Enron Questions & Answers
What is Enron? Until its decline into bankruptcy in 2001, Enron was the United States’ seventh-largest corporation. Enron grew from a natural gas pipeline company into a trading and marketing giant, moving first into the business of acting as a broker between energy suppliers and buyers, then expanding its role as a broker of non-energy transactions, and later adding a variety of diverse investments to its portfolio. Enron was a leading advocate of restructuring energy markets in the United States and the largest player in the energy trading business. What led to Enron’s collapse? The company’s most recent troubles can be traced to revelations in October 2001 of massive amounts of unreported debt and steep losses incurred in non-energy and oversees energy partnerships established between Enron and other companies. In accounting arrangements now under investigation by the Securities and Exchange Commission, Enron for several years had kept the debt and losses off its balance sheet. When these losses and the level of debt became known, the marketplace lost confidence in Enron; shareholders sold the stock and credit agencies slashed the company’s credit ratings. In addition, domestic trading partners required increasing amounts of collateral due to Enron’s impaired credit-worthiness. This drained Enron’s cash reserves, forcing them to take on more debt, creating a death spiral. By the end of November 2001, credit agencies had downgraded Enron’s debt to “junk” status and shareholder selling had driven stock prices from a 2000 high of nearly $90 to less than a dollar. When a proposed merger with Dynegy Inc. fell through in late November, Enron sought protection from creditors in bankruptcy court. What does Enron’s collapse say about U.S. energy markets? Although Enron was closely associated with the move to open U.S. energy markets to competition, the company’s collapse is unrelated to the industry restructuring now
underway. Financial analysts, economists and regulators agree that Enron’s fall was the result of investors and financiers pulling back after they lost confidence in the company’s financial disclosures and debt levels –- not because of problems in competitive energy markets. U.S. Secretary of Energy Spencer Abraham is among those making this point. “In the face of Enron’s collapse, the largest bankruptcy in U.S. history, there were no price spikes, no trading panics, no electricity outages and no gas shortages,” Abraham said. “… there is no indication that the energy side of Enron’s business was the cause of its collapse.” Were electricity consumers harmed by Enron’s collapse? No. In the days and weeks following Enron’s fall, there were no price spikes in electricity markets and the power continued to flow. Although Enron had been a dominant player in the energy trading business, competition has evolved to support a large number of vibrant companies. These companies quickly and effectively picked up the slack created by Enron’s sudden departure. In the days and weeks following Enron’s bankruptcy, power supplies remained constant, trading and marketing continued without disruption and prices remained stable. How did energy markets respond to Enron’s bankruptcy? Energy marketing and trading continued without interruption in Enron’s wake. Ironically, the competition that Enron helped establish ensured that the company’s departure did not become a crisis in terms of energy supply – as trades were picked up by other companies, energy supplies were undisturbed, power flowed from generators to utilities to consumers, and prices remained stable. Did Enron’s bankruptcy harm the electricity industry? On Wall Street, the Enron collapse was cited by some analysts as being responsible for a substantial decline in stock prices for a number of electricity marketers, traders and suppliers. Some credit agencies – criticized by some as slow to act as the Enron saga unfolded – adopted a tougher stance with regard to energy firms’ balance sheets. Responding to new expectations and temporary downgrades from credit agencies, a number of energy companies adjusted their holdings to enhance their cash positions and lower their debt/equity ratios. This, along with adequate reserve capacity currently in many regions of the country, has resulted in the suspension of some announced generation projects under development and projected to come on line in the middle of the decade.
Does Enron’s fall mean the end of energy competition? No. Economists, analysts and regulators have been quick to point out that Enron’s fall appears to be the result of Enron’s financial disclosure and accounting practices, not restructured electricity markets. In fact, many of these experts have pointed to the lack of disruption in energy trading, and the marketplace’s swift move to marginalize Enron once its troubles were revealed, as proof that open markets are working in the best interests of consumers and the economy. Is Electricity Competition Working? Yes. During the 1985-1999 period, when the nation began evolving toward a competitive electricity business, inflation-adjusted electricity prices decreased on average by 30 percent for residential customers, 36 percent for industrial/commercial customers and 36 percent for the “all customers” class, according to a study by the Boston-Pacific Co. These decreases are in sharp contrast to the heavily regulated 70s and early 80s, when inflation-adjusted electricity prices increased 25 percent for residential customers and 86 percent for industrial/commercial customers. Wholesale competition was a key component in reversing this trend, with the most dramatic price decreases occurring where competitive pressure was the greatest. Additional proof of success can be seen in states such as Pennsylvania, where the statewide “customer choice” program has saved employers and families nearly $4 billion; up to 1 million people have cumulatively shopped for power; and nearly 600,000 are currently shopping. Furthermore, Pennsylvanians are currently paying electric rates that are 1 percent below the national average. Before competition, they were paying rates 15 percent above the national average. What further changes should consumers expect? Enron’s fall into bankruptcy is the subject of myriad hearings and investigations in congressional, regulatory and criminal venues. Panels are questioning the role and responsibilities of third-party auditors, examining the effect on pension plans and employee section 401(k) investments, and searching for lessons to avoid repeats of such a sudden collapse of a large employer. While these inquiries might be expected to lead to changes or new safeguards related to corporate financial disclosure practices, it seems clear that competition in energy markets has shown itself an effective advocate of consumer interests. Restructuring of the industry will continue, providing customers with more choices, more efficient services, along with a resulting downward pressure on prices.