ENERGY DERIVATIVES DIDN'T CAUSE CALIFORNIA CRISIS

Feb. 15, 2002
The political feeding frenzy over Enron Corp. is summoning the worst from the US Senate.

The political feeding frenzy over Enron Corp. is summoning the worst from the US Senate.

Three Democratic senators have introduced legislation to increase regulation of energy derivatives.

A news release from the office of one of the sponsors, Sen. Dianne Feinstein (D-Calif.), says the bill would "provide regulatory oversight to the Commodity Futures Trading Commission (CFTC) over derivative transactions…of energy commodities on multilateral markets and over electronic trading platforms and ensure that all energy transactions are transparent."

The temptation is strong to wonder what in the world that means and how in the world legislation is supposed to accomplish it. But that would bring more thought to the matter than the sponsors themselves apparently bothered to apply.

Feinstein's statement says some traders estimate Enron controlled 50-70% of the natural gas transactions in Southern California. Because the trading was done in secret, "Enron had the ability to manipulate prices."

Therefore, goes the thinking, CFTC oversight should extend to off-exchange derivatives transactions.

This is the legislative equivalent of trying to leap off two bridges at once.

For one thing, it is not as clear as Feinstein et al. indicate that Enron, whatever its manifold indiscretions, unfairly controlled prices. There will be investigations and punishments as appropriate.

Even if somebody in the company did kite gas prices in California, the state government still deserves most of the blame for the state's recent energy crisis.

It was the state government, not Enron, that contorted the electricity market with wholesale price deregulation and retail price ceilings. It was the state government, not Enron, that discouraged construction of intrastate gas pipelines and generation plants.

Enron traders might indeed be shown to have misbehaved in California. But that would not exonerate the state of its own energy failures.

Feinstein and company are trying to use Enron as a smokescreen.

And their default to regulation is dangerous. Derivatives markets didn't create California's dilemma. To hamstring them with regulation would create more problems than it would solve.

A more sophisticated approach to the subject of derivatives came on Feb. 13 in testimony by Richard C. Green, chairman of UtiliCorp United of Kansas City, before the House Subcommittee on Energy and Air Quality.

Energy trading, especially derivatives, he said, helped keep energy markets working as Enron collapsed.

"It is imperative that the value of derivatives themselves not be confused with questionable accounting practices and inadequate financial reporting," he said.

Green should visit California. People there would benefit from hearing his sensible approach to energy and markets. If Feinstein is typical, they certainly won't learn much about those subjects from their elected officials.

(E-mail the author at [email protected].)