Once mighty Enron strains

IS TIME running out for Enron? At the beginning of this year, the Enron Corporation, the world's dominant energy trader, appeared unstoppable. The company's decade-long effort to persuade lawmakers to deregulate electricity markets had succeeded from California to New York. Its ties to the Bush administration assured that its views would be heard in Washington. Its sales, profits and stock were soaring.

And under the leadership of Jeffrey K. Skilling, its chief executive, Enron's arrogance had grown even more quickly.

The company, based in Houston, dripped contempt for the regulators and consumer groups that stood between it and fully deregulated markets - for electricity, water and everything else. Everyone would win under deregulation, Enron said - especially its shareholders, whose stock would soar as the company profited from creating new markets. But less than a year later, everybody seems to have lost, especially Enron's investors. Enron's stock is plunging, and questions about its finances are mounting.

Some experts in the energy industry worry that if the crisis at the company worsens, trading in natural gas and electricity could be seriously disrupted and energy prices could grow more volatile.

The future of electricity deregulation is in doubt, thanks to blackouts and soaring power prices in California earlier this year - a crisis that ended only when that state contradicted deregulation's basic tenets by intervening deeply in the power market.

Enron's problems boiled over earlier this month, when it disclosed that its shareholders' equity, a measure of the company's value, dropped by $1.2 billion in the last quarter because of a deal disclosed only hazily in Enron's regular financial statements.

The supply of natural gas and electricity would probably not be affected even if the company failed, because Enron is mainly a trader, rather than a producer, of energy. But a crisis at the company might increase the volatility of energy prices, which have swung wildly in the last year.

A drop in the company's credit rating could also prompt other energy traders and producers to back away from doing business with Enron, hurting the company's sales and profits.

For now, Aquila and other major energy traders and producers, including Reliant Energy, the El Paso Corporation and Dynegy, are continuing to do business with Enron.

Still, some executives at other companies said they were looking more carefully at transactions with Enron, especially long-term contracts. They also said risk-management and credit officers were calling each other regularly to discuss the situation.

Mark Palmer, an Enron spokesman, said on Friday that no energy- trading company had stopped doing business with Enron. He declined to say whether any of the company's trading partners had suspended or altered credit terms. He said the company was continuing to see normal volumes of business.

But the crisis that Enron will face if its credit rating is downgraded is just a symptom of the bigger problem the company must confront.

To others in the industry, the opaqueness of the company's financial statements parallels Enron's efforts to keep its energy-trading business lightly regulated and free of disclosure requirements.

The most pressing concerns are a series of partnerships and trusts Enron created to move some of its assets and debt off its balance sheet.

Deals with partnerships formed by Mr. Fastow, who was chief financial officer when they were organized, led to the $1.2 billion write-off in shareholders' equity that Enron announced last week. The company has offered only skimpy details of its transactions with those partnerships.

Enron ended its relationships with those partnerships in the last quarter, after being criticised by shareholders.

Now analysts are scrambling to figure out the extent of Enron's off- balance-sheet debt and to assess the risk that the company will have to issue new shares to make good on its partnership guarantees.

Even traders at other energy companies say they do not have a clear picture of Enron's positions. Enron maintains that it is in no danger of being wiped out by a sharp move in electricity or gas prices because it keeps its trading book balanced, meaning the energy it has agreed to sell is offset, in roughly equivalent amounts, by energy it has agreed to buy.

In fact, Enron has lobbied forcefully over the years to limit regulation and disclosure of its trading operations. Last year, the company successfully lobbied Congress to effectively ensure that its Internet-trading platform would be exempted from regulation by the Commodity Futures Trading Commission.

Enron and other power traders do file limited information in reports to the Federal Energy Regulatory Commission, the agency that oversees wholesale electricity and natural gas markets. But the commission does not keep track of specific transactions and prices. Large-scale energy trading has existed for only about a half-dozen years. Enron pioneered the business, and now dominates it, accounting for about one-quarter of all trading in the U.S.

Before Congress and federal regulators opened up the market for wholesale electricity, a process that began in earnest a decade ago, the power business was a simpler affair. Utilities were given areas of monopoly service, and their rates - and ability to deliver enough electricity - were overseen by state regulators. But with the move to deregulate the business, independent and unregulated generators and traders have flourished, providing an ever-growing portion of the nation's power.

Beginning in the 1980's, the sale and transportation of natural gas was also deregulated, spurring Enron, which used to be primarily a gas-pipeline company, to move into the trading business.

The company's shift to trading gas and electricity accelerated in the mid-1990's, with the ascension of Mr. Skilling, who became chief executive in February, just six months before his unexpected resignation. Underscoring the change in direction, in securities filings this year Enron described its principal business as ``security brokers, dealers and flotation.'' Before, it had said it was in the business of ``wholesale-petroleum and petroleum products.''

Enron does not appear to face an immediate cash crunch. But the bank credit lines that it drew on last week to pay off its short- term debt will have to be renegotiated next spring. The controversial partnerships do not have to pay their debts until the following year - unless Enron loses its investment-grade credit rating before that.

Enron will also need to maintain its large trading positions, which could suffer if participants in those markets grow more nervous about Enron's credit. Enron's new chief financial officer may yet persuade investors that in fact the company's profits are real, and that its condition is better than the short-sellers believe. As questions are answered, confidence, and the share price, could rebound. But for now, investors are skittish, and some competitors are eager to take advantage of Enron's plight.

Alex Berenson & Richard A. Oppel Jr.

New York Times

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