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A Wrinkle in Time

Enron makes an exit; FERC cost-based rates return.

Fortnightly Magazine - January 1 2002

Out of the fog of Enron's demise, a historian might note that the company's greatest legacy was its championing of competitive energy markets. 

No other company in recent memory argued as forcibly, lobbied as hard, or spent as much money to convince America that it had a choice. 

Certainly, like most companies, Enron's agenda was to make money. But in the early days of Order 888 and 889, its voice was clearly distinct from the chorus of utility industry dissent towards electric restructuring.  

Enron was a useful barometer from which to judge against industry opinion on the support for competition. 

Now, Enron is simply no more. Even though its demise has been clearly documented, one may never really understand how those pesky off-balance sheet transactions truly worked. 

The company liked to revel in the level of complexity of its transactions-which, ultimately, was its undoing. Perhaps it's a tribute that even the jokes being sent around show similar intellectual rigor. Interested in how Enron conducted its accounting? Below is an anonymous e-mail that was sent to trading floors describing humorously how Enron might have accounted for a portfolio of cows:   

Enron Accounting: Texas Style

You have two cows. You sell three of them to your publicly listed company using letters of credit opened by your brother-in-law at the bank. 

Then, you execute a debt-equity swap with an associated general offer, so you get all four cows back, with a tax-exemption for the fifth cow, of course. 

The estimated future value of the milk cash flow stream rights of the six cows are monetized and transferred via an intermediary to the Cayman Islands, secretly owned by a majority shareholder who sells the rights to all seven cows back to your listed company, off-balance-sheet, of course. 

The annual report says the company owns eight cows and recognizes milk revenue for its 20-year life of the cow. 

This is hedged with derivative cow life insurance policy through a Cayman Island bank, and these hedges are done through EnronOnline's commodity storefront with an option to buy one more cow, no balance sheet provided ... 

The company says it will file all footnotes at a later date...

-Anonymous e-mail circulated just before Enron's bankruptcy

But what may not be a joke is FERC's new market power screen, which will set cost-based rate mechanisms for those deemed to have market power. The market screen itself-called the Supply Margin Assessment (SMA)-attempts to take into account regional transmission constraints and generation load imbalances that the previous hub-and-spoke analysis did not. (Please refer to FERC Docket No. ER96-2495-015 .) 

According to FERC, in determining the size that triggers generation market power concerns, the SMA establishes a threshold based on whether an applicant is pivotal in the market, such as whether some of the applicant's capacity must be used to meet the market's peak demand. When an applicant is pivotal, it is in a position to demand a high price above competitive levels and be assured of selling at least some

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