Move Over ‘Fat Boy’

Issue 6 and Volume 106.

By Brian K. Schimmoller,
Managing Editor

My younger brother had a gift – if you want to call it that – for giving nicknames to everyone in our family. My older sister was called “Gen,” short for “General,” because he always thought she was ordering him around. He referred to our mother, rarely to her face, as “Boss Lady,” which pretty much speaks for itself. Our dad was called “Big,” short for “Big Man,” because he was rather imposing – six-foot two, large frame and about 240 pounds. My older brother and I were called “Hubcap” and “Fat Boy,” respectively, because both of us were slightly overweight during our middle school years.

The only reason I’m sharing these intimate details of my family life – without prior approval from my parents or siblings – is that my childhood nickname has cropped up in the news recently. “Fat Boy” is the moniker given to one of the electricity arbitrage schemes used by Enron traders during its trading heyday. Some of the others had similarly creative names like “Death Star,” “Get Shorty,” and “Richochet.”

Each of these schemes involved trading and market massaging techniques that acted to tilt the odds in Enron’s favor with respect to profit-making potential. One scheme reportedly involved buying power in price-capped California at $250/MWh and selling it out of state – in Arizona or the Pacific Northwest – for 4-5 times that amount. Another reportedly enabled Enron to benefit from ISO-sponsored congestion relief efforts. By scheduling transmission in the opposite direction from the prevailing flow – but without actually moving any energy – Enron was able to earn lucrative congestion payments during emergency power situations.

Following on the heels of the Enron schemes, rumors, innuendo and accusation have also begun swirling around several other companies – including Dynegy, Reliant and CMS Energy – primarily related to the use of “round-trip” trades that artificially boosted trading volumes. Although many of the companies insist they gained little or no market advantage, Reliant Resources has admitted that these practices falsely inflated revenues – by about 10 percent over a three-year period.

It’s not 100 percent clear that any of these specific activities were illegal. As one former Enron employee put it in an article in The Oregonian, “California set up a market that was ripe to be cherry-picked. And that’s what Enron traders did.” They may have ruthlessly pushed the rules, but it’s not a foregone conclusion that they broke the law.

The line between legality and illegality here is actually quite difficult to define. The rules of the game are rather ambiguous, which isn’t all that surprising since the game itself is still evolving.

Legality is one issue, and any legal transgressions perpetrated by Enron or others must be identified, prosecuted and punished. Ethicality is quite another. From a business viewpoint, however, ethical lapses can be just as damaging as legal lapses. Inflating trading volumes to boost business and/or increase share prices, for example, certainly gives off an unethical stink, if not an illegal one.

The catchy phrases used to describe some of the Enron trading schemes provide an important lesson. They’re innovative, cutting edge, “next generation,” exactly the sort of thing needed to capitalize in a turbulent, deregulating market. In my opinion, however, they’re also deceptive and psychologically seductive, exactly the sort of thing that captures the imagination but blinds the ethical conscience.

By giving trading schemes zippy phrases that roll off the tongue, rather than descriptive terms that attempt to hint at their nature, it’s easier for the participants to carry out the schemes and easier for management and Board members to gloss over, or misunderstand, the ethical and business implications.

However, while the blame assuredly resides with the participating trading companies, some measure of culpability – or at least regret – falls to the rest of us as well. Ambiguous rules, inadequate oversight, and market uncertainty conspired to create an environment in which savvy traders could unearth and exploit the energy industry’s market loopholes.

With all the dirt flying, most of it aimed at the merchant energy and trading companies, I believe it’s important for everyone to look in the mirror. Strip away the filters that can lead to excuses, to misguided justification, to the belief that “we’re different than everyone else.” Remember, what’s unethical can be just as damaging as what’s illegal.

Although many are in damage control mode right now, there is an opportunity for our industry to emerge from this time of tribulation healthier, more open, and primed for growth. My older brother and I both thinned out and grew out of our respective nicknames. Our industry now needs to do the same.

Move over “Fat Boy.”