When the stock of energy giant Enron fell to 36 cents per share this week from a high of $84 this year, the market finally accepted the reality that the company–a middleman whose main business was not producing or delivering power but trading it–was never really needed. Investors, who unlike Enron executives, didn’t sell until too late lost their retirement savings and children’s college tuition to the illusion.
Enron workers sacrificed their retirement plans, which were locked up in Enron stock that was frozen by Enron executives after they sold off their own shares.
California ratepayers will pay billions too much for power over the next decades to foot the bill for price gouging by Enron and its proteges. The task for both society and the market now is to prevent such mirages in the future.
The illusion that Enron had value was created through both politics and philosophy.
The company’s chairman, Kenneth Lay, was one of President Bush‘s biggest donors and was an energy advisor to Vice President Dick Cheney. Lay was even rumored to be on the president’s short list for Treasury secretary.
Lay’s power over the Bush administration was so great that he has been credited with forcing the nation’s chief energy regulator out of his job because the regulator disagreed with him.
Enron created itself through a growing corporate vision: If you want market share, create a market, even if there is no need for it. Lay turned a stodgy gas pipeline company into a tech-savvy energy trader.
The “make a market” mantra, in conjunction with his long-standing ties to political leaders, shifted the nation’s energy system from regulated monopolies to a deregulated, wholesale market-based system with few rules and even fewer entities with the technical capacity to make sense of it.
For Enron and Lay, a market was a tool for profitability, not productivity. Rather than add efficiency to the energy delivery system, Enron simply added layers of expense.
The new energy market, with Enron at its vanguard, became a free-for-all of energy companies selling electricity back and forth like pork bellies while siphoning off the excess with each trade.
Its apparent success made Enron a shining star on Wall Street. Chairman Lay took in $141.6 million in salary, bonuses and stock in 2000. He cashed out another $20 million earlier this year. Former chief executive Jeffrey Skilling took home $70 million in 2000.
Meanwhile, what did Enron accomplish?
If a competitive market was supposed to drive prices lower, why were Californians paying so much more for their power?
Why were there blackouts?
Indeed, Enron‘s stock was so high due to investors’ belief that the company would continue to price gouge in California and, as their deregulation model took hold, throughout the country.
Greed, cloaked in the promise of a competitive market, created and drove the deregulated energy system. So it should come as no surprise that Enron would try turning the free money skimmed from ratepayers into more free money by creating new markets.
But through foolish investments and poor management decisions, their money began to evaporate.
Without oversight, Enron managed to conceal massive mistakes. It played accounting games to hide problems and shifted money from book to book to maintain the illusion of success.
Why would Enron come clean about partnerships that were unprofitable, if no regulators were there to make it do so?
Like Icarus, the company flew too high and came crashing down. Only the small investors and pension fund mangers who bet on the company were burned, while insiders parachuted out into the sunset with all the proceeds.
The moral for society should not only be that markets need rules and limits, but also that some things don’t need markets at all.
Enron took over a system that reliably moved a public good–electricity–from power plant to home. It used deregulation to make money out of nothing, simply by adding cost to the product en route.
Federal regulators should ensure that if Lay or other Enron executives deceived the public, they pay a price.
Courts should return to workers and shareholders as much of their losses as possible.
The energy system must reinstate rules.
Most important, society must recognize that when such great value is pinned on illusions, it will also have a great cost.