Book Reviews: "Power Play"
- Jeremy Agar
In December, 2001, when Enron went bust, it was the largest corporate bankruptcy in world history, yet, according to Sharon Beder, that is not what makes Enron significant. Enrons collapse was noteworthy because, as Fortune noted, Enron has been "far and away the most vigorous agent of change in its industry, fundamentally altering how billions of dollars worth of power ... is bought, moved and sold, everywhere in the nation" (quoted, p142). That was Fortunes assessment before the collapse. The magazine, which takes its name from its single-minded admiration of those who make big bucks, thought it knew a winner. Enron was about to come the name of corruption. The companys failure is said to have acted as a spur to clean up accountancy methods or to provide stockholders with more honest information.
Enron was in fact far from being the aberration that Wall Street likes to assert. Beder argues the opposite. She thinks that Enron existed as the "politically influential promoter of deregulation that made huge profits from exploiting the opportunities deregulation offered to speculators". When it came to privatisation, Enron set the tone and showed the way. Enron existed as the tool of private profiteers in global electricity and was admired in corporate circles because of its methods, not despite them. When it went down, it sank with its transnational accountants, Arthur Andersen, a pillar of corporate respectability.
Few companies can ever made so much money by doing so little as did Enron. As the Wall Street Journal opined in the wake of its collapse, Enrons "profits on the trades - of cubic feet of gas it didnt extract or burn, of kilowatt-hours it didnt generate, and of fibre-optic lines it didnt light - sent Enrons revenues soaring". Beder notes that "deregulation transformed electricity into a tradeable commodity.... Whereas, before regulation, a company needed generating capacity and transmission lines to be able to sell electricity, Enron demonstrated that a company could now sell electricity without owning a power station. It could become a broker. Enrons business model was built entirely on the premise that it could make more money speculating on electricity contracts than it could by actually producing electricity at a power plant" (Beder, p143, quoting Public Citizen, Washington, December 2001).
Henry Ford, who mass produced cars and sold them at affordable prices, gave his name to "Fordism", the characteristic mode of the 20th Century. Fordism has an inbuilt sneer. It connotes conformity, efficiency, a tedious material world. But at least it got the job done. And Ford still hasnt gone bust.
What of Enronism? The company might be bankrupt but its values and methods are triumphantly setting the mark for 21st Century business. A magazine with the happily appropriate name of Risk considered Enron its Energy/Commodity Derivatives House of the Year. Forbes called it the Worlds Leading Power Company. Enrons chief executive officers (CEOs) were ranked #2 in of 50 Best CEOs in 2001, its final year. Etcetera. The corporate elites saw a corporation forever teetering on the brink and they liked what they saw, because what they saw were business practices that were setting the trend. Enronism is the ability to make a fortune without having to make a product. Enronism is the triumph of manipulation. According to the business press, its the way of the future.
Of all corporate values, "innovation" is perhaps the most valued, and for five successive years Fortune named Enron Americas Most Innovative Company. These days one of the best things you can say about anyone is to call them innovative. At its core, as a quality to congratulate yourself for having, innovation is a corporate concept. The Kiwi myth of Number 8 wire, with which innovation is usually compared, is about adaptability, about coping. The Enron innovator wants nothing less than Number 8 patching up and making do, which he sees as a legacy of Fordist thinking. He wants to smash and replace.
In the propaganda skirmishes, Enronism means to imply that a dullard state could never "innovate". In truth, in New Zealand no less than anywhere, flexible, pioneering ideas come often from public institutions. Weve always had an innovative civil service.
The #8 wire spirit belongs to the practical 21st Century. Beder quotes the Economist, in awe to the emerging Enronism of 1998: "In Enrons world, the engineers have been replaced by theoretical physicists trained in portfolio analysis; the reliability is engineered on the trading floor, where young traders price and strike deals with customers in something like 90 seconds" (Beder, p143). Innovation and speed are the centrepiece of all else.
What the Economist liked in Enron was the primacy of finance over industry. It respected Enron because it had thrown out practicality and experience and replaced them with young graduates with lots of theory and contempt for established custom. They dont care whether things actually work. Just as Enron had little to do with generating electricity, the physicists and derivative traders were brought in for reasons unconnected to the production of power.
Enron was all about being able to move fast, without having to answer to anyone. In his companys final catacylsmic year CEO Jeff Skilling told a conference that he had to "cut costs ruthlessly by 50 or 60%" and "get rid of people" because they "gum up the works" (p145). Enrons business was the trading of contracts for the buying and selling of power, along with currency speculation, futures contracts and hedge contracts. Americas fastest growing company was a speculator, its employees, gamblers. For this Skilling needed smart operators at computer keyboards, so to replace the productive workers who were gumming up the works he hired "a battalion of doctorates in mathematics, physics and commerce to manage these complex contracts". Enron became the largest e-commerce company in the world. Virtual activity. Virtual commerce (p146).
Yet, in another sense, behind all the frenetic wheeling and dealing, Enron was very much business as usual, its success being due to its bosses being pals of the oil and energy tycoons at the top of the American heap. As its always been said, its not what you know (how to gamble with figures) but who you know, and Enrons bosses knew how to get to play golf with George Dubya Bush, the Oil President himself. More than most outfits, Enron needed contacts. Its fortune was based on access to information and political power. Beder traces the course of Enrons lobbying from the decisive 1992 deregulation of the wholesale electricity market - for which Enron lobbied Congress.
Overseas, Enron efforts were equally successful. According to Beder their breakthrough came in Argentina in 1988 following a phone call to the Minister of Public Works and Services from a Texas oilman who happened to be the son of the US Vice-President (and denies making the call). Dubya has always been close to the Enron action. In 1989, when the UK privatised its energy, Enron was in at start. The minister who opened the door to Enron later served on Enrons board. And when the worlds trade ministers go to Doha or Cancun (see my reviews of the two books on the WTO in this issue), the US World Trade Organisation representative who keeps saying no is Robert B Zoellick, a former Enron employee.
Brazil: The Souths Leading Energy Privatiser
Britain set the pace for energy privatisations in the North, developed world. In the South, Brazil was the hot market. Beder writes that Brazilian privatisations have been the most extensive of any, so when she tells us that one of the companies getting in on the action was Enron, it is not surprising. Electricity deregulation in Brazil was a meeting of the outfit shortly to become notorious as the biggest corporate failure in history with the biggest sell-off of public assets in history.
"By 1998 Brazil led the world in the number of companies that had been privatised in the areas of telecommunications and electrical energy. By early 2000, 65 companies had been privatised and 58 public services tumed over to the private sector. Foreign investment made up 48% of privatisations from 1991-2001, with 16.5% to US-based companies and 14.9% to Spanish companies", (p315). Does this Spanish and US emphasis help us appreciate the membership of the Coalition of the Willing in the 2003 invasion, colonisation and privatisation of Iraq?
The results are instructive. Brazil has been gifted by nature with vast rivers, so that by 1990 over 90% of its energy came from cheap and efficient hydroelectricity. Beder explains how the system was reformed. Faced with an economy in crisis through debt and high inflation, the Brazilian goverment "used the thriving State-owned electricity companies to raise money to pay off its debt, while keeping electricity rates down so as not to fuel inflation. This effectively shifted some of the debt to the electricity companies, thereby providing major justification for privatisation in the 1990s. The government prepared these companies for privatisation by consolidating and annulling inter-sectoral debts, so that the companies would be attractive to investors".
In 1990 the newly created Brazilian Development Bank announced its goal was "to redefine government participation in the economy, reduce public debt, eliminate bureaucratic bottlenecks which slow down economic growth, and increase the productivity and competitiveness of Brazilian business" (quoted by Beder, p315). The words were those of the Brazilian government, but the parroted cliches were pure Enronism. From its inception the privatisation of Brazilian electricity was motivated not by any shortcomings with the way Brazils publicly-owned system was working. It was all to do with the needs of foreign money men.
Ignorance An Essential Requirement For Restructuring
The restructuring was organised by Coopers and Lybrand (C&L), one of the big four global accountancy firms, whose lack of knowledge of either Brazil or electricity qualified them for the job. Ignorance allows you to apply the global model to restructurings without getting bogged down by the facts or being diverted by sympathy. Coopers and Lybrand had done the UK privatisation, but it could just as easily have been the now-disgraced Arthur Andersen that was called in. The same few big firms have conducted most of the big "restructurings" of assets around the world. If youve worked for any largish public enterprise anywhere, one of the big four has probably been called in to eliminate your bottlenecks.
Once Coopers and Lybrand arrived, the prescription was inevitable. They need not have even gone to Brazil to recommend that the previously integrated system of power generation be broken into its constitutent parts of generation, transmission and distribution. The new "regulatory" agency was "set up as an autonomous independent agency to regulate the privatised energy companies, to promote and protect competition and private investment, and to set electricity rates. A private National System Operator was established to coordinate generation of all private and state plants. Its membership consisted of electricity generators, distributors, importers and exporters, and consumers, as well as the Ministry of Mines and Energy".
A British observer had seen it all before, noting that, "while the term market is sprinked throughout, the blueprint is feudal, not capitalist. C&L divides the nations saleable infrastructure into legally enforceable monopolies designed to guarantee new, principally foreign owners super profits, unimpeded by real government control or by competition" (p316; quoting the Observer).
Enronism abhors the integrated efficiency that Brazils hydroelectricity exemplified. Its a first point of principle to break wholes into parts because that makes most easy profit. Tactically its helpful as it destroys institutional memory. Enronism is Maoism of the Right, bent on a cultural revolution * so that regional societies with all their knotty individuality can be transformed into consumer malls within a new global corporatism. Based on the superstition that "the market" would know best about future weather patterns and energy consumption demands, the state agency that used to plan ahead for such contingencies had to go. * Mao Ze Dong, leader of China from 1949 until his death in 1976. In the mid 1960s he launched the Great Proletarian Cultural Revolution, headed by the Red Guards, to fundamentally restructure the Communist Party and Chinese society. Ed.
So did hydro generation itself. This was determined not so much by the genius of the market as by a carefully planned business strategy at Enrons head office. By its nature, water generation is an integrated whole. Whats more, the genius of the market saw that water was free and therefore inefficient. Gas, on the other hand, can be divided into marketable constituent parts down the chain from production to sale, all "adding value". These considerations might explain why Enron had been "spreading the gospel of gas throughout the world as it builds new pipelines and power plants in countries ranging from Brazil to India, from Mozambique to the Philippines, but the service has proven to be neither just nor sustainable" (quoting the US non-government organisation, Project Underground, p319).
Particularly not in Brazil, where the results of switching from publicly generated hydroelectricity to privately produced gas energy were higher prices, pollution, social dislocation and shortages. In Rio de Janeiro, following privatisation, prices went up by 400%. Beder argues that the Government had to put up the price of power to satisfy the gas companies that it was worth spending their money on new ventures. Electricite de France and Enron were the main beneficiaries when the wholesale price of gas-fired electricity shot up to $US250 per megawatt hour (MWh), which is about ten times as much as electricity costs in rich Europe and the USA (p322). More market genius.
According to Beder, the worlds biggest single privatisation (by 1996) was when Brazils retail and distributon sections were auctioned off to a consortium of EdF of France, AES of the US, and CSN of Brazil. Under the terms of the contract the State would sell hydro-elecricity to them for $US23 per MWh. The consortium would sell it to consumers for $US120. Beder compares this to the $US75 that EdF charged its French customers. After the deed was done Brazilians paid a real 108% more for their power.
The market celebrated ever new heights of genius. A gas pipeline had to be built at a cost of over $US2 billion. Beder says this is the largest private investment in Latin America. It has destroyed pristine Amazon forests and opened up areas inhabited by indigenous people to unsustainable development. The $US2 billion came from the Brazilian people via their government, the World Bank and other big "development" banks, and companies including Shell, British Gas, BHP - and Enron.
Meanwhile the World Bank advised that the "labour market efficiency" of Brazils electricity workers wasnt too good. The Bank advocated reduced wages and pensions, longer working hours and less certain employment. More primitive fear and loathing. More change agency, more innovation.
When the prices went up and the lights went down, the spin doctors blamed droughts. Beder makes the case that weather cannot be blamed for Brazils power outages. She points out that the Enronists have claimed that all the worlds blackouts that followed privatisation/deregulation were said to have been the fault of drought or heatwave or a cold snap. Or something. The best known example is the farcical sequence in California that Terminated with the election of a new governor in October 2003.
Massive Corporate Campaign Against The Idea Of Public Ownership
Beder provides an extensive and absorbing background to the present phase of what her subtitle calls "the fight for control of the worlds electricity". She takes us back to the America of the 1890s, where she finds that, despite all the blarney to do with 21st Century change agency, the issues were the same as now.
19th Century American consumers began to tire of the poor service and high prices of private electricity. Detroit, then Cleveland, then scores of cities voted for a public system. In all cases, the result was cheaper power. Detroits cost less than half of what the local subsidiary of General Electric (GE) had charged, so the resulting electricity public relations campaign to maintain private ownership had its work cut out. As the empirical case could not be made, there followed a massive corporate campaign against the idea of public ownership.
It took the form of barrages against "socialism". A reliable, inexpensive municipally-owned power grid would be hostile to the "American way". From Beders narrative it is clear that the rhetoric we tend to associate with the post-war McCarthyist * era originated much earlier. In the absence of a Soviet Union or a Communist China, or of any powerful domestic radicalism, the GE-sponsored campaign had to invent bogeymen. It did so by a sort of social guerilla war, the tactic of which was to associate big energy corporations with positive American mythologies. It was done in the towns through service club speakers, in the schools through providing curricula to teachers and scholarships to children, in local governments through co-option and bribes. Professors knew where advancement lay; priests knew to give sermons that would be socially popular; newspaper editors knew how to attract advertising. * Senator Joe McCarthy personified the anti-Communist hysteria that swept the US in the 1950s. Ed.
In a sense GE was inventing a morality by colonising existing values. It had to. The difference between the early and late 20th Century campaigns was that in the former the privatisers knew they could not soon convince a sceptical public to accept that an inferior way of doing things was really a better way. (All of the recent privatisations, in every country, have been deeply unpopular too, but the latter day zealots have more agents in state power). The reformers themselves knew that electricity could only be reliably provided by a regulated public entity, so they redefined words, arguing that the private was really the public. Back then policy makers felt constrained by what until recently was called "the public interest".
Beder cites the example of Martin J Insull, the leading electricity lobbyist. In 1926 Insull entitled his industry report "State Regulation Through Commissions Urged as a Method of Combating Public Ownership and Operation" (p32). By this time, after a generations manipulations, "public ownership" self-evidently denoted the bad. Insull wanted to appropriate the methods of public corporations while handing control and profits to private interests. He also wanted governments to subsidise the power companies. As Beder explains, the mode of ownership of an enterprise, public or private, in itself has nothing to do with how well it will be run.
"The campaign", Beder writes, "was careful in its use of language. Public ownership became political ownership; private utilities became public service companies. Mergers were argued to be necessary because they were more economical and efficient. A holding company, according to Insull, was more properly an investment company; even more accurately perhaps, a development company" (p39). As the many small local providers were taken over and consumers options were narrowed, the talk of "choice" grew loud.
Throughout, during 100 years, energy companies have acted to keep prices artificially high by holding back supplies in periods of peak demand. In January 2001, Credit Suisse First Boston memoed its clients (one of whom leaked the message) that the blackouts California was suffering were "intended to soften up the Legislature and the voters to the need for rate increases" (p117).
Beder tells the story of one supplier which sabotaged its own plant to create a supply crisis. Years later this company might have thought it had set a record for gouging (1990s-version) when it charged the state of California $US3,880 for a megawatt hour which had previously cost $US30.
Enron, otherwise so undependable, could be relied on to better this. In a three month period in 2000, Enron traded power at between US5 cents and $US3,322 per MWh. In perhaps the purest of all expressions of the genius of the market, Enron made itself $US100 million in one day that year through trading power to and from itself.
The stated rationale behind the dismantling of public bodies, whether in Brazil, California - or New Zealand - was to eliminate the evil and waste of cross-subsidies. Only when agencies and boards are broken into independent, stand-alone units can true costs be assessed. Or so we have been told. Yet it could be argued that all the Enrons of the world have done was to redefine and perfect cross-subsidies, transforming them from commonsensical and pragmatic responses to social needs into sheer rip-off. What else was the Enron flurry of trading, exploiting complex rules of its own devising? What else was the practice of sending profits from Brazilian energy "production" to whisk up more super-profit from unrelated activites in overseas countries? What about the privatised habit of forcing residential energy consumers to pay more than industrial customers are charged? How is it not a nanny-state subsidy for governments to guarantee fearless entrepreneurs a sale? In the Brazilian farce, there was not actually a market for the new gas. In 2001, 60% of it was unused, but the State had already promised to buy it all anyway.
The whole Brazilian energy revolution was, in essence, a device to get the people of the country, through their taxes, to subsidise private and usually foreign businesses. Indeed the pattern in restructurings around the world has been for the domestic state to underwrite whatever aspect of production entailed risk or made no money. Think of your own examples.
No Good Economic Reasons For Privatising Electricity Supply
Beder is convincing when she explains why there are no good economic reasons for anyone to privatise their electricity supply. The ubiquitous failures are structural. Other times and places might restrain the excesses of the Enrons of the world, but publicly-owned generation has always been cheaper and more reliable than privately-owned energy. When, in an apparent exception, prices fell after deregulation in the UK, it was due to temporary supply factors which had nothing to do with the question of ownership.
Everything about electricity suggests Enronism could never have worked. After it is generated, electricity cannot be stored. Voltage and frequency have to be maintained. When demand is low, expensive generating systems can be idle, but reserves are needed for unanticipated events. All of this requires a regulated monopoly acting without a profit motive. The old model routinely planned; in a privatised system, were supposed to respond to price signals. But as New Zealanders well know, you cant respond to a signal you cant see. So if youre in the supermarket and dont know that the spot market took off at 11 a.m., or if you missed the weather forecast and dont know that its still not raining in Twizel, youre in the soup. Besides, most demand is inelastic. After work, families cook dinner and bath the kids. The first thing they know about those price signals is when the power bill comes.
Beder points out that energy planning needs a long lead time and heavy capital expenditure and maintenance costs. Enronism wants to escape all three responsibilities, none of which help the quarterly profit statement. Electricity is unsuited to deregulation, and hydroelectricity is particularly unsuited.
Its All About Profit
That is one important finding of Beders study. Another is her demonstration that when interested players talk about energy, they might be thinking about something else - like money. Just as Brazil switched to gas despite hydro being economically and socially preferable, so have profit-motivated entrepreneurs in the US pushed for more nuclear plants despite their being both more expensive than alternative energy sources and often not justified by consumer demand.
In this context, the proposed power play on the South Islands lower Waitaki River raises more than the obvious environmental concerns. A "partner" of Meridian in the Project Aqua scheme is Bechtel, a corporation with blueblooded links to the American financial and military establishment. It might be a good idea to ask questions sooner rather than later.
"Power Play" casts doubt on the whole policy of the commercialisation of formerly public assets. Why suppose that any of the other natural monopolies making up New Zealands infrastructure are doing any better than the power companies? As a society we might well look again at how we administer not just our energy, but our airline, our rail and roads, and our ports. All operate under the assumption that they exist to make profits for their shareholders at the expense of their former duty to serve the public that created them.
Privatisation was a political gambit. It was not a response to any failure of existing generating processes, not in 1890, and not in 1990. Beder sums up her powerful case by calling the policy a confidence trick. Its best seen as an attempt to replace the State with a business government, at least when it comes to matters of money. The International Monetary Fund (IMF) did not permit Brazil to run a budget deficit so it was unable to invest in energy infrastructure of its own choosing. Yet Enron operated on speculative debt. In its last three years, on an income of over $US1 billion, Enron paid no federal tax. The cost of the California fiasco, the amount lost through the deregulation in which Enron was only one participant, has been put at $US71 billion. And public ownership is wasteful? The playing field is level? If debt is bad, why would George W, the Enronist President, think it right to saddle his government with a much bigger - and fiscally unnecessary - deficit?
Enron was nailed for tax evasion (which is wrong). They called their myriad plottings tax avoidance, the planning of which for the Enrons of the world is the reason for the big accountancy consultants to exist (which is OK). The US Senate expended 2,700 pages on reporting on Enrons crimes, noting that Enron and fellow crooks Arthur Andersen had not been dealing with any commercial reality. For outsiders the question is: How can the Senate tell the differences between criminal intent and smart operating or between either and "commercial reality"?
Beder, a New Zealander working in a New South Wales (NSW) university, has sections on Australia and the UK and a chapter on India. Local readers will be interested in her tracing of the ideological links between the NZ Rogernomic revolutionaries and the state of Victoria, where, in the 1990s, the influence of the deregulating zealots was intense, and where, inevitably, the electricity costs a lot more than it does in the more regulated NSW next door. Its a great read.
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