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.