The smartest guys in the room

Written By: - Date published: 7:08 am, December 24th, 2022 - 9 comments
Categories: Abuse of power, business, Economy, energy, sustainability - Tags:

Readers may remember Enron, the large US corporation that claimed revenues of nearly $101 billion during 2000 and which was described by Fortune Magazine as “America’s Most Innovative Company” for six consecutive years.

It all ended in tears.  Reporters dug behind the glossy surface and concluded that it was essentially a pack of cards and that huge amounts of wealth were generated by shoddy accounting practices.  An intrepid reporter analysed the cash flow and worked out that its market value was hopelessly overstated.

At this time directors knew they were in control of a lemon and were secretly offloading their shares as they were publicly pushing people to keep buying.  Senior figures went to jail.  Lots of people lost money.

One particularly disturbing aspect of its behaviour was its contribution to rolling power outages in California.  Enron traders were revealed as intentionally encouraging the removal of power from the market by persuading suppliers to shut down plants to perform unnecessary maintenance.  That way price levels spiked and large profits were booked.

There is a really interesting documentary about the episode called “Enron: the smartest guys in the room” which perfectly captures the testosterone sense of superiority displayed by Enron’s senior management.

Here is the trailer.

The film can be seen on Youtube.

What made me think about this is recent news about actions by Vector which has resulted in the Commerce Commission issuing a warning letter for likely contravention of various rules.

One News has the details:

Electricity giant Vector has backed down on moves the Commerce Commission say “would have cost its customers millions of dollars over the coming decades” after an investigation.

The Commission’s deputy chairperson Sue Begg said the investigation began two years ago.

A statement from the Commerce Commission today explained the issue.

“In March 2020, Vector entered into the transactions involving two of its wholly-owned subsidiaries, selling its CBD tunnel and a portfolio of substation land and building assets, then leasing those assets back from its subsidiary companies.

“In the Commission’s view, Vector’s approach to valuing those transactions was inconsistent with regulatory rules under the Commerce Act 1986,” the statement read.

The reason for Vector’s actions is captured in this paragraph from the Commerce Commissions’s statement:

This revaluation would have enabled the company to significantly increase charges to consumers, without providing any service improvements or infrastructure investment,” the statement read.

Pump up the value and then you can pump up the charges, even though the underlying asset and its cost has not changed.

This is not the first example of bad behaviour in the local energy market.  Meridian were accused of spilling water at the same time as increasing the spot market price for power in 2019.  Contact Energy were also said to be involved.

But it discloses a unfortunate habit.  Senior executives more interested in the accounting and legal side of the business than the thing that matters most, making sure that power is delivered as cheaply as possible and the infrastructure is up to scratch.

And as we head to an uncertain future and the desire for our power to be 100% renewable the market control over the energy sector has to be questioned.  As said by Molly Meluish at OurClimateDeclaration:

” … the extreme profit-driven governance of our electricity sector must be replaced with some system to confirm and promote the public interest in energy supply. (7) There are several options (8), all incompatible with neoliberal philosophy and finance.”

The timing is interesting.  It looked like the Commerce Commission and Vector were negotiating the terms of the letter and the release and managed to get it completed just before Christmas so the outrage would be dulled by the pre Christmas rush.

Well done to the Commerce Commission for identifying and highlighting this issue.  And shame on you Vector for trying to pull a swiftie.

9 comments on “The smartest guys in the room ”

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  1. Ghostwhowalksnz 1
    24 December 2022 at 9:40 am

    I see the recent Victoria State election, in which the labour government returned with its 'outsize' majority intact despite noisy opposition from the anti lockdown/health brigade, one of the policy planks was to resurrect the state owned electricity supplier the SEC .

    As an interesting aside , they also want to insert a supermajority (60%) clause in the states constitution to prevent the easy selloff of the new SEC by a future government

    They had in 2018 used a similar clause for future 60% majority to rescind coal seam gas and fracking bans.

    Maybe we need a change to our 'Constitution Act' to allow for 60% supermajoritys separate to the 75% now needed for electoral type law changes

    Its only a number !

  2. Dean Reynolds 2
    24 December 2022 at 9:41 am

    The only solution is to renationalise power.

    • tc 2.1
      26 December 2022 at 6:25 am

      +100
      No significant new generation since muldoon’s hydro or retooling plan for the distributed new world. Dragging it’s heels on solar/wind, insufficient reinforcement/resilience the list goes on.

      A market failure if the objective is “making sure that power is delivered as cheaply as possible and the infrastructure is up to scratch…”.

    • Thinker 2.2
      26 December 2022 at 9:28 am

      Or regulate it.

      The issue in any decision is “is this an essential public necessity or a commodity to be traded?”

      One should be delivered at cost-plus, the other delivered at what the market will pay.

      The problem is Rogernomics and Ruthenasia mixed things up and proclaimed public utitilies as to be traded as if they were commodities.

  3. PsyclingLeft.Always 3
    24 December 2022 at 10:25 am

    Mickey Savage, Good Post. Would..or could we ever trust a NZ profit driven Power company? IMO : no.

    The examples you list (incl spilling water) are just some of their many dodgy dealings (akin to used care sales)

    And there was recently this ..

    A controversial data centre proposed for the foot of the Clyde Dam has been granted resource consent, opening the door for cryptocurrency mining in Central Otago.

    New Zealand was attractive due to its high proportion of renewable electricity generation.

    He explained Lake Parime was entering into a commercial relationship with Contact Energy for the supply of up to 10MW of electricity.

    https://www.odt.co.nz/regions/central-otago/clyde-data-centre-gains-consent

    The uses of a data centre are varied, Prof Eyers says.

    "The potential use of data centres to ‘mine cryptocurrency’ involves computers burning through power in a race to solve computational puzzles that themselves have no inherent value.

    "Winning such a race bestows the right to add a block of transaction records into proof-of-work blockchain ledgers such as for bitcoin."

    He says proof-of-work was designed paying no attention to its environmental effects.

    "My view is that promoting use of proof-of-work is environmentally irresponsible at a time when the planet collectively has more important uses for energy, renewable or not."

    https://www.odt.co.nz/regions/southland/who-behind-data-centres-south

    To use OUR Renewable Power for something as "worthless" as cryptocurrency …is a travesty.

    • Ghostwhowalksnz 3.1
      24 December 2022 at 10:39 am

      Electrons in AC grid dont travel like cars down a highway as some imagine.

      Having a data centre at the 'foot of a hydro dam' isnt any different to having it ( more likely) in Dunedin.

      in a simplified terms think of it like dominoes all lined up , when the first falls the rest then fall very quickly but the first dominoe stays where it is. Thats a good analogy for how electric charge moves near to the speed of light around the grid .

      • PsyclingLeft.Always 3.1.1
        24 December 2022 at 10:57 am

        Well….maybe address Mr Brinsdon?

        Contact Energy head of hydro generation Boyd Brinsdon said in evidence the reason the site was selected was because it was next to the Clyde power station reducing transmission and distribution losses.

        https://www.odt.co.nz/regions/central-otago/clyde-data-centre-gains-consent

        But anyway..that was … one… part of my msg and links. Ok?

        • Ghostwhowalksnz 3.1.1.1
          24 December 2022 at 11:23 am

          More important the data is close to users – which does 'move like cars down the road and do have congestion' -which is why there will be many new centres around Auckland. They are more likely to want continuous supply rather than a tiny amount of line losses

          often replies can be for more general readers…Ok

  4. millsy 4
    24 December 2022 at 11:33 am

    LOL. Vector's network isnt exactly gold plated. Ask any Aucklander when a storm comes.