Lessons from the Enron Collapse
(Published January-February, 2002
In Infinite Energy Magazine Issue #41)
by Jed Rothwell
In December 2001, the Enron energy trading company
declared Chapter 11, in the biggest bankruptcy filing in U.S. history.
The ten largest filings since 1980 include two other energy companies:
Texaco in 1987 and Pacific Gas & Electric in 2001.
Last year, Enron was the seventh largest corporation
in the U.S. It was considered one of the most aggressive, successful,
and politically well-connected. It made close friends with high
officials in the U.S., Britain, and India. Rivals and enemies accused
Enron of exploiting the confusion in newly deregulated utility markets
for electricity, natural gas, water, and fiber optic communications.
They say its accounting practices deliberately obscured profit and
loss to confuse stockholders and regulators. Many people believe
Enron masterminded the California energy crisis, fleecing rate payers
and the state for billions of dollars.
Enron's political influence was extraordinary. The
CEO is a close personal friend of President George W. Bush, and
his biggest campaign contributor. Enron executives huddled with
Vice President Cheney to help write the National Energy Policy.
In May 2001, in an article titled "Bush Task Force on Energy
Worked in Mysterious Ways," the New York Times reported: "Richard
S. Shapiro, senior vice president of the Enron Corporation, a major
Republican contributor and the nation's largest trader of wholesale
electricity and natural gas, said top executives from his firm spent
half an hour with Mr. Cheney, but he could not tell how much this
may have influenced the final report."
The collapse had many causes. Enron made failed investments
in fiber-optic networks, a power plant in India, and water distribution
in the U.K. Top executives in the company are accused of unethical
behavior. The SEC is investigating shady deals in which they allegedly
enriched themselves, and formed partnerships designed to hide $500
million in losses. These are serious problems, but corporations
have survived worse, and Enron could have been fixed with new management
committed to reform. The fatal blow was the collapse in the price
of energy and the sudden end of the California energy crisis, which
drained cash and ruined Enron's credit. Enron was mainly a trading
company, a business that depends on good credit and customer confidence.
What lessons do these events hold for cold fusion
and other radically new and cheaper energy sources? Giant corporations
are not as powerful as most people think. Stock value, capital,
political connections, and clout can be erased by market forces,
or by the public, in this case the enraged rate payers of California.
If the public ever realizes that cold fusion is real, oil companies
and the DOE will be doomed.
The energy industry has vast wealth, power, and influence.
The U.S. has fought wars, in part to protect oil company interests
in the Middle East. It sends billions of dollars in oil revenue
to Saddam Hussein and other tyrants, who are committed to building
weapons of mass destruction. None of this is necessary. The New
York Times estimates that the U.S. could save 1.6 billion barrels
of oil per year, more than all imports from the Middle East, with
a single innovation: hybrid automobiles, now being sold by Toyota
and Honda ("Sunday Magazine," December 9, 2001, "Hybrid
Cars"). We risk nuclear annihilation, enrich our worst enemies,
and run up gigantic trade deficits supposedly because the public
does not want energy efficient automobiles, even though the savings
in fuel would pay for the extra cost of the engines. It seems more
likely that conservation is unpopular with policy makers. Judging
by its actions, the government's main goal is to shore up oil company
profits. The energy industry is ruthless. It is willing to risk
catastrophic global warming to protect profits. It cuts short countless
lives with pollution and flattens mountains to dig coal. If ever
a corporation has held sway over national energy supplies and policy,
and was in a position to dictate policy for its own benefit, it
was Enron. Yet, when circumstances changed, Enron's power evaporated.
The California crisis was the main cause of Enron's
demise. In retrospect, it is unlikely there was a significant physical
shortage of generator capacity in California. In the first half
of 2001, California consumed less electricity than in 1999 or 2000,
yet it paid billions of dollars more, and power outages occurred.
Investigators suspect that some generator plants were deliberately
taken out of service ostensibly for maintenance, but actually as
a ploy to tighten supplies and trigger emergency purchases. When
the Federal government imposed price caps, and power companies could
no longer collect a hundred times more revenue per kilowatt-hour
than normal, the incentive to withhold supplies vanished. Maintenance
went back to normal and the missing capacity reappeared. Many new
generator plants are under construction in California and the Pacific
Northwest. It seems likely there will be a capacity glut for the
next five or ten years.
Left-wing critics say this fiasco demonstrates the
failure of deregulation. They point to the City of Los Angeles,
which has a city-owned generation system, and never suffered from
a shortage or high rates. Conservative critics say the problem is
that the market is half-regulated and half-free. From my perspective,
the problem is not the laws, regulation, or deregulation, it is
that these companies are trying to sell obsolete, overpriced technology
to unwilling customers.
Last spring Vice President Cheney dismissed conservation,
saying it "may be a sign of personal virtue, but it is not
a sufficient basis for a sound, comprehensive energy policy."
California rate payers cut consumption 10% by turning off unnecessary
lights, buying new refrigerators, and compact fluorescent lights.
They put Enron out of business. If the public-consumers and voters-ever
realizes that cold fusion is real, it will insist the research be
funded and products brought to market. The energy companies, the
DOE, the Patent Office, the administration, OPEC, and many others
will fight this, but the public has more power than all of them