Meaningful Distinction:

Patrick S. Lasswell Look outward for something to accomplish, not inward for something to despise.
pslblog at gmail dot com
Monday, May 29, 2006
How to Convict an Enron Fraud Part One

Last week was a good one for my friend Andrew Nisbet and the energy market research firm he works for, McCullough Research. Enron executives Ken Lay and Jeff Skilling were convicted of a variety of charges stemming from driving a culture of fraud to tremendous wealth. Much of the testimony that has put Enron frauds in jail was discovered by the people at McCullough Research. Andrew is a not entirely satisfied, though, because the culture of fraud still exists. There is a list of 58 people who were on the Enron trading floor in Portland, Oregon. After reading their email, diaries, and spreadsheets for the last four years, Andrew is convinced that all of them were engaged in securities fraud. Less than one in five has been successfully prosecuted. Most of those not in jail are still engaged in energy trading.

This is part one of an interview with Andrew on the occasion of Lay and Skilling's conviction.

Meaningful Distinction: Why aren't the regulators catching these people?

Andrew Nisbet: The people who are supposed to regulate it have a vested interest in not admitting that there's a problem. The people who are supposed to catch Enron, and for that matter the big five producers in California, built the system and they have a vested interest right till this day in telling you that the system worked just fine. FERC (Federal Energy Regulatory Commission) was in the process of doing what I actually think in a very real extent was a good thing, deregulating the energy markets. They have a vested interest in saying, to the extent that there was a problem it wasn't what we were doing and it certainly has been dealt with it already.

One of the reasons I don't have complete confidence that just making things transparent would work is that you have to be motivated to deal with things.

MD: Additional checks and balances?

AN: During the middle of the California power crisis one of the big five who owned most of the generators in the LA area, suddenly on their EPA reporting forms cut the amount of pollution the produced by a factor of ten.

MD: One tenth of the...

AN: Suddenly by magic, the amount of pollution those plants were producing dropped....when they running. Not because sometimes they weren't running. We're not talking about the amount of pollution that they produced over average, we're talking about when they were turned on. The amount of pollution...

MD: Ten times as clean?

AN: Ten times as clean. They didn't change fuel sources. Because they would have had to note that. They put in no new equipment, they would have had to tell us. Just by magic, that happened.

Now, you can believe, if you choose that a sudden decision that instead of having the plant manager sign the forms they have to send to the EPA that gives the amount of pollution, having a central official sign all the forms that they sent to the EPA from all the plants decreased the amount of pollution. Or you can believe that magic decreased the pollution. Or possibly the immaculate polluter pole was suddenly used, or something... Or you can believe that they lied.

I know which one of those things I believe.

When it was pointed out to EPA, who has an immense budget and whose job it is...

MD: To find this?

AN: Well, I don't know what their job is. You would think, that if you worked at EPA you would care about pollution. But the fact of the matter is that when things like this were pointed out to the people who run the EPA's Acid Rain Database, they remarked, “Oh. Well that does seem odd.”

And to the best of my knowledge, no one has even been questioned about this.

The people that collect the information, EPA keeps track of hourly production at all of the plants, they don't care. As long as the forms come in...he's a bureaucrat. Forms come in, boxes mainly filled out right.

MD: So, they could have no pollution protection, at all, right now and short of having giant gouts of black smoke?

AN: No one would give a shit. Nobody. The people who are bureaucrats, care that the paperwork is filled out right.

MD: Would you buy green power from Enron or any of the other big five?

AN: No, I wouldn't buy green power from anybody. If you're going to buy green power, what you're saying is that somehow electricity comes around in discreet packages.

MD: So is there any incentive for the power producers to actually generate honest numbers when reporting about green power sales?

AN: None that I can think of.

More Soon...
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