Judge Cudahy

Readers of my blog know that I admire this judge, although I have never met him and will never have a case before him. I was looking at some of my old savings from 2005, and came across this article from, I think, Depaul Law Review, which full article gave a profile on each Seventh Circuit judge (circa 1995 or so). I had a Seventh Circuit case pending at the time.



C. Richard D. Cudahy
Richard D. Cudahy, 67, is a 1955 graduate of Yale Law School. After serving as a law clerk for the Second Circuit and a lawyer at the State Department, he was an associate at Isham, Lincoln & Beale in Chicago from 1957-60, and he was managing partner of the Washington, D.C., office of Isham, Lincoln & Beale from 1976 to 1979. During the intervening years, he served as Chief Executive Officer of Patrick Cudahy Inc., an 800-employee firm, and he practiced law with Godfrey & Kahn in Milwaukee. He was also a commissioner and chairman of the Wisconsin Public Service Commission. He has taught law at several law schools and was active in politics for the Wisconsin Democratic party, serving as party chairman and as a candidate for Attorney General. Judge Cudahy was appointed to the Seventh Circuit by President Carter in 1979.
Judge Cudahy has been one of the court's most prolific writers. He files separate concurring or dissenting opinions far more often than the court's other members, and he writes the court's opinions more frequently than many of the other judges. n213 Judge Cudahy writes opinions for the court in a direct and pointed style, characterized by most lawyers as scholarly. His writing is uncomplicated
[*737] without being simplistic and it is notable for its clarity. Judge Cudahy usually begins by stating the issue before the court, summarizing the treatment given the issue in the court below, and announcing the disposition of the case. He then presents the facts as developed in the record, with appropriate deference to the fact-finding province of the district court. Next, Judge Cudahy almost invariably turns to a practical exposition of the controlling law, liberally salting the text with citation of precedent and other authority. He makes ample use of explanatory footnotes but he is rarely given to lengthy discourse on the law's history or its underlying philosophy unless the point is essential to the court's decision.
His opinions' treatment of the applicable law generally leads to a straightforward application of the law to the facts of the case. Before concluding, he often -- but not always -- will give attention to the most important arguments of the losing side, further explaining the basis of the decision. n214 Judge Cudahy's writing is evenhanded and temperate, neither displaying nor evoking passion or notoriety. This basic sturdiness of style is considerably easier to appreciate than it is to achieve. Posing few obstacles to the reader, Judge Cudahy's opinions usually accomplish what they set out to do -decide the case before the court -- and incrementally advance the law without regard to generalized theories or activist agendas. In contrast to Judge Cudahy's established reputation as a frequent dissenter, other judges of the court dissent from Judge Cudahy's majority opinions at no more than an average rate. n215
Although almost any of Judge Cudahy's published opinions would provide a good example of his style and care, some cases illustrate particularly well his skill for resolving difficult issues. In FMC Corp. v. Capital Cities/ABC, Inc., n216 the court reversed the district court's ruling that the plaintiff defense contractor could not state a claim against a television network for conversion of the contractor's confidential documents. n217 Judge Cudahy's opinion for the panel carefully sorted through a choice of law issue and deftly harmonized the defendant's important First Amendment concerns with the plain [*738] tiff's need for the information allegedly pilfered from its files. n218
In Merk v. Jewel Food Stores, n219 Judge Cudahy wrote the majority opinion, withstanding a lengthy and caustic dissent by Judge Easterbrook. n220 The court reversed a judgment entered in the defendant's favor by Judge Posner, who had presided over a jury trial in the district court. n221 Judge Cudahy's opinion held that oral agreements secretly negotiated between the company and the union did not override a collective bargaining contract, noting "the grave dangers posed by a back room deal that is secretly negotiated between union officials and company management without the knowledge or consent of the union rank and file." n222 This decision permitted approximately 15,000 former food store employees to sue the company for back pay and benefits under the collective bargaining agreement. n223 Both the opinion and the dissent appeared thoroughly researched.
Judge Cudahy does not necessarily jump at the chance to resolve an important question if the case can be decided without doing so. Judge Posner criticized Judge Cudahy's majority opinion in a separate concurrence in Martin v. Consultants & Administrators, Inc., n224 writing that the court should have used the case "as a vehicle for clarifying issues that have been a recurrent source of uncertainty and confusion;" n225 that is, the distinctions between self-concealing fraud and active concealment of an underlying fraud, and equitable estoppel and equitable tolling. The two scholarly opinions reached the same result for the case before the court, but Judge Cudahy's principal opinion was content to decide the case on narrow grounds and not to resolve the other issues.
Quite recently, Judge Cudahy wrote for a unanimous panel in Great Lakes Dredge & Dock Co. v. City of Chicago, n226 one of the many cases arising out of the Chicago flood of April of 1992. The city's contractor, Great Lakes, was sued in state court by thousands
[*739] of plaintiffs, including individuals, businesses, and the city, who alleged that the contractor had negligently installed pile clusters in the Chicago River, causing a break in a subterranean freight tunnel that sent millions of gallons of river water into basements of many Loop buildings. n227 The contractor filed a complaint in district court, claiming the existence of federal admiralty jurisdiction and seeking the benefit of a statutory limitation of liability for vessel owners. n228 The city successfully moved to dismiss the action in the district court but the court of appeals reversed, concluding that the contractor's alleged negligence was within admiralty jurisdiction. n229 The scholarly opinion traces the origins and development of the somewhat arcane field of admiralty, carefully grounding the court's holding in the statutes and cases, and methodically applying a threestaged inquiry to the specific facts of the case. The court remanded the case to the district court for further proceedings relative to the limitation of liability, which Judge Cudahy wryly noted was "the substantive law upon which Great Lakes anchored its claim." n230
While Judge Cudahy is to be commended for his ability to produce opinions of this quality with reasonable speed, he can also be criticized for contributing to the court's backlog. Because Judge Cudahy is more apt than anyone else on the court to voice objections to opinions circulated from other chambers, he has been known to delay other judges in issuing their final opinions. Judge Cudahy's own opinions tend to be longer and more academic in style, and it often takes him longer to issue opinions than his colleagues. n231 Most of the opinions written by Judge Cudahy and reviewed by the Council were issued within six months after oral argument. On occasion, however, Judge Cudahy takes an inordinate amount of time to produce a decision. n232 In recent years, his opinions have revealed a tendency to request supplemental briefing of particular issues, especially jurisdiction. In all, however, Judge Cudahy's contribution to the court's backlog is small. The Council views the delay attributa [*740] ble to Judge Cudahy's separate opinions as worthwhile.
Judge Cudahy prepares intensely for oral argument, requiring detailed bench memos from his law clerks. He often discusses a case at length with his clerks before argument, and his opinions reveal independent research of the issues briefed (or not briefed) by the parties. During oral argument he is consistently engaged but shows an affable, calm style. Appellate advocates report that he is courteous from the bench, raising questions when they are important to him but not otherwise speaking. His questions reflect thorough preparation and an understanding of the issues. As he does when he writes opinions, Judge Cudahy's performance at oral argument also shows self-confidence and an independence from the rest of the court.
As is probably true of many appellate courts, there are a number of judges on the Seventh Circuit bench who disdain dissent, seeking consensus, believing it is important for the court to speak with one voice. Judge Cudahy is not among them. Unlike many of his colleagues, Judge Cudahy will refuse to join in an opinion with which he has serious reservations, whether he differs with the majority's result or its reasoning; hence his prodigious total of separate opinions, both concurrences and dissents.
Judge Cudahy also has come to be perceived by the bar as somewhat ideologically distanced from his colleagues on the court. To some, this perception raises a question as to the extent of Judge Cudahy's influence on the court when he must compete for a colleague's deciding vote. His dissents have grown shorter and pithier, though usually not biting. n233 But Judge Cudahy can be biting when Chief Judge Posner or Judge Easterbrook is on the other side, as in Original Great American Chocolate Chip Cookie Co. v. River Valley Cookies, Ltd. n234
The Council believes that published dissents and separate concurrences are useful instruments in the explication and advancement of the law. Judge Cudahy has issued numerous important and effective
[*741] separate opinions, n235 and he has also played an important role in the court by writing majority opinions that narrow overly-broad opinions issued by other judges. n236 Judge Cudahy's record -- whether speaking for the court, concurring, or dissenting -- reflects a substantial contribution to the law and the court. He continues to be an excellent judge.

Glengarry Glen Ross

To understand the environment in New York that caused the subprime disaster, rent the movie Glengarry Glen Ross, starring Jack Lemmon, Kevin Spacy, etc., a 1992 movie.

When one's job is to sell, sell, sell, and your/family's survival is on the line, you sell, sell, sell. The product is immaterial. The interest of the buyer is immaterial. You screw your co-workers, your superiors, etc.

Also, as readers of this Blog know, the concept is best discussed by Michael Lewis in Liar's Poker, and if you click on this Label (Liar's Poker) you will see the key quote quoted multiple times.

Also Richard Cudahy, the judge, hits on it from an administrative point of view in the electric utility field. Again, click on that Label (Judge Cudahy).

Richard D. Cudahy

As readers of this Blog know, Richard D. Cudahy is one of the great judges of our country. In the two fields of my changing practice he has written definitive articles which were ahead of their time and/or which changed the law exactly as needed -- in my Sixth Circuit. (Asmo case being the latter). Click on my label "Judge Cudahy" for the details.

Here's another paper I came across this morning.

From Insull to Enron: Corporate (Re)Regulation After the Rise and Fall of Two Energy Icons

HON. RICHARD D. CUDAHY
U.S. Court of Appeals for the 7th Circuit
WILLIAM D. HENDERSON
Indiana University School of Law-Bloomington
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Energy Law Journal, Vol. 25, No. 1, pp. 35-110, 2005


Abstract:
For most Americans, the collapse of the Enron Corporation is without doubt the most memorable corporate event of their generation. Remarkably, few people are aware that the New Deal regulatory framework - which Congress recently reformed and toughened to in response to the Enron debacle - was itself erected in the wake of a strikingly similar corporate crash. In late 1931 and early 1932, the country looked on in horror as Samuel Insull's mighty and seemingly invulnerable electric utility holding company empire collapsed without warning, wiping out the holdings of over 1 million investors, most of whom believed that they had invested in a safe and secure electric utility enterprise. The newspapers of the day declared the event "the biggest business failure in the history of the world." President Franklin D. Roosevelt and the progressives in Congress subsequently used the Insull debacle as a rallying point from which to promote many of the most important laws of the New Deal, including the Securities Act of 1933, the Securities Exchange Act of 1934, the Public Utility Holding Company Act of 1935, the Federal Power Act of 1935, and the legislation creating the Tennessee Valley Authority and the Rural Electrification Administration.

This Article chronicles the striking similarities, and the ironic differences, between the respective failures of Insull and Enron. A careful examination of these historic events suggests that Insull and Enron were emblematic of rare moments in history when the birth of an infrastructure industry generates an enormous surge in economic activity, capturing the imagination of the investing public and weakening the commitment of the political class to serve, if needed, as vigilant, disinterested regulators.

The main lesson that emerges from our analysis is not so much that we need to strengthen laws against corporate wrongdoing. Rather, it is in recognizing that, during a financial bubble driven by rapid growth in network industries (e.g., electricity and the Internet), regulatory officials will almost inevitably buckle under political pressure and (a) fail to issue new rules that might interfere with the financial "hijinks" and (b) fail to enforce vigorously laws already on the books. This Article suggests that the laws adopted in response to Enron are destined to be watered down and ignored during the next boom, just as the New Deal laws, passed in response to the Insull debacle, were watered down and ignored during the 1990s. The authors reluctantly conclude that history will likely repeat itself in another generation or two, and there is little that can be done beyond vain entreaties to our own grandchildren to become more devoted students of history.


Keywords: Enron, Insull, electricity, deregulation, New Deal, securities, SEC, FERC, PUHCA, PURPA, Energy Policy Act of 1992

JEL Classifications: B15, B25, B31, G18, G38, K22, K23, L51, L94

Accepted Paper Series

--------------------------------------------------------------------------------

Suggested Citation
Cudahy, Hon. Richard D. and Henderson, William D. , "From Insull to Enron: Corporate (Re)Regulation After the Rise and Fall of Two Energy Icons" (March 2005). Energy Law Journal, Vol. 25, No. 1, pp. 35-110, 2005 Available at SSRN: http://ssrn.com/abstract=716321

Sept 4 2007 NYT Article on Deregulation of Electricity

I was travelling the day this article came out.

I am linking this topic with my label "Judge Cudahy" because he was the first to stand up and write about the coming fraud/tragedy of electric deregulation, as I point out in my earlier blogs.

This is a theme I have spent a lot of time on on this blog. Assuming the NYT reporters are knowledgable, the reporters do not call a spade a spade, due to influence from the likes of the Cato Institute, which is quoted, as though it knows anything other than dogma. Sam Randazzo, representing northern Ohio industrial consumers, and John Anderson of ELCON, also quoted, were the ones who planted the seed for electric deregulation, which, by definition gives this most important segment of our society over to monopolies.

http://www.nytimes.com/2007/09/04/business/04energy.html?pagewanted=1&fta=y

Deregulation of Electricity

Click on Title for this year-ago article.

A report that the nation faces more frequent power outages comes just as a decades-long debate over industry deregulation heats up — and shows no signs of resolution.
With roughly half the states stuck midway in a long-term experiment in rate deregulation, consumers in many of those states now face big rate increases next year as rate caps expire. And with billions of dollars of additional investment needed to keep the power grid humming, it’s not at all clear where that money is going to come from.
Until new power plants and transmission lines can be deployed, the reliability of the nation’s power grid will likely get worse before it gets better, according to the North American Electric Reliability Council, which oversees North America's power grid. In a report issued Monday, the group said that a looming power supply crunch will likely worsen over the next decade as power demand outstrips new capacity.
The impact will be felt unevenly but will be widespread, the report said. In the next two to three years, surplus capacity needed to keep the lights on in Texas, New England, the mid-Atlantic, the Midwest and the Rocky Mountain regions will drop to levels that make brownouts and blackouts more likely.
And with power demand seen rising 19 percent by 2015, and generation capacity expected to rise just 6 percent, "the adequacy of North America's electricity system will decline unless changes are made soon," the council's president, Rick Sergel said in the report.
In addition to building more power plants, companies need to upgrade transmission systems, improve energy efficiency programs for businesses and consumers and prepare to replace an aging work force, the council said.
It wasn’t supposed to work this way. Under the old, state-regulated business model, electric utilities controlled both the plants that generated power and the lines used to move it to customers. When more capacity was needed, state regulators oversaw those utilities' expansion plans and decided how much of the cost could be passed along to power customers.
Buoyed by the '80s-era deregulation success stories of the natural gas, telecom, airline and trucking industries, the electric power industry, with the help of Congress, embarked on a similar path. The hope was that by breaking up the ownership of power generation and transmission, competition would spur new, investor-funded capacity, drive the development and deployment of new technology and — over the long run — drive down prices for consumers.
But it hasn't worked out that way. After decades of change that included the near-collapse of California's power industry and the power trading scandal at Enron, the industry is stuck halfway between a market-driven future and a state-regulated past.
“We have one foot planted firmly in traditional regulation, one foot planted in competition,” said Ken Malloy, founder of the Center for the Advancement of Energy Markets. “And (we have) very little enthusiasm for going further from regulation to the competition side and very little from the competitive side to back to regulation.”

Much of the savings to date has come from state-mandated caps and rate freezes that will soon expire — leaving power customers facing potential big increases in their monthly bills. If those caps are extended, utilities say they face big losses because competition hasn’t yet driven down the market price of the power they need to buy on behalf of their customers.
Case in point: Last week top executives of the two big Illinois utilities told a committee of the state legislature that their companies will go bankrupt if lawmakers extend a cap on electric rates.
CONTINUED: Election-year battle
With elections just weeks away, Exelon’s Commonwealth Edison and Ameren Illinois are fighting a move by Illinois lawmakers to block a rate increase set to kick in when a 10-year-old law deregulating rates expires at year's end. ComEd Chairman Frank Clark said the state’s rate freeze would make life worse — not better — for consumers.
"They'll pay more all around and have less-reliable service," Clark said.
The move toward market pricing — which was supposed to lower rates over the long term —would mean rate increases over the short term, according to the companies. Starting in January, Illinois consumers face an average increase of between 22 and 55 percent compared with what they’ve been paying for the past decade. But ComEd has said it expects lose $1.4 billion if those increases are blocked. The company also faces cuts in its debt ratings if the freeze is extended.
And Clark said “partial deregulation” was a big part of the current problem. Not enough new power generation players have entered the state to drive down prices — and rate caps are one of the reasons why.
"Competition has not developed, and the reason it has not developed is that rates are so artificially low no competitors can come in here and beat them," he said.
But Illinois Lt. Gov. Pat Quinn, who said the utility’s executives got pay packages of $2.7 million to $7 million last year, blamed the rate increases on "inflated egos with inflated salaries."
The same scenario is playing out in many of the two dozen other states that have moved toward deregulation. Even where deregulation is beginning to take hold, looming rate increases are creating a backlash.
“Even the states that have moved (to deregulate) are being pummeled with lots of concerns about where this is all going,” said Malloy.
All of which has discouraged the kind of heavy, long-term investment needed to add more power generation and upgrade the reliability of the national grid. Power generators now face rising natural gas costs; ironically, one reason for the jump in gas prices is the surge in popularity of the fuel after 1980s-era natural gas deregulation spurred a construction boom of gas-fired power plants. Now, as the industry relies more heavily on natural gas, supplies of that fuel are stained and prices are rising.
That has power companies looking for alternative sources, but the options aren’t cheap. Wind and solar are gaining on fossil fuels, but the amount of power generated by these sources is tiny. They are also only available in limited parts of the country — and then only when the sun is shining or the wind is blowing.

Coal-fired plants are still in widespread used, but eliminating carbon emissions adds to the cost of new plants. And nuclear power, though increasingly attractive to the U.S. utility industry, still faces significant hurdles. Even under the most optimistic timetables, new nuclear capacity won’t be available 2015 at the earliest.
“There’s a finite amount of fossil fuel, and the environmental regulations are getting more and more restrictive,” said Dan Keuter, head of nuclear business development for Entergy, one of the largest operators of nuclear power generators. “But there’s huge demand for energy.”

Judge Cudahy and the Idiocy of Electric Deregulation

Judge Richard D. Cudahy, Judge for the Seventh Circuit Court of Appeals, [Chicago; covers Illinois, Indiana & Wisconsin] which court is known for its excellently-written, often hilarious, opinions, (e.g. Lust v. Sealy Matress) is the first and only knowledgeable person that I know of, to write unflinchingly about the idiocy of electric deregulation.

Earlier in his amazing career he was a commissioner on the Wisconsin Public Service Commission. He knows whereof he writes.




[excerpts]
Copyright (c) 1998 Yale J. on Reg.
Yale University
Summer, 1998
15 Yale J. on Reg. 427

Commentary: The Folklore of Deregulation (with Apologies to Thurman Arnold)
Richard D. Cudahy

And it celebrates the army of middlemen sustained by the folklore of deregulation--
marketers, publicists, advertisers, and the like--a new class dedicated to reinventing
venerable industries as savvy competitors.

We will see that certain endeavors--e.g., the unbundling of functions, the stranding of
costs, the passionate search for mergers, and the pervasive drumbeat of advertising--are
the indispensable ingredients of deregulation. Moreover, we will see that the process of
deregulation itself is legitimized by an army of consultants, marketers, middlemen, and
media people that give shape and meaning to the folklore of deregulation
But gone is obeisance to the idea of universal service--that everyone, wherever
located, should get adequate service at a fair price. This would be achievable only under
regulation, of course. With competition, the megalopolis is frequently and cheaply served
while the small city may have fewer flights than the space shuttle but at comparable
prices.

The ISO is one of the mythic heroes of deregulation, beholden to no one and capable
in theory of monumental feats of coordination and dispatch...

In fact, the bilateral traders accused the Poolco advocates of fabricating nonexistent
transmission problems and of introducing an unnecessary ISO to engage in, of all things,
regulation. The bilateral folks only wanted free trade betw

Retail wheeling is an arrangement devoutly sought after by large industrial
users of power. Those with an uncritical commitment to the market believe that the worst threat to their goals is any kind of slowdown [*435] that would allow the forces of regulation to
regroup and counterattack. Perhaps this perception is correct, and retail wheeling is like
the flag raised by the Marines on Iwo Jima to signal their final victory and discourage

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counterattacks. But symbolism aside and with a view to grim reality, the rush to judgment
may be premature. The decisive importance of faith and folklore in energy matters is illustrated by the stark contrast between the treatment of natural gas twenty years ago and today. Twenty years ago natural gas was generally believed to be a precious resource in short supply. It was to be reserved by regulatory fiat for its highest use--home heating. It was
emphatically not to be used for electric generation, for heating swimming pools, or for
burning in gas logs. Now the supply of natural gas is generally believed to be
inexhaustible, with no threat of inflated prices. As an environmentally friendly
hydrocarbon, there can be no higher and better use for gas than for industrial applications
and for electric generation. By using it in combined cycle turbine generators, we have a
low-capital-cost source of power, which cancels out economies of scale in generation and
voids any argument that electricity is a natural monopoly. Thus, instead of being subject
to legislative extinction as a generation source, natural gas is to be elevated by free
market competition to a new place of honor. There has been a radical shift in natural
[*436] gas's place in the folklore, reflecting once again the manic-depressive bent of
energy thinking. As we have seen, the folklore of deregulation is imbedded in all the various schemes for competition. But that folklore is perhaps most striking in the people, activities, and
buzzwords that accompany sort. Unbundling and stranded costs are exotic features of the
process, and mergers are commonplace. All are rich ingredients these proposals.
Deregulation is a magnet for middlemen and consultants, as well as for advertising
people of every of the folklore of deregulation.

A. Middlemen, Media, and Consultants

The folklore of deregulation is part of the powerful myth of the market, with the trader
as high priest and trading as the liturgy. Again, this is perhaps best illustrated by
developments in electric power. In its early years, the electric power business was
dominated by engineers and scientists. The initial problems of the industry raised
predominantly scientific and engineering issues--e.g., [*437] whether direct or
alternating current worked best. There were also early rate problems, mostly addressed by
engineers. After the engineers came the lawyers, who were presumed to know how to
deal with government regulation, when regulation came to be a bigger concern than
which way the current flowed. If there were any cracks in the phalanx of lawyers, they
were filled by the throngs of economists pouring into a land of opportunity. The
economists temporarily eclipsed the lawyers by shrewdly inventing deregulation, thereby
depriving the lawyers of their stock in trade.

With the advent of deregulation came a whole new breed of industry figures. This was
a crowd extraordinarily comfortable in an atmosphere redolent of new angles and new
dollars. These were the marketers, traders, and brokers that composed the emerging class
empowered by the new regime of competition in an unregulated marketplace. In sober
truth, the battle cry of deregulation was not, "Eliminate the middleman!" Rather,

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middlemen--individual and corporate--were coming out of the woodwork. The pecking
order of the new regime seemed to put those who arranged trades and made deals or who
followed futures quotations ahead of those who merely knew how to power up a gas
turbine or how to get on the good side of a utility commissioner. The less one dirtied
one's hands with wires and poles, or even rate schedules, the faster one rose, with
marketers in the lead. This new prominence of the trader is a bit like a move from mere
wheat farming to trading in wheat futures on the Chicago Board of Trade. How do you
get them back on the farm, once they've seen the wheat pit? In the folklore of
deregulation, the marketer and the trader are the leading players. In the new regime, if one needs power, one merely e-mails a marketer who has gobs of electricity in his, her, or its portfolio. Everything seems ethereal because it is virtual electricity that exists only as a blip on a computer screen and will never give one a shock. One imagines that somewhere there have to be real power plants and real transmission lines and real electricity, but one doesn't really know this for sure. All one deals with are virtual megawatts, emerging from virtual power stations onto virtual transmission lines for delivery to virtual customers, from whom payment will be received. But note this carefully: The payment is not virtual--it is in real dollars. Reality has retreated to the money part of the system.

The widespread existence of power marketers with only a computer, a fax, and a
cellular telephone lends verity to the idea that electric power has joined the yen and the
ringgit as a staple of exchange and speculation, and that the new elite of the electric
world are traders, brokers, and marketers--middlemen. To those steeped in the culture of
capitalism there is something reassuring about this. Certainly it is more modern and
enlightened to entrust the fate of the nation to traders, who understand and obey the
Invisible Hand, than to follow the lawyers into the snake pit of government regulation. In
the folklore of deregulation, the [*438] prime article of faith is the terminal ineptitude
of government. Any government is conclusively deemed part of the problem and not part
of the solution.

The better one is able to put the trading process into sophisticated garb, the better one
seems to evoke the beating heart of capitalism. Thus, the development of futures and
options or, better yet, options on futures for megawatts of electric power provides an
exhilaration that mere megawatts cannot match. In the public relations version, these
derivatives are useful for hedging and therefore contribute to the efficient management of
the power system. But we sophisticates know better. We know that these vehicles
occasionally prove useful, as in Orange County, to the informed speculator or even to the
uninformed gambler. Also of consequence is the business that these derivatives will
generate for brokerage houses and for commodity brokers, as well as for the exchanges
on which they are traded. A reform and restructuring of electric power is hardly of note
unless it provides new and exciting products for the trading floor--something to put pork
bellies in the shade.

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The deregulation of electric power has therefore generated an impressive growth of
employment opportunities for brokers, traders, and marketers. This will more than make
up for all the linemen, electricians, and clerks laid off in the interest of efficiency.
Perhaps these unfortunates can be retrained to be useful around a trading pit. But the need
for brokers, traders, and marketers is only the beginning of the employment opportunities
springing from deregulation. Some of the most impressive of these opportunities are in
the realm of education. No one can keep track of all the seminars, conferences, courses,
colloquia, encounters, round table discussions, brown bag lunches, and apres-ski
discourses offered in the name of preparation for the New World of Deregulation. The
revenues generated by these educational efforts seem to dwarf the combined take of all
the formerly regulated industries put together. And all these industries have their own
educational programs, at times with inter-industry insights, like using power lines for
computer talk.

Many of the members of the faculties of these various courses are consultants hopeful
of finding work with one or more of the programs' students, who are company managers.
So there is a delightful reciprocity about things. It is generally true that brochures
announcing these programs proclaim the advent of deregulation as a turning point in
history roughly on a par with the discovery of America. Nonetheless, however expansive
these interpretations, there is nothing to obscure the bottom line that "the 'd' in
deregulation is for 'dollars'." I am still waiting to hear any suggestion that the new
competitive regime might have a downside. If the advent of deregulation is like any other
novelty, however, at some point there will be a reactive flood of complaints, warnings,
and bomb threats demanding the immediate end of deregulatory activity and a return to
what the sender will call sanity. [*439] Rivaling the rash of educational conferences heralding the arrival of deregulation is the deluge of new newsletters, books, and periodicals dealing in hyperbolic terms with one facet or another of a deregulated industry. These publications have a seemingly inexhaustible supply of arguably newsworthy events with which to fill their pages. Now this is not news as riveting as Monica Lewinsky or Princess Di, and it may even be thin
gruel for a dentist's waiting room. But at least the definition of "newsworthy event" is far
from confining. It includes, of course, every official action of every state utility
commission and of every relevant federal agency. But this is only the beginning. Afterdinner
speeches of the commissioners may contain important clues to impending
developments in state X or in the nation. This sort of interpretation calls for virtuosity on
the part of the newsletter author in the art of "reading the tea leaves." This is a talent for
sensing, in an apparently unambiguous declaration, a hint that just the opposite may be in
store. For example, if a regulator proclaims dramatically how ardent his or her agency has
been in furthering deregulation and waves a bunch of papers to prove it, it may really be a
signal that a huge batch of onerous new regulations is about to be issued.
The need for inside information is particularly pressing at a time when industries are
being restructured to prepare them for competition. The reason for this is that everyone is
in favor of deregulation, and it becomes increasingly important to tell those that are really

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for competition from those who merely fear that a negative stance will jeopardize their
consulting contracts. There are few in industry, government, or academia who have gone
on record as opposing deregulation. Even the managements of the highest cost and most
inefficient regulated utilities declare that they are delighted to be stripped of their
monopoly. They like to give the impression that their newly proclaimed desire to trash
their monopolistic past and to seek entrepreneurial opportunity really was hidden in their
secret hearts all along. And no politician has been rash enough to suggest that
competition will be bad for the consumer and for the environment, even though his past
campaigns have always been generously supported by utilities with a monopoly
franchise. It is therefore important for the purveyors of inside information to be able to
report not only what is said publicly but also with whom the speaker had lunch before the
talk, or with whom he shot grouse in Scotland, not to mention miscellaneous pillow talk.
There is also a heart-warming rapport among, first, publications following industry
news; second, conferences and seminars at which the speakers make news; and, third,
consultants seeking to make a name for themselves as deregulation gurus. This
combination can work beautifully, with a newsletter sponsoring a conference, at which a
consultant can speak and have his views reported in the newsletter, wherein they will be
read by numerous potential clients. A government official seeking lucrative employment
in private industry can be a useful addition to this mix. [*440]

6
B. Advertising
Further, it is certainly not a revelation that deregulation has brought unimaginable
prosperity to people in advertising. We will soon be listening to electricity commercials.
Along this line, ads plugging as exceptionally reliable an "Old Faithful" brand of electric
power (filmed in Yellowstone Park, of course) are probably not far off. We can also look
forward to "green" promotions, where fly fishermen and Smokey the Bear will be
featured in 30 second spots recommending current generated by windmills or flowing
from a solar panel. Negative ads may showcase a mushroom cloud floating up from an
errant nuclear generator. We have as a model, of course, the virtually unintelligible television pitches of long distance telephone companies. One features ten minutes of free calling a day to American Samoa, while another explains a new procedure for making
.
C. Unbundling, Stranded Costs, and Mergers

Three issues that have been the subjects of many conferences and seminars, and which
arise in many deregulatory contexts, are the questions of unbundling, stranded costs, and
mergers. A short word on unbundling will suffice. It is not the forced separation of lovers
wrapped in intimate embrace; it is the forced separation, in the interest of competition, of
utility functions and services formerly wrapped in anticompetitive embrace.
Stranded costs refer to all the most harebrained mistakes made by regulated utilities,
which had duly received regulatory blessing, but which in the new order are condemned
to oblivion by competition. In the electric power industry, very [*441] expensive
nuclear plants are prominent on the list of stranded assets. The burial costs of such illstarred
undertakings are high, and there have been various plans for their payment by
some category of hapless customers. Unless the customers can be forced to pay, the
utilities may be driven into bankruptcy. It is therefore not surprising that many of these
monopolies asked nothing of the plans stripping them of their franchises except that their
stranded costs--the "funeral expenses" of their stranded assets--be somehow paid by their
customers. This position is not noble, but it is surely practical. Some of the most
apparently fanatical deregulators have adopted a mirror-image stance: Regulated
monopoly must be destroyed root and branch, but, almost incidentally (wink and nod),
the customers should pick up the tab for stranded costs. In fact, this is the new
"deregulatory compact."

Another favorite subject of conferences and of economists' theorizing is industry
concentration, mergers, and the like. As industries deregulate, their constituent companies
rush into one another's arms, forming ever more gigantic firms to compete in a much
friendlier market. These surges of corporate love at first sight give rise to the aphorism
(duly noted in the folklore): "Nothing is certain about deregulation except the mergers
that follow." Mergers are accomplished in the name of efficiency and perhaps (though
certainly sub silentio) in the hope of some easing of competitive pressures. The efforts of

7

the antitrust authorities to halt or slow this process are ineffectual in the face of the wild
corporate lusts unleashed by deregulation. More and more, competition in the formerly
regulated industries is carried on by a handful of behemoths of international dimensions.
And, to complicate the picture, the competitive myth that everyone covets his neighbor's
business is being tested in, for example, the telephone industry, where the anticipated
rush of long distance companies to enter local service has been notably subdued.
In the electric power industry, Herculean efforts are being made to sustain competition
against merger, vertical integration, and other hazards. Power companies vertically
disintegrate by selling off their power stations to eliminate cozy relations between
generators and distributors in their regional market and to put rival generators on a level
playing field. In line with this thinking, plants in New England are being sold to faraway
California owners and, in another transaction, to an even more distant French concern.
These deals are supposed to make sense competitively because the new owners have no
distribution or other assets in New England with which to play footsie. As in other
matters governed by the folklore of deregulation, the theoretical effectiveness of
competition is the one and only factor considered. Whether the infrastructure belongs in
foreign hands or even in absentee ownership is not a question any informed person would
ask. Whether New England regulators will have the same leverage over distant owners is
also not a permissible question. In the olden days, the only international relationships
among utilities involved First World ownership of Third World facilities--and these
arrangements frequently ended [*442] unhappily for both parties to the bargain. Now,
on the other hand, U.S. concerns own things in Britain (and elsewhere), and British
companies own things in the U.S. (and elsewhere). So far the French electric system is
not in play because it is still government-owned and, France being French, may stay that
way. International crossownership may be put to the test if electricity demand should
slacken and foreign owners seek to reduce or abandon service--pulling the infrastructure
out from under, so to speak.

Conclusion

Deregulation is a wondrous process, driven by the belief that competition is all. One of
the truly remarkable things about deregulation is its strong appeal to both the Right and
the Left. There may be some observers in the center who do not wildly applaud
deregulation, but nothing is heard from them as the plaudits come in from both ends of
the political spectrum. Conservatives love deregulation because it gets rid of the
government. Liberals seem to love it because it spells the end of hated monopolies.
Deregulation legislation is often sponsored by a vociferous liberal in partnership with a
doughty conservative. <=9> n8 In fact, judging by the debate on deregulation, it is hard
to believe that traditional regulated industries like AT&T ever had any friends. Rather,
these industries seem so cowed by the volume of demands by the Right and Left that they
be stripped of their monopoly, that they have accepted their fates, literally renounced
their regulated past, lit a candle to deregulation and its folklore, and adopted the fanatical
faith common among converts.

8

Competition is undoubtedly something, but whether it is all remains to be seen. It is
certainly a prod to efficiency and, no doubt, to innovation; but whether it can live up to
its folklore as a paradise of unlimited choice among ever-cheaper, yet always reliable,
basic services may raise nagging questions. Possibly, in some circumstances, the oldfashioned
obligation to serve may even be missed. The true believers would, of course,
be scandalized that one could entertain such a thought. In any event, whether
deregulation is a sea change or only a nudge of right rudder, it has certainly called forth a
wild abundance of musings by experts and by those aspiring to be experts. They have
launched a torrent of writings and speeches and regulations and orders and policy
statements that rival catalogues and credit card offers as a burden on the mails.
Developments in deregulation have actually appeared in front page banner headlines!
That has almost succeeded in making regulated and formerly regulated industries
exciting. At least that is the fragile reed on which this Commentary rests.

FOOTNOTES:
n1 See generally Applications of Microwave Communications, Inc., 18 F.C.C.2d 953
(1969).
n2 Back in 1973, I heard John deButts, then Chairman of the old AT&T, make a speech
at a convention of state regulators in Seattle. See John D. deButts, The Time Is Now for
the Communications Industry: Address Before the Eighty-Fifth Annual Convention of the
National Association of Regulatory Utility Commissioners, 1973 Nat'l Ass'n Reg. Util.
Commissioners Proc. 285. To an audience packed with AT&T vice presidents, he
declared that his company had fought to retain its monopoly status, but, now that
competition had been ordained, AT&T was going to compete with the best of them. See
id. at 287. Judging by its role as a defendant in a pack of antitrust suits, AT&T did
compete in a muscular way and without excessive restraint until it mutated from
regulated monopoly to telephonic free spirit.
n3 Applications of Microwave Communications, Inc., 18 F.C.C.2d at 978.
n4 Id. at 971.
n5 David Boies, Deregulation in Practice, 55 Antitrust L.J. 185, 189 (1986)
(commenting on Alfred E. Kahn, The Theory and Application of Regulation, 55 Antitrust
L.J. 177, 178-84 (1986)).
n6 Now apparently to be joined by a fourth--a Northwest-Continental combination.
n7 Abundant Power from Atom Seen, N.Y. Times, Sept. 17, 1954, at 5 (quoting Lewis
L. Strauss, Address at the Twentieth Anniversary of the National Association of Science
Writers (Sept. 16, 1954)). Mr. Strauss was the chairman of the Atomic Energy
Commission. See id.

9
n8 See, e.g., The Transition to Electric Competition Act, S. 1401, 105th Cong. (1997)
(Dale Bumpers (D.-Arkansas), Slade Gorton (D.-Washington)).

Faith-Based Deregulation

A Few Facts About Enron

The “perfect storm” of capitalism coinciding with faith-based DEregulation of electricity

Citigroup comes in for the harshest criticism. The bank generated more than $188m in revenue from Enron from 1997 to 2001, acting in a variety of roles from underwriter to investor.
http://www.enron.com/corp/por/examinerfinal.html
http://www.enron.com/corp/por/pdfs/examinerfinal/NBFinalAppendixD1.pdf