FACULTY OPINION: Enron, politics, and business

Dan Alger, economics department

The Enron mess raises four main questions involving the regulation of business, and it exposes major flaws in our system, but not necessarily in the areas you might first suspect. First, does Enron have disproportionate influence over government policy because of its substantial lobbying efforts and its large campaign contributions? Second, do current pension rules adequately protect pension holders? Third, do current accounting standards and practices provide all available, verifiable information that could help any potential shareholder to evaluate properly each company? Fourth, do current governance rules concerning the boards of directors provide an appropriate safeguard for potential management abuses? The Enron mess is likely to lead to changes for business and politics in all of these areas.This week I provide a bit on my background with the topic and then address the first of these four issues. I leave the last three for next week.

I of course address these issues from the perspective of an economist, and in my case one interested in political economy where the incentives of political decisionmakers are considered as well as those of economic decisionmakers, but also from the perspective of someone involved with the direct regulation of Enron from both sides of the table. For twenty years before returning to LU, I worked in D.C. as an economist. For four of those years, I was a manager at the Federal Energy Regulatory Commission (FERC), the federal regulator of natural gas pipelines, and Enron has the largest system in the U.S. I was also at the FERC because of strong “deregulatory” efforts by the chair at that time, and Enron was the strongest proponent of these efforts. For the following ten years, I was an economic consultant focusing on the natural gas pipeline industry, and Enron was a client several times.

Did Enron have undue influence? Enron (including its executives) is certainly one of the biggest corporate contributors to political campaigns. Check out www.opensecrets.org and you will see that some Democrats, especially from Texas, and lots of Republicans have received major dough from them. They contribute primarily to politicians from the oil states, to members of Congressional committees of importance to them, and to anyone espousing free market ideals.

What did Enron receive for this corporate cash? They had contacts with the VP, the Treasury Secretary, the chair of the FERC, and I expect others too that would have been highly unlikely if Enron had not had its substantial Washington “presence.” They certainly had access. Even so, at the highest levels of government, this extraordinary access seems to have resulted in little, if any, policy changes. This is the story that all Washington political journalists seem to be looking for, and it appears they will largely go away without one. We’ll see.

At a lower level of government, though, at the FERC, where decisions may also be made on technical, arcane details, undue influence appears more likely, but here too the smoking gun has yet to be found. Enron submitted to the administration a short list of candidates of which it would approve for chair of the FERC; the chair at the time was not on it. The chair was then replaced with one of Enron’s darlings. This would certainly be undue influence if they were the only ones that recommended the new chair and wanted his predecessor out. I expect a bit more here, though. I expect that everyone was given an opportunity to make recommendations, and that all the major pipeline companies, trading companies, the biggest customers, and organized coalitions of smaller-but-still-big customers submitted their own lists. Enron may not have had any undue influence among these groups.

At the same time, the FERC affects many people with no representative group submitting a list for them—particularly the small, ultimate customers for natural gas, which includes almost all of us. The problem is more likely to be not with Enron, but the systemic problem of no influence from many interested people that did not organize into a group, while other people did organize and had substantial influence. The reason for this is well explained in a great book, The Rise and Decline of Nations by Mancur Olson. (See especially Chapters 2 and 3.) Olson explains why some people (often the fat cats) can organize and have political influence even over other people (often most of us) that in the aggregate have much more at stake. He explains why special interests form and why they will have their greatest influence in the technical, specialized alphabet soup agencies. Read it.