Enron: capitalism in a nutshell (Part 3)
Lessons of deregulation

by Anna Pha

"Despite the fact that Enron did not own a single power plant in the state, 
its control of the venue in which electricity was bought and sold placed 
Enron in almost total control of California's energy supply", concluded 
Tyson Slocum in "Blind Faith: How deregulation and Enron's influence over 
government looted billions from Americans"*

Enron was in this powerful position because of deregulation. Deregulation 
enabled Enron's directors to play fast and loose and also contributed to 
the company's collapse.

In the USA, the regulation of energy utilities dates back to the 1930s, 
when the Public Utility Holding Company Act of 1935 was passed in response 
to the actions of utility holding companies that were seen as a major 
contributor to the 1929 stock market crash.

Over recent years there has been a considerable drive by the private sector 
to deregulate the energy industry in the name of "competition policy".

"As Enron took the lead in the deregulation movement, the company showered 
millions of dollars on state and federal politicians in both parties whose 
support was critical in forcing open the energy markets". (New York 
Times, 20-1-02)

Former Presidents Bush Snr and Clinton and the then governor of Texas and 
the now President George W Bush, have all contributed to the deregulation 
process.

Speculation

As Government oversight and controls were lifted, the big corporations such 
as Enron were left to do as they pleased and the public and other customers 
were at their mercy. And they showed no mercy.

Enron found it more profitable to specialise in energy trading rather than 
to generate and sell its own electricity. The company turned electricity 
into a speculative commodity, exploiting the essential nature of the 
service and its own monopoly position as a distributor.

In the new unregulated environment, Enron was not obliged to disclose 
prices or the volumes bought and sold. The company and its subsidiaries 
bought and sold bulk energy, often with each other. They were not 
accountable.

In the year prior to December 21, 2000, — the date when Enron was 
permitted to operate its own unregulated auctions — California experienced 
only one "rolling blackout", creating a Stage 3 emergency.

In the first six months of deregulation up to June 2001, 38 Stage 3 
emergencies were declared. Stage 2 emergencies increased 81 per cent and 
Stage 1 by 21 per cent in the same period.

During the same six months Enron's revenues increased by nearly US$70 
billion over the previous year.

Although Enron did not own power stations it was able to withhold 
electricity supplies through its energy auctions. It created artificial 
shortages to force up prices and hence, profits.

"The correlation is clear", wrote Tyson Slocum, "Phil Gramm's commodities 
deregulation law allowed Enron to control electricity in California, pocket 
billions in extra revenues and force millions of California residents to go 
hundreds of hours without electricity and pay outrageous prices." ("Blind 
Faith")

Senator Phil Gramm was on Enron's donor list and his wife was on its board. 
He blamed the crisis on "environmental extremism and interstate 
protectionism". His solution lay in "common sense and market freedom"!

Bush's response to the crisis was to call for more deregulation.

Re-regulation

Public and corporate pressure became so great, however, that the federal 
Energy Regulatory Commission was forced to re-regulate and introduce strict 
controls on wholesale prices.

Spot prices fell by more than 80 per cent and the "rolling blackouts" came 
to an end. Enron came crashing down as it held contracts which depended on 
high prices.

Enron's role was entirely parasitic. It added not one cent of value. 
Electricity was bought and sold up to five times before reaching the 
consumer. Each sale was expected to produce a profit.

Consumers were promised that deregulation would bring a 20 percent 
reduction in electricity prices. It was claimed that "competition" would 
result in improved services, greater reliability and consumer choice. These 
myths of deregulation were used to justify Enron's practices.

Realities of deregulation

So what are the real consequences of deregulation and competition?

High, volatile prices — Enron handled one fifth of the electricity and gas 
sales in the US. Enron and the other energy traders forced up prices by 
more than 1000 per cent in California.

The breakup and contracting out of the different functions into generation, 
transmission, marketing, connections, installations, repairs, metre 
reading, infrastructure maintenance, etc, is unnecessary. It creates many 
layers of profit making, and confusion and frustration for consumers.

Unreliable services — The rolling blackouts and artificial shortages 
experienced by California were a direct consequence of deregulation. This 
was the "genius" of market forces at work — at work making private profits 
for Enron and chaos for consumers.

Job losses — Deregulation, competition and privatisation involve 
continuous job cutting and attacks on wages and working conditions.

In an honest moment, Enron's former President Jeffrey Skilling summed it 
up: "You must cut costs ruthlessly by 50 to 60 percent. Depopulate. Get rid 
of people. They gum up the works."

No obligation to provide universal service" — In Massachusetts, no utility 
was prepared to serve residential customers. The companies set about 
"cherry picking" the most profitable markets, refusing to cross subsidise 
less profitable customers.

This of course, did not stop the utilities in 11 US states that had 
deregulated from receiving or demanding more than US$112 billion to bail 
out failed investments. The corporate sector demands that profits be 
private but that governments bail them out with public welfare.

Health & safety take a back seat": Self-regulation by corporations results 
in short cuts and cost savings, usually to the detriment of workers.

Environment neglected — There is also environment is neglected in cost 
cutting. It pays (with more sales) to encourage the usage of more 
electricity. There is little incentive to conserve energy or develop 
alternative, renewable sources.

Loss of tax revenue — With little or no accountability, the creation of 
hundreds of subsidiaries in tax havens and generous government tax rebates, 
the public purse misses out completely, or as Enron claims, the tax 
department owes it money.

Profits, profits and more profits — Enron wasn't the only energy 
corporation to exploit deregulation. Duke Energy doubled its revenues as 
deregulation set in. Dynegy tripled its net income. All of this while 
Californians were literally and figuratively left in the dark while paying 
higher prices.

Public sector puts people first

Electricity, natural gas, telecommunications and water are essential 
services. They cannot be left to the whims of market forces, to profit 
gouging companies which have no interest in meeting the needs of the whole 
community.

The break-up and contracting out of the different functions into 
generation, transmission, marketing, connections, installations, repairs, 
metre reading, infrastructure maintenance, etc, is unnecessary. It creates 
many layers of profit making, and confusion and frustration for consumers.

Electricity or gas travels down a line or a pipe, as the case may be. It is 
the same product reaching the home or business establishment. There is 
absolutely no need or logic in having more than one supplier using the same 
pipes and lines with products that are indistinguishable.

One pubic utility for each service is required. In that way the many layers 
of profiteering can be removed, service provision can be integrated and 
prices regulated with cross-subsidisation ensuring universal, quality and 
reliable service.

Australia going down Enron path

In the name of "competition policy", Australia is moving in the same 
disastrous direction as the US.

This is being done with electricity, natural gas, water, postal services, 
telecommunications, and many other important public services. Deregulation 
and privatisation are being phased in by such means as corporatisation, 
breaking up of utilities into component functions, contracting out, phasing 
out price caps, ending cross-subsidisation and universality of services and 
lifting restrictions on foreign ownership.

The NSW Treasury recently declared privatisation of electricity off the 
agenda. But this deceptive declaration covers up proposals for private 
electricity traders to have the right to buy and market the electricity 
generated by the three state-owned generation companies. At present, 
electricity is distributed by four state-owned distributors.

The private traders will be allowed to practice "risk management" and trade 
in derivatives** as Enron did!

In the case of electricity, the state and federal governments agreed on the 
establishment of a National Electricity Market with states hooked up to a 
national electricity grid.

At present electricity in the national market is traded in half hour blocks 
with a cap of $5000 a megawatt hour. The ceiling price will be doubled to 
$10,000 in April and after January 2003 there will be no cap whatsoever.

In South Australia, where considerable deregulation and privatisation have 
already occurred. electricity generation was taken over by transnationals 
including the giant Texas Utilities and Origin Power. The transmission 
lines were handed over to another private company. Other companies handle 
the retail side, selling to consumers and delivering the bill.

Last winter the SA experienced 1000 blackouts! Prices rose on extremely 
volatile markets. The cost to schools, hospitals, charities and providers 
of aged care rose by 30-100 per cent.

On one occasion local generators abandoned their South Australian 
customers, blacking out whole suburbs as they chased Victorian clients. In 
Victoria $5000 was the going price when a sudden industrial dispute created 
a shortage.

And while South Australians sat around with candles, Northern Power's 
weekly income rose from $278,564 to $10,618,619. Other generators made 
similar killings.

When the Victorian Government knocked back a push for an average price rise 
of 18 per cent for household power and capped price rises to an average of 
4.7 per cent last December, there was an angry reaction from the three 
city-based private retailers.

AGL, CitiPower and Pulse Energy — the three city retailers — said the 
price cap would undermine competition. Yet we are supposed to believe that 
prices would fall with deregulation and competition.

The lower price claim is a myth. The aim of removing the cap is to be able 
to charge higher prices and make larger profits.

There is still time for us to learn from the Californian experience but 
governments are not listening.

* * *

*Blind Faith is published by Public Citizen, an organisation representing 
public interests founded by Ralph Nader in 1971.

**Derivatives are a form of gambling on future prices. In the case of 
industry, various types of contracts are bought (options, futures 
contracts, etc) that give the speculator the right to buy a certain 
quantity of a product at a certain price at a certain time. A business, 
heavily reliant on electricity might buy such an option to hedge against 
future price rises. If prices do not go the way anticipated, they can 
result in massive losses. Stupidity? Madness?, yes, but that is capitalism!