The collapse of Enron, the global energy trading giant, has provoked a great deal of analysis on the part of the world of finance and business. Every facet of Enron is being examined, and pundits are examining Enron’s failure for signs of greater significance. Commentators and analysts are looking for the hinge issue upon which this whole debacle turned and some have settled upon the culprit: deregulation of the nation’s electric power market. But the blame for Enron’s demise lies not in electric power deregulation, but in the questionable accounting practices of the company.
An article in the December 4 edition of the New York Times offers the following headline: "Collapse of Enron May Reshape the Battlefield of Deregulation." The battle lines on the regulation issue, no doubt, are going to shift as lawmakers in Washington continue to debate the issue of energy industry oversight. Some politicians are using Enron's example to offer an indictment of the free-market ideas underlying electric power deregulation in the United States.
Representative of the camp arguing for more aggressive regulation of the nation’s electric power market is Congressman Edward Markey, D-MA. In a comment in the aforementioned New York Times piece, the congressman offers that "we can’t leave energy products in the regulatory shadows. It hurts both investors and consumers." His is an interesting logical leap: The failure of one company should dictate increased regulation on an entire industry.
As a result of Enron’s failure, has the nation experienced an electricity shortfall? Are cities turning out the lights? Are major industries halting production? Hardly. These entities, which rely on a steady supply of electric power, have simply turned to other suppliers to fill their needs. The bankruptcy of one energy trader does not indicate that local monopolies on electric power should be restored.
It is unreasonable to assert that the restoration of local monopolies would better protect consumer interests. Electric power deregulation has led to increased competition and lower prices for consumers. Where there is no competition, prices go up and the level of service goes down.
It is easy to see why such a feeding frenzy has been created around Enron’s destruction. Such an event serves as a useful cover for those corporations who monopolize local and regional markets with the assistance of government regulatory policy. Attempting to roll back the deregulation project would allow them to keep their local dominance and quash competition. Reverting to monopolies offers no benefit or protection to consumer interests. Rather, it is an attempt to encourage government meddling in a matter best left to free and open markets.
While the full scope of what led to Enron’s disintegration may never be fully known, it seems that responsibility for this colossal business failure lies with Enron, not the deregulation of energy markets. Various analysts of Enron’s fall have consistently offered that the company’s lack of transparency in the accounting of its income and liabilities are the source of its failure. When investors discovered this lack of transparency, translating into billions more in debt liability, they lost confidence in this company that was once hailed as a model twenty-first century corporation. This failure of Enron to be forthright in its reporting does not serve to denigrate market principles, but serves as a fine illustration of how the free-market places moral demands on market players.
In the market, transparency in financial arrangements is a necessary piece of information to would-be investors and entrepreneurs. This information allows investors to assess the risk and the viability of their investment. Without some guarantee of truthfulness in the reporting of a corporation’s true financial picture, the appropriate calculation of investors is distorted and the risk of investing cannot be accurately measured. When the truth finally comes out, confidence is lost, investors withdraw, and the company collapses.
The market, while morally neutral in and of itself, is powered by individuals with moral inclinations. The market will not sustain systemic misinformation that seeks to distort the calculations and confidence of investors. When the truth is revealed, there will be a price to pay. In this case, it meant the collapse of Enron.
Again, the failure of Enron rests squarely upon its questionable accounting practices. The fact that Enron was a leader in the electric power industry is, in one sense, irrelevant to its collapse. Such questionable accounting practices and lack of transparency in financial arrangements would lead to the demise of any major corporation. Investors will not tolerate the distortion of information necessary to the investment process.
The moral demands of honesty and transparency are foundational principles for investing in a free economy. A cavalier approach to these demands serves the cause of those who would restrict the economic liberty. This liberty has led to a flourishing of the entrepreneurial spirit in our land. The decision of one corporation to ignore the moral demands of honesty and transparency in its financial arrangements should not be used as an excuse to smother the entrepreneurial spirit through further, more aggressive regulation.