The economic and political news these days is dominated by the recent events surrounding Enron. The story has all the elements of a good novel—billions of dollars vanishing, lives tragically impacted, alleged chicanery and secrets, prominent names from all sides on the political contribution list, high-profile attorneys and accountants, and a company whose success became in many ways synonymous with the economic renaissance of major, legendary city.
I have no doubt the saga will spawn numerous books, movies, and documentaries. It will be played out in Congressional hearing rooms, courts, radio talk shows, and both network and cable news outlets. It will attract an ever widening cast of colorful characters, be closely scrutinized by financial markets, be an issue in the mid-term elections, and ultimately impact public policy on several fronts. We will be treated to an endless stream of impassioned rhetoric and, then, the inexhaustible supply of expert commentary on each day’s happenings. Like Elian, Monica, and O.J., we will be graced with “All Enron, all the time!”
In an effort to be a least moderately novel, I’d like to put all of that stuff aside for the moment and focus on some fundamentals. First, the demise of Enron does not spell doom for energy competition. Far from it! It has been repeatedly demonstrated that competition brings lower prices, greater innovation, and more consumer choice. While changing the way we buy and sell electricity after many decades will have its temporary bumps and glitches, the long-term effects are decidedly positive. The train has left the station, and neither a bad law in California nor the demise of a single trader is going to stop it (nor should they).
Second, energy trading is an entirely legitimate activity which makes markets more efficiently and provides needed services to consumers and producers alike. Indeed, such functions are essential to the proper operation of modern markets—and can be highly profitable as well. Even as Enron was filing for Chapter 11 protection, suitors were clamoring to acquire its trading business and competitors stood more than willing to plug any gaps that might appear. Some hats may change, but the basic process will continue and expand on a global scale. Markets routinely absorb the rise and fall of individual companies.
Third, by its very nature, trading natural gas and electricity (or just about any other commodity, for that matter) is a volatile business. It is characterized by high risk with the prospects of high return (or not), and it is not for the faint of heart. It is the lure of massive profits and the abundant risk that gives this area its excitement, but is not and never has been the place for your grocery money. While various alleged actions will be poked and prodded ad nauseam and ad infinitum, we shouldn’t lose sight of the fact that all or a substantial part of the actual losses from the enterprise could have occurred without any of the stuff which has garnered the headlines. A year ago, natural gas prices were at historic highs, California was in the midst of power outages, and gasoline prices were soaring. In such a market situation, it is easy enough to be both completely legitimate and spectacularly wrong. It happened with tulips in Holland in the 1630s and, more recently, with derivatives and dot-coms. If your tastes run toward high risk investments, you might want to again ponder the age-old wisdom of diversification. (By the way, some of the problem was with old-fashioned, traditional assets.)
Needless to say, there will be plenty of sideshows to divert our attention as this complex tapestry is unraveled thread-by-thread. In the midst of the madness, we could do well to occasionally harken back to some fundamental truths which transcend the fate of a single, albeit notable, firm.