System Failure: Deregulation, Political Corruption, Corporate Fraud and the Enron Debacle. (Economics)

By Wheat, Andrew | Multinational Monitor, January 2002 | Go to article overview

System Failure: Deregulation, Political Corruption, Corporate Fraud and the Enron Debacle. (Economics)


Wheat, Andrew, Multinational Monitor


SMITTEN BY THE GENIUS with which it manipulated successive U.S. presidencies, the late great Enron Corporation tried to manipulate its own investors. Shareholders -- who had not balked at Enron's political machinations -- forced it into the largest bankruptcy in U.S. history by dumping its stock when they learned that Enron had played them for chumps.

From humble origins in the 1985 merger of two gas companies, Houston-based Enron transformed itself into the nation's seventh-largest reporter of corporate revenues. It did so by pioneering energy trading and flimflam accounting. At its peak, Enron controlled a fourth of all U.S. gas and electricity trades, profiting from the spread between a buyer's biding price and a seller's asking price.

In recent years, however, other energy companies launched competing trading operations, squeezing Enron's profits. At the same time, Enron launched disastrous financial trading ventures that took it away from its core energy business, trading such disparate commodities as water, paper, steel, computer bandwidth and weather derivatives.

Rather than admitting to a lull in its breakneck growth, the company took ever-bolder steps to cook its books. Enron pumped up reported earnings and hid mountains of debt to preserve the illusion of its once-stellar performance. Enron's colossal failure required a string of failures by Enron management, its "independent" board of directors, the legal and accounting professions, investors, stock analysts, credit rating agencies and numerous government officials and regulators.

ENERGY REVOLUTION

Enron doggedly pursued a vision in which natural gas would supplant other electric-generating fuels and consumers would buy kilowatts from competing suppliers rather than from a monopoly. It is no coincidence that a one-time gas company spearheaded this deregulation, since the United States effectively deregulated gas a decade before electricity.

Responding to supply shortages in 1978, Congress deregulated gas producer prices. From 1985 (when Enron formed) through 1992, the Federal Energy Regulatory Commission (FERC) issued rulings that eventually permitted open access to private gas pipelines, thereby relieving gas distribution bottlenecks. Subsequent steps by FERC and the Commodities Futures Trading Commission created huge gas futures markets that allowed industrial consumers to hedge the prices that they pay for energy commodities.

Congress took the first step toward electricity deregulation in 1978, when it authorized FERC to let private power producers compete in wholesale markets. This allowed industrial power users to bypass the utility monopolies, which still controlled the residential power market. FERC started approving such licenses in the late 1980s. Congress gave deregulation another nudge in 1992, when it deregulated wholesale markets further and required utilities to share transmission lines, thereby allowing utilities in high-rate states to buy power from cheaper, out-of-state suppliers.

California drove the electric deregulation experiment home in 1996, when its legislature unanimously passed a sweeping bill to deregulate the state's residential electricity markets. A slew of other states followed suit, including such major markets as Pennsylvania, Illinois, New York and Texas.

Acute labor pains accompanied the birth of deregulated electricity markets. The scorching summer of 1998 brought severe power shortages and price spikes of up to 20,000 percent to Midwestern and Eastern wholesale markets. Since California's residential electricity market opened in 1998, few households have switched electricity providers, yet consumers periodically have been hit by rolling blackouts and skyrocketing power bills. As deregulation's leading proponent and beneficiary, Enron became a deregulation poster boy widely accused of profiteering from a complex system that few people understand [See "Power Struggle: California's Engineered Energy Crisis and the Potential of Public Power," Multinational Monitor, June 2001].

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