Timing of Enron collapse ‘lucky,’ Maine regulator testifies

By the OGJ Online Staff

HOUSTON, Jan. 29, 2002 — The US Northeast was “profoundly lucky” Enron Corp.’s collapse occurred when electricity prices were falling not rising, the president of the National Association of Regulatory and Utility Commissioners testified Tuesday.

Because electricity prices have been falling rather than rising, suppliers with fixed-price contracts can make a profit, William Nugent, who also chairs the Maine Public Utilities Commission, testified Tuesday before the US Senate Committee on Energy and Natural Resources. The committee is one of many holding hearings into the causes and effect of Enron’s collapse. Many believe the outcome will be additional rules and legislation affecting the financial markets.

Had electricity prices been rising, Maine ratepayers could have taken a $50 million-$100 million “hit,” Nugent said. Suppliers would have had an “extraordinary” incentive to escape their obligations, he explained. Furthermore, if Enron had captured as much of the New England market as it has of the Maine electricity market and prices had been rising, Nugent said, the comparable “hit” for ratepayers could have approached $1 billion.

Because of the magnitude of Enron’s losses on surety companies, he predicted these firms will raise prices, require collateral, tighten underwriting standards, and cancel some policies. Some companies will have a more difficult time obtaining bonds, which could reduce the number of electricity competitors, Nugent said, and energy prices could reflect the additional costs.

Nugent noted Enron also owes the New England Power Pool (Nepool) for electricity purchases it made during the days before the company’s disintegrated and filed for protection from creditors Dec. 2. Enron’s collapse didn’t affect reliability because the company didn’t own generation and Enron continued to meet its contractual obligations. But fearing Enron might not pay for electricity purchases, Nugent said generators opted out of contracts whenever possible and sold the power on the spot market.

Enron’s collapse impaired its ability to arrange bilateral contracts with generators and the Houston marketer was forced to buy more from Nepool each day to meet its obligations, Nugent said. The company now maintains a 3-day cash balancing account with the independent system operator, and at the end of each day draws down enough money to cover the previous 3 days transactions.

Nugent called for federal reforms that will restore confidence in markets, noting “states cannot protect against incompetence or purposeful cheating by a major national energy company.” Otherwise, he said, unscrupulous players can avoid state rules by operating in those with the fewest restrictions.

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