Prior to the push toward privatization, the government had maintained ownership of its facilities.

In late 1999, Army officials had no idea that within a few years, Enron would file for the largest bankruptcy in U.S. history, and that its failure would torpedo Fort Hamilton's privatization plan.

Providing power for an entire Army base could have been a lucrative enterprise for many firms, but the onerous provisions of taking on Fort Hamilton's assets made many companies balk. Also, a number of regulated utility providers were prohibited from operating under the terms of the Fort Hamilton contract, because state regulations specify that they may only provide one type of utility service to a single customer. Fort Hamilton officials wanted one company to provide all services.

As an unregulated entity, Enron was able to do just that, according to the New York State Public Service Commission, which granted the company a special waiver freeing it from the restrictions of its regulated rivals. That gave Enron a tremendous edge, and lowered the Army's costs-on paper. In reality, the company went under just months before the Army was scheduled to begin turning over power lines and plants and other utility assets to the company. Had the handover occurred, the Army could have been tied up for months in bankruptcy court to get those assets back.

The Army failed "to privatize rationally," says one attorney familiar with the Fort Hamilton contract who asked to remain anonymous. Officials overlooked the inherent risks of doing business with unregulated companies, the attorney says. State regulators have struggled for decades to perfect the art of protecting consumers from the vagaries of the utility business. But officials at Fort Hamilton bought into a much riskier philosophy pushed by Enron and other unregulated providers-that competition for utilities should be open to the market as a whole. In the process, they overestimated their ability to police unregulated companies, the attorney says. "[The Army] assumed that it could internally develop what had been a century-long period of expertise, and that they could do it overnight. It turns out that they couldn't, and that they didn't," the lawyer says.

The Fort Hamilton experience led to a sweeping change in the Army's privatization strategy. Now the Army no longer requires that a single company provide all energy services on a base, says John Nerger, the service's director of facilities and housing. And as a matter of policy, all Defense agencies will now openly compete privatization contracts if more than one company expresses an interest, regardless of what restrictions state regulators might have placed on providers.

For its part, Enron exited the military utilities business not long before it collapsed under the weight of its financial troubles and unprecedented scrutiny from lawmakers, federal regulators and the public. Before filing for Chapter 11 bankruptcy protection, the company had backed off opportunities to bid on other utility contracts, seeing that they weren't as lucrative as executives had initially hoped.

Enron Federal Solutions' former vice chairman, Thomas White, has steadfastly maintained that the firm was shown no special favors in its bid at Fort Hamilton. Nerger says he had no discussions with White about the Fort Hamilton matter after White left his corporate post and became secretary of the Army, where he continued to aggressively push for the privatization of Defense utilities. Today, two state-regulated utilities provide service at Fort Hamilton.