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May 12, 2002
David Warsh, Proprietor


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Shorty is Alive and Well

Enron Corp.’s conduct during the California power crisis of 2000-2001 (and that of other energy companies) seems certain to go into history books as the most memorable price fixing case since the General Electric/Westinghouse electrical equipment scandal in the late 1950s. That was the last time senior executives of some of America’s biggest companies went to jail.

It turns out from internal documents made public last week that Enron energy traders pursued strategies they dubbed “Fat Boy,” “Death Star” and “Get Shorty” to manipulate wholesale electricity prices at the height of California’s energy crisis, in order to inflate profits.

The state of California reckons that complicit companies may have looted as much as $30 billion during a six-month period in late 2000 when local energy prices rose ten-fold.

“Who says that business isn’t fun?” writes economist Paul Krugman in his New York Times column.

It is worth emphasizing that Enron lost this game. Shorty won — meaning those who bet one way or another against Enron’s capacity to successfully rig the market. The manipulators, at least some of them, probably are headed for jail. The bears made the real money, by betting in 2001 that energy prices — and Enron shares — would fall.

Indeed, the “Get Shorty” strategy apparently was not an attempt to clobber these skeptics, but momentarily to join them. Enron was betting against itself, in hopes that still more manipulation lay ahead. The joke’s intent was not parallel to the dark humor of the other strategies’ sobriquets. Some guys will do anything for a laugh.

Nor should we be astonished when such shenanigans take place. “People of the same trade seldom meet together, but the conversation ends in a conspiracy against the public, or in some diversion to raise prices,” wrote Adam Smith some 225 years ago.

His observation has been a reliable guide ever since.

Sometimes these plans eventuate. When they do, often they succeed, at least for a time, and then they fail. The real story in Enron is the meta-story — the fact that price-fixing is difficult to do successfully for any length of time. The ritual collapse of some scheme occurs at least once every generation.

Take the electrical machinery scandal. Like the California electricity squeeze, it occurred towards the end of a prosperous peacetime decade, with business culture regnant. Paul Samuelson and William Nordhaus recount the details in their economics text:

“Executives of the largest companies — such as GE and Westinghouse — conspired to raise prices and covered their tracks like characters in a spy novel by meeting in hunting lodges, using code names and making telephone calls from phone booths.”

In court, top executives claimed they didn’t know what their vice presidents were doing. The vice presidents went to jail. J. Fuller entertainingly chronicled the episode in “The Gentleman Conspirators.”

What was the fallout? A distinct push was given to the reform agenda of John F. Kennedy, who edged out Richard Nixon in the autumn of 1960 on a promise to “Get this country moving again.” In the 1960s and 1970s, big businesses generally operated under a slight presumption of guilt.

The next big episode of price-fixing was undertaken in the early 1970s by the Organization of Petroleum Exporting Countries — with the complicity of the government of the United States, it was fairly widely believed. It took some doing to bring down the oil cartel, including an episode of tight money in the early 1980s that sent interest rates to 20 percent. The vague presumption of guilt shifted to governments for the next twenty years.

Now the Enron scandal is running its course. You can read the damning letters for yourself, on the Federal Energy Regulatory Commission site where they were posted last Monday. See the files under “Follow-up questions” at http://www.ferc.fed.us/electric/bulkpower/pa02-2/pa02-2.htm#request.

Enron’s own lawyers wrote them. You can see how the third letter tries to undo the damage of the interpretation of the first two.

The Bush administration is scrambling to show that it has behaved according to the old Texas dictum often attributed to Senate majority leader Lyndon Johnson before he became president: “If you can’t drink their whiskey, screw their women and still vote “no,” you don’t belong in politics.”

Thus the administration first crossed its generous campaign supporter when it withdrew from the Kyoto protocol on greenhouse emissions — Enron had been an enthusiastic supporter of the treaty. Bush’s choice to head the Federal Energy Regulatory Commission, his fellow Texan Patrick Wood, put an abrupt end to the California crisis when he imposed interstate power price controls at California’s urging in June 2001.

The administration then refused to take Enron executives’ phone calls as the company careened into bankruptcy. And it was Wood who posted the incriminating evidence of “Fat Boy,” “Death Star” and “Get Shorty” on the FERC Website last Monday, hours after he received the documents from Enron attorneys.

Whether these and other measures defuse the issue politically remains to be seen. But the episode certainly has made clear why regulators are important. Ambition must be made to counteract ambition, as another old timer, James Madison, wrote 215 years ago. That’s why neither regulation nor deregulation is going to go away.

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