During the week of November 11 I had the opportunity to teach the DSI course, "Investment and Trading in Electricity Markets," in San Francisco, California. That week was full of daily news about several major generating companies ("GENCO’s") that had been subpoenaed to testify in lawsuits alleging involvement in price manipulation during the 2000-2001 California electricity crisis. We all recall the disastrous Enron collapse issue, with its ramifications later on regarding several other players in the electricity markets. All of these developments have led to intensive discussions, actions and deliberations by FERC, NERC, state regulators, ISO’s, RTO’s and many others. At this point in time, the industry is debating the FERC Notice of Proposed Rulemaking (NOPR) regarding the Standard Market Design (SMD).
During the various lectures that I gave during the two and one-half days of the course, several issues flashed in my mind. I recalled the dramatic presentation at the 2001 IEEE Winter Power Meeting by Professor S. Oren of the University of Berkeley, CA entitled, "Greed on the Grid is Good!" Dr. Oren’s point was not that "Greed is Good," but rather that one cannot avoid man’s (or corporate) greed and hence, the solution is to allow enough competition to limit the greed and achieve the economist’s dream of "efficient markets." At the time of that presentation, the news were indicating that all the generating companies were "playing by the rules," and hence, any price spikes and even sustained high prices over a six months’ period were due to various causes, some of which being related to flaws in the design of the California market. Dr. Oren was indeed of that opinion as he went on to explain how greed coupled with market design flaws may have yielded sustained high prices, indeed a full electric energy crisis.
The emerging facts, however, have started to indicate that this was not the whole truth. Indeed, greed may have allowed the crossing of a fine dividing line between prudent business practices of working strictly within the rules, to taking advantage of the situation to achieve immensely high profits. Indeed, both legal and moral barriers may have been crossed.
The recent book by Loren Fox entitled, "ENRON: The Rise and Fall" sheds some light into the matter. This easy-to-read but insightful book performs the work of a detective trying to identify the causes of one of the worst success-then-miserable collapse in US corporate history. By empowering the "trader" to take actions to maximize profits, but with strict periodic reviews of "performance" may have yielded not only extreme myopia in business dealings but perhaps the tendency to convert "rational greed" into an immoral one.
It is interesting that in the era of the 1980’s and early 90’s there was a major move by corporate America to train their employees and managers in "Ethics." The issue at the time was that "ethics" is "good business." So how come this did not last in the situations reported above?
Stay tuned till next month. In the meantime, I appreciate your direct feedback – adebs@dsipower.com