Ken Hirsch writes:

>  It may be that Enron was manipulating the market,
>  trying to corner electricity in California, as it were, but I haven't yet
>  seen evidence of that.

Let me apologize for that failing, but apparently you didn't have time to
read the supporting material I included in the various postings at the time.
Among the most important of these was the Sacramento Bee's series of articles:


http://www.sacbee.com/static/archive/news/special/power/050601california.html

...although I myself was made aware Enron's behavior by a "Frontline" episode
on PBS earlier that year in 2001. If PBS should ever happen to rerun the
show, I think that you would find it extremely interesting. It certainly
irritated the heck out of me.

I also referenced at the time a non-sensical defense of the then-current
situation by Senator Larry Craig, archconservative Republican of Idaho. He
wrote in part:

=======================================

The California Energy Crisis: Fact versus Fiction
by US Senator Larry E. Craig
June 13, 2001

[snip]

Let us put to rest this conspiracy charge. Are the independent generators
withholding capacity from the market? The facts show that quite the opposite
is true.

The facts show that the power plants acquired by these generators are
producing more electricity then they have produced in recent memory. Indeed,
the owners of these plants, the alleged pirates and price gougers from Texas,
have generated far more electricity from these plants than was generated when
they were owned by the California utilities.

For example, the Williams Companies has been one of those suppliers accused
of withholding electricity to drive prices up. What is the truth about the
output from the plants whose power they market?

The conspiracy theorists say that these plants have been taken out of service
under suspicious circumstances. This is nonsense. These plants are old
natural gas fueled plants that use out-of-date technology. The average age of
these plants is over 30 years. They have been running beyond their reasonable
limits in order to provide power to Californians.

And so of course they need to be serviced. I am amused when the conspiracy
theorists point to plants taken out of service for maintenance in January and
later this past spring, and say this is proof of market manipulation. In
fact, these are traditionally maintenance periods for such plants, in order
to prepare them to run full out in the peak summer season.

=======================================

Two months later, individual employees of the Williams Companies began coming
forward, telling exactly the opposite story, of their orders to take
individual California plants off-line or to sharply curtail their outputs
during specific hours. These whistle-blowers eventually testified in front of
Congress, which ultimately slapped a modest fine of a few million dollars on
the Williams Companies.

At almost exactly the same time, the Williams Companies began running public
relation advertisements extolling their virtues as good corporate citizens on
the Sunday morning news shows, a bit of behavior that I have come to consider
a true red-flag for suspicions of misbehavior.


>  Deregulation did, in fact, spur an increase in supply, which
>  was one of its goals.

That's true, but in the most bizarre manner possible.



>  Electricity deregulation has proved successful most places it has been
tried
>  and will probably continue to spread.  Texas has said this month that they
>  will continue with their plan to deregulate.

That's also true. Texas believes that it has a 13% excess supply capacity and
thus the market gaming that was forced on California can't happen to them.
However, all of the other states in the west have either called off or
sharply curtailed their movements towards deregulation.



>  What seems to be clear is that the Enron executives lied about their debt
>  and their earnings in order to keep their stock price high.  Other
companies
>  have done that--e.g. Sunbeam during the "Chainsaw Al" Dunlap reign.  I
don't
>  seem to remember them being involved in energy trading or any kind of
>  speculation.

No, but Arthur Andersen was also Sunbeam's accounting firm, as it was for
Waste Management, two other very similar scandals to Enron. Anderson
ultimately paid a $110 million dollar fine to the government for the
accusations of fraud involved the Sunbeam affair.


>  I don't see anything in your e-mail of last July about hiding debt or
>  inflating earnings.

There's no way that I or any other outsider could have known what they were
doing internally, but what they were doing with their fundamental business
model was an altogether different kettle of fish, and that was becoming
increasingly transparent.

It's often said that the reason that golf is so important to business
executives is that it lets you measure the honesty and personal integrity of
the people that you might do business with. If a person cheats on the small
stuff, who knows what he will do when the questions become critical.

Given Enron's fundamental mode of business, all of their other activities
should not be very much of a surprise.



>  Yeah, yeah, more regulation, that's the ticket.  Could you be more specific
>  as to what specific regulations would have prevented this?

I can only presume that you're kidding about this. One of the stories I
remember best from my high-school American history classes was that of FDR's
fight against the electric utility holding companies that sprang up during
the 1920's. During his tenure as governor of New York, he did everything in
his power to stop the price gouging of the very few monopolies that served
his state. Electric power then was inordinately expensive and unreliable, run
then by "steely-eyed capitalists (or "major league a**holes", as I wrote last
year).

Having been elected President in 1932, FDR made the regulation of the
nation's electric supply one of his top priorities, particularly so now that
the depression had set in. In his 1935 State of the Union speech, FDR
described the monopolistic holding companies as "evil". Later that year he
pushed lesiglation through Congress that created four forms of highly
regulated electric power utilities: investor-owned, publicly (municipally)
owned, community-owned (primarily in rural areas), and government-owned, as
created in the REA (the rural electricification authority) and the TVA, the
Tennesse Valley Authority, thereby breaking up the "holding companies" grip
on the generation and distribution of power in the United States.

The result of Roosevelt's initiatives was 60 years of extremely dependable,
reliable and inexpensive power that fueled the growth of the US's economy. In
the late 1980's the philosophical tide began to turn back to the notion of
deregulation. The consequence of that ebb has been an amost 180 degree swing
back to the unregulated world of the 1920's.


>  So, are we going to see these kind of revelations and stock collapses with
>  Dynegy, Reliant, and other energy traders?

I have no way of knowing. But what I can say with at least some possibility
of being correct is that there's a better than even chance that Andersen
Consulting, a company roughly the same size as HP, will cease to exist within
the next 12 months. Arthur Andersen has no product; rather, it offers only
services, and thus depends wholly on its credibility for its survival.

In that regard, BusinessWeek writes this week, not about Andersen
specifically, but about the current business climate in general:

=======================================

Can You Trust Anybody Anymore?
The scope of the Enron debacle undermines the credibility of modern business
culture. Let's get back to basics

[snip]

We now know that something went seriously wrong in the march to deregulation.
There is no question that deregulated markets are generating lower costs,
higher growth, and lower unemployment for the U.S. economy. But dereg
ideologues, such as Enron's President Jeffrey K. Skilling and the company's
political allies in Washington, convinced the nation deregulation meant no
regulation. A big mistake. Enron and other companies used the transition to
deregulation to gain access to Congress and regulators and write their own
rules. They persuaded the Commodity Futures Trading Commission to let Enron
and a few other companies run largely unregulated energy-derivatives trading
businesses. Wendy Gramm, who at the time was head of the CFTC, later joined
Enron's board of directors--on the audit committee.

Financial complexity made it easy to mask the truth and play financial games.
The financialization and securitization of the real economy into mathematical
bits and bytes allowed Enron and others to massage earnings results in
infinite ways. Off-balance-sheeting financial engineering became the
requisite way to boost earnings and stock prices. Hundreds of companies have
done it. Common standards were replaced by idiosyncratic measures. Slowly but
surely, the financial truth disappeared. No one, not the accountants or
lawyers or bankers or Wall Street analysts, protested as the bottom line
became a fiction. On the road to deregulation, basic building blocks of
capitalism--clarity, transparency, fairness, openness--were sacrificed.
Everything the public needs to evaluate risk, value stocks, and participate
in an equity culture was undermined. Americans embraced the equity economy in
the '90s because they believed they could participate in it fairly. They
didn't expect to see their 401(k)s go up in smoke.

Who can come to the rescue? The reputations of many of the professionals who
were counted on to safeguard the economic system lie in tatters. Corrupted by
the chase for an ever-greater piece of the action, accountants, lawyers,
analysts, and managers have shirked their duty on a scale not seen since the
1920s. Conflicts of interest abound as accounting firms sell services to the
companies they audit and accountants jump to the corporations whose books
they examine. The accounting profession has successfully fought all attempts
at reform, rebuffing efforts to end conflicts of interest, impose stricter
oversight, or increase liability for their actions. In short, most certified
public accountants feel little duty to the public at large.

Nor do lawyers see themselves as officers of the court, which they are.
Vinson & Elkins LLP was asked by Enron Chairman Lay to check out whether
Watkins' seven-page warning of financial deceit warranted action. It came
back with a "No." Wall Street analysts stopped being honest when their
compensation became contingent on their firms getting investment-banking
business from the companies they covered. And bankers are too busy selling
fee-based services to carry out due diligence on loans and debt. They have
enormous conflicts of interest. The Glass-Steagall Act was passed in 1933 to
stop those conflicts. Its repeal in 1999 has ushered in their return.

=======================================

Wirt Atmar

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