Monday, December 24, 2001

It looks like some libertarians are still in denial about the Enron mess. Even George Will acknowledges that:

Enron's spectacular meltdown demonstrates how capitalism requires strong government to structure markets, and to enforce the transparency to sustain investors' confidence.

Contrast that with this piece from Reason by Michael Lynch on the Enron debacle (link via Brian Linse). Among other things, he says:

So who will ultimately bear the cost of Enron's collapse? The exact two groups who ought to: investors and employees. The first, because they took the risk freely in hopes of future rewards. Those rewards came in the past, and investors were handsomely rewarded. Markets are imperfect, and Enron was certainly another case of analysts failing to do their jobs. ...

That's not Reason; it's Rationalization. The analysts didn't just fail to do their job; they were prevented from doing it by deliberate fraud on the part of the management. The investors were the victims of that fraud. The fraud was enabled by lax securities laws and enforcement; those in turn were enabled by Enron's close ties with politicians of both parties, which went beyond campaign contributions. Sen. Gramm's wife was one of the members of Enron's board of directors, and received tens of thousands of dollars in fees for her services; she joined the board months after helping to get energy futures trading exempted from standard reporting requirements as chairwoman of the Commodity Futures Trading Commission. Quite a few high Bush administration officials (Cheney, Rice, etc., etc.) got consulting fees from Enron, or had very sizable holdings of Enron stock. And fraud is one of the situations where even most libertarians will acknowledge a role for law enforcement.

Oh yes, Lynch mentioned employees. He admits that their case ...

is more troubling, since no one wants to see people thrown out of work. This is worse in Enron case since, at the end of 2000, 62 percent of employees 401(k) account balances were in Enron stock. With the stock collapse, so too did many workers' retirement plans.

But here ... we have established systems, most notably unemployment insurance ...

It seems almost churlish to point out that unemployment insurance is a government program. But there's a deeper disconnect with reality in the Rationa..., er..., make that Reason piece here:

Markets, be they for groceries or microchips, are wonderfully resilient. Failure for one firm provides opportunities for others. Just as the failure of Safeway would not cause anyone to starve for lack of access to food, the failure of Enron has not caused a single factory, office building, or house to lose power.

Well, there may be no power shortages now, but the deregulated California energy market, a year ago, was leading to unprecedented price rises and blackouts in winter, which is a period of low demand (no air conditioners, and not much need for electric heat). That's inconvenient for defenders of deregulation.

So is the evidence that the shortages and blackouts resulted in part from generators deliberately gaming the system --- the S.F. Chronicle reported last may that utilities were deliberately shutting down and ramping up plants so rapidly that it risked damaging the equipment, for no obvious purpose other than running up prices on the spot market:

"What they would do, especially late at night, is if the price tanked, they would undergenerate," an operator said. "Then, mysteriously, the price would go up.

"Then, if the schedule was at 70 (required megawatt hours of output), they'd say, 'Go up to 90.' That would cause the price to tank. And they'd say, 'Bring it down again.' "

These fluctuations occurred within time spans of as little as 10 to 15 minutes, the operators said. But acceptable rates for bringing a unit from minimum to maximum levels when the plant was owned by Southern California Edison were more like 80 minutes, to avoid stressing the machinery, one of the workers said. Moreover, they were typically run at constant levels, which also reduced wear and tear.

"They were basically ramping up as fast as they can, and then slamming the brakes on," said one of the operators. "They were increasing the fatigue on the units."

Here's another story naming names, citing power plants inexplicably ramping down even during declared high-level power alerts, and alleging that workers were ordered to disable equipment. Defenders of deregulation typically deal with this sort of thing, when they do at all, by sneering at the charges and ignoring the evidence

Enron specifically doesn't come up in these sorts of stories, which means that they were either more scrupulous than their competitors, or better at hiding the evidence. Consider their balance sheets and make your bet. But they benefited from the runups in the spot market regardless.

It's worth noting that the California energy market was easier to game than some other deregulated states because of flaws in the California deregulation plan --- particularly, the effective ban on long-term contracts between generators and distributors, which made the market as a whole peculiarly, and unnecessarily, sensitive to spot market fluctuations. But that doesn't absolve parties who deliberatly caused fluctuations for their own benefit from the responsibility for their actions. And it's also worth noting that the energy companies bear a certain responsibility for whatever flaws there may have been in the California law, since it was largely written by their lobbyists. Which is, in its way, a very old story; a few centuries ago now, an astute observer of the operation of markets noted that

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.

I sometimes get the feeling that many of libertarians could benefit a great deal from careful study of this guy's meditations on supply, demand, and markets...


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