Enron Is Proving Costly to Economy
Bankruptcy: Energy projects valued at $12 billion are on hold as financial markets make
it tougher to raise capital. Any shortages would fall heavily on consumers.
By JAMES FLANIGAN, Times Staff Writer
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.
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