Does Anyone Remember Enron? Or their Plan?
It seems like ages ago. The collapse of Enron. The embarrassment of corporate executives. It was just so corrupt and tacky. But the Enron plan rolls on, much to the unknowing dismay of each of us who are attached to the electric grid.
The plan was simple in its concept and from an executive’s point of view, a fairly standard business plan. The generic plan was one that all executives understand: find a niche where prices are low, find a way to control the price, and drive it up. The Enron plan had a twist. For it to work, electricity had to change from being a boring utility to a high flying commodity.
Historically as technologies began serving the nation’s population, the government decided if it was valuable enough to be encouraged. Did the new technology benefit the populace? If so, was the technology life-sustaining or of great benefit, as opposed to merely a luxury?
If the technology was of great benefit, such as regional gas and electricity distribution, national telephone service, or municipal water distribution, the government placed obligations and restrictions onto the firms that handled them. A firm could not just run service to the easy, most profitable locations. It had to build infrastructure to farms and remote locations; and it could not gouge the users on price, thus making the technology available to almost everyone.
To make a technology affordable, the percentage of profit that a ‘utility firm’ could generate was limited, after subtracting all costs. Investors understood that they could invest their money into volatile companies that may or may not make a great return on investment, or they could invest in a utility and be guaranteed a low, safe return.
So Enron executives along with electricity executives from across the country decided that if they were to generate large profits, and therefore large salaries and bonuses, they needed to eliminate the profit restrictions from their industry. Only when electricity traded as a commodity, bought and sold at a high prevailing rate, would their incomes be what they deserved.
Americans love entrepreneurs and an open, competitive marketplace — let the best firm win our business. So the cry went out by way of lobbyists: deregulate, compete, fairness for all. They targeted the states one at a time, sending all of their lobbyists in to spread the word, and the money. “Deregulation will benefit the electricity users since competition will drive the price down. How can a state legislature be so cruel that it would deny these lower prices?” A donation was made here and there, a fact-finding trip funded, maybe other things, who knows? Deregulation and a better life for all were to follow.
Of course the opposite happened. Electric prices went up in deregulated states. The first deregulated states were selected because they generated low-cost electricity. Once deregulated, the power generators did two things: transferred the generation stations once of twice to ensure that the state could not affordably reverse its decision, and began selling its affordable power to other states that paid more for electricity. If the generating state wanted electricity, it would have to match the other buyers’ price. So up goes the price of electricity, in state after state.
Now the commodity brokers can get involved. Buying futures and reselling them as the price rises. Tying up available contracts until prices meet their targeted profit margin. A transformation: electricity has gone from being a boring utility to a high flying commodity. Even with Enron’s death, the plan moves ever forward, bringing benefits and profits to executives everywhere. Sweet!
IndiscreetSage