Enron Is Proving Costly to Economy
The collapse of Enron Corp., so far a political, legal and investor crisis, is now imposing widespread costs on the U.S. economy, according to a range of companies, energy experts and bankers.
Electricity and natural gas companies are facing higher costs. Projects to build power plants, pipelines and transmission lines are being put on hold. And in all sections of the economy, companies with high debts are feeling the pinch of tighter credit.
More than $12 billion of investment in new power plants has been postponed in recent weeks as financial markets, unnerved by Enron’s sudden descent into bankruptcy, have effectively raised the cost of capital for energy projects. Plans to develop natural gas deposits also are being cut back dramatically.
Ultimately, if these cutbacks result in power shortages and higher costs in future years, the burden will fall on consumers, according to energy experts.
To be sure, the recession and mild winter weather are reducing demand for energy. But Enron’s demise is playing a role, experts say, as lenders and credit rating firms are taking a hard look at corporate debt levels and forcing many to cut back spending plans and sell assets to improve their balance sheets.
That reaction in financial markets may have been unforeseen by the Bush administration.
Lawrence B. Lindsey, the president’s chief economic advisor, and his staff studied Enron in the months before its Dec. 2 bankruptcy filing to gauge the potential effects of its collapse on markets for natural gas and for stocks, bonds and currencies.
“Lindsey found the impact on other markets was a nonevent,” Ari Fleischer, White House press secretary, said Wednesday. (Before joining the Bush administration, Lindsey was a paid consultant to Enron.)
Some businesspeople have a different view. “Enron is affecting the whole U.S. economy, particularly the energy industry,” said analyst Christopher Ellinghaus of Williams Capital Co., a New York investment firm. “At a time when the U.S. needs to improve its energy infrastructure with transmission lines and power plants, the Enron case has changed the credit market’s whole view of debt and put off projects,” Ellinghaus said.
The very decline of Enron stock from more than $90 a share to 50 cents a share in a single year has taken a massive $67 billion of shareholder wealth out of the economy. Many employees and former employees at Enron face meager retirements.
Also, other energy companies have suffered losses in the hundreds of millions of dollars because of their relationships to Enron, either through contracts or loans. Major banks such as Citigroup and J.P. Morgan Chase have so far acknowledged losses in the hundreds of millions and the potential for billions of dollars more.
Trying to put the cost in precise terms, Joseph Tovey, a New York investment banker specializing in energy issues, said that “at a wild guess I would say Enron’s collapse adds one-half of 1% to the cost of capital for the energy industry,” a calculation that translates to roughly $4 billion a year.
Spread across the vast complexes of the oil, gas and electricity industries, with more than $1 trillion in annual revenues, such a sum may not seem like much. But the higher costs are enough to affect independent producers of natural gas and investments by even well-financed electric companies.
For example, Entergy Corp., a large New Orleans-based firm that supplies electricity throughout the central United States and to Latin America, Europe and Australia, has just postponed power plant ventures in Ohio and Illinois.
TECO Energy Inc. of Tampa, Fla., is cutting spending by $700 million, postponing three power plants. Calpine Corp. of San Jose said last week it was cutting planned expenditures by $2 billion.
Cancellations of such projects may not cause shortages of power and natural gas in the current economic environment, although cutbacks in investment are not helping the economy recover from recession.
When the Bush administration dismissed the threat of an Enron failure, it was focused on short-term effects on markets. But the more important effect of Enron’s collapse “is in the longer term,” said James S. Pignatelli, chief executive of Unisource Energy Corp., the holding company of Tucson Electric Co.
When the economy recovers and use of electricity resumes a 3% annual growth rate, power shortages and higher energy prices could be “the price we pay for Enron,” Pignatelli said.
To see why, it is necessary to understand the service that Enron, at its best, provided. In a phrase, Enron “made markets.”
It bought and sold natural gas and electricity on contracts with durations as long as a decade and contracted to supply all of the energy needs of large companies and institutions, such as the University of California and California State University systems and the Catholic Archdiocese of Chicago.
Its massive market-making allowed customers to buy energy in tailored packages. Enron often was offering a lower price than the local utility, thanks to high volume.
The company, no less than the dot-coms and Internet firms in technology, was a standard-bearer for an era that took an expansive view of industrial possibilities and a liberal view of finance.
Enron was part of a process that enabled more power plants to be built in recent years than had been commissioned in previous decades, said John Rowe, president of Exelon Corp., a Chicago-based firm that distributes electricity to Illinois and Pennsylvania.
Now Enron’s bankruptcy increases “the risks and uncertainty in the business,” Rowe said. It threatens to end a decades-long movement to deregulate and restructure energy industries, he said.
Deregulation, the setting up of competitive markets for electricity generation and marketing, was not the disaster elsewhere that it proved to be in California. Newly competitive arrangements, under cautious state supervision in Ohio, Pennsylvania and other states, helped to bring down electricity rates in most parts of the country over the last decade and a half.
But deregulation in California led to ballooning energy prices, which so far have been paid for by bankrupt or crippled utilities and by the state government. In deregulation’s wake, California is burdened with electricity prices that are far more than what neighboring states pay for power.
California’s failure stalled the deregulation experiment’s progress in other states. Now with the bankruptcy of Enron, deregulation will be put off for years, experts say. The experiment has lost its champion. “Enron lobbied in every state for deregulation,” Unisource’s Pignatelli said. “No other company is going to do that.”
The financing and administration of electric power will retreat to older ways: somewhat more regulations, less freely available finance, according to Pignatelli.
A period of “muddling through” will last at least a year, said analyst Steven Fleishman of Merrill Lynch.
Easily available finance and expansion may not return soon. Enron’s downfall also “has eroded trust,” said Clinton Vince, a Washington-based attorney with Sullivan & Worcester LLP, a law firm that represents municipal and cooperative electric companies. “There is a cost for lack of trust in interest rates charged and business that doesn’t get done,” Vince said.
But such periods are seldom permanent, analysts note, and other companies--such as Duke Energy, American Electric Power, Dynegy and Williams Cos.--already are taking over some of the contract trading that Enron specialized in.
Enron, which continues to operate at a minimal level in bankruptcy, is still fulfilling contracts, supplying electricity to seven UC campuses and 19 of the 23 Cal State campuses.
The universities are negotiating with Enron over a two-year extension on those contracts, which another firm could acquire from the failed company.
But other traders are unlikely to be as expansive as Enron was in the variety and size of deals it undertook, energy experts say. But then, some of Enron’s expansiveness was based on spurious accounting and fictional financing.
Enron’s secret partnerships to hide debt and inflate reported profits have left fears and misgivings in credit markets that are now hobbling many economic sectors, analysts and investment bankers say.
Enron has even sullied the international reputation of U.S. capital markets. “It’s no shining city on the hill,” Stephan Richter, publisher of the Globalist, said of the U.S. financial system. Richter’s online newsletter is distributed widely in Europe.