Enron: Bad Business, Worse Government

by Alexander "Ace" Baker

With the recent release of the soon-to-be-infamous “Enron Trader Tapes,” media pundits are once again propagating the myth that big business is evil and must be reined in by (still more) government regulation. A closer look at the facts should make it clear that the gouging of California energy customers and taxpayers was orchestrated by government, for government, and that shenanigans like those discussed on the Enron Tapes are impossible in a free market.  

On the tapes, an Enron energy trader is heard using profanity and talking about taking “Grandma Millie” [public utility companies] for millions of dollars. "Well he makes . . . between one and two [million] a day, which never shows up on any curve shift . . . . He steals money from California to the tune of about a million . . . . " Peter Jennings was barely able to contain his joy at being able to play that for his World News Tonight audience Wednesday.  

Clearly, these Enron guys were in it for themselves and were using their position to full advantage. They were fraudulently overstating the assets of the company to inflate their stock price. But how did they ever get into a situation where they could manipulate energy prices at will? How were they able to stick their greedy hands into the pockets of California taxpayers?  

Let’s do a little thinking. Any seller can set prices wherever he wishes. The guy at 7-11 can ask $1,000 for a loaf of bread. If that happens, I’ll just go to the grocery store. That $1,000 was only the asking price, not the sale price. Competition between 7-11 and the grocery store will force 7-11 to lower its price or else go out of business. The same is true of the labor market. I could announce that I wish to be the chairman of Sony Records and receive $1,000,000 in salary, but the owners of Sony could dismiss me as delusional.

In a free market, sale prices are set by the interaction of supply and demand. The only way to manipulate this basic law of the universe is to threaten physical violence, and the only people who can legally initiate physical violence are government agents. Any time we hear of some corporation manipulating the market, or gouging consumers, it should raise a red flag signaling us to look for the strangling hands of government.

Energy production and trading in California is the furthest thing from a free market.

First, the government grants a monopoly to a single energy provider for each geographic area, eliminating competition.

Second, there have been government price controls on energy since the beginning of the industry. Freely fluctuating prices are the single most important aspect of a market, because prices send vital information to both producers and consumers. Artificially controlled prices send false information, and this creates a harmful misallocation of resources.

Third, the government prevents an increase in the supply of electricity by blocking the construction of new generators. Nuclear power is a clean, cheap and viable method of electricity production, yet there has not been a new plant built in California in over 30 years. This shifts the burden onto natural gas, which is more expensive and more dangerous. We are left with no alternative but to import electricity to meet the ever-increasing demand.

Now, supposedly to remedy this situation, the California government under Pete Wilson imposed yet another intervention, calling it “Deregulation.” It’s hard to imagine a more misleading term. They allowed the wholesale price of energy to fluctuate, while continuing to fix the price at the retail level. Anyone with an understanding of economics could have (and did) predict the outcome: Massive shortages of electricity, and a taxpayer rip-off. Unable to increase supply, unable to lower demand by raising prices, the local utilities were stuck. This made them eligible for taxpayer bailouts, always more fun than earning a living on the market. Enron, being both a supplier of natural gas and an energy broker, and enjoying government monopoly contracts in these areas, was poised to exploit the situation.

The government then lifted the retail price control in one small area, San Diego and South Orange County . This meant that the power supply there was suddenly opened up to the desperate demand of the entire Western United States . Surprise! The price of electricity skyrocketed. That one little area had to absorb the price shock generated by an entire region. Blackouts and brownouts would follow, because if you don’t allow the market to work, resources must be rationed by politicians, i.e., force. This was enough to frighten the people into losing what little common sense they might have had left in the matter.

So, here came the government again. With willing accomplices in the ignorant media, new California Governor Gray Davis was able to pin the blame on, of all things, the free market! (Redefining words is a very useful tool.) Next came the final dagger, with Davis and the legislature entering into long-term energy contracts at high prices, and borrowing huge amounts of money. The taxpayers are on the hook for all this, of course. This then led to the political demise of Davis , but the damage was done.

Mission accomplished. The California Government now has license to extract untold billions of dollars from its productive workers indefinitely. As if that weren’t bad enough, voters replaced Davis with Arnold Schwarzenegger, who promptly passed a bond measure and refinanced the debt even further. Do not be misled into thinking that government was harmed by the whole fiasco. It has benefited greatly, despite the change of figureheads.

The Enron executives were liars. They were fueled by the reckless credit expansion of the Fed. But the market discovered this and punished them. For all their ill-gotten gains, Enron went bankrupt, which is exactly what is supposed to happen. It was the market that rid us of Enron, despite government regulators.

But who is going to punish the government officials? After all this, amazingly, we hear cries for greater government control. Wake up, people. Government regulatory agencies are not operating in the interest of consumers. They are the very means by which companies like Enron are able to insulate themselves against competition, and manipulate the market. The Enron tapes reveal this, as Enron had an entire department devoted to government affairs:

"This is the time of year when government affairs has to prove how valuable it is to [Enron execs] Ken Lay and Jeff Skilling," said an Enron trader, according to the tape transcript.

So government will sit back, watch the show, rake in tax dollars and bribes, and occasionally kill off a sacrificial lamb. When the public gets close to understanding the truth, politicians are happy to be characterized as inept. That way, they can appear benevolent while continuing the process that characterizes all government activity: Finding excuses to forcibly take money away from people. For those of you who still believe that government is merely incompetent, I urge you to instead replace that with the understanding that government is evil.