Gaming Delaware

Back in 2000, at the World Trade Center in Portland, Oregon, Time Belden and other Enron electricity traders carefully studied the regulations governing California\u27s new electricity market. Belden thought that the complex rules were prone to gaming. And game them he did. Under one strategy, Enron filed imaginary transmission schedules, creating nonexistent congestion, so as to draw on the rules\u27 provision of payment to alleviate congestion. They called it Death Star. Then there was Ricochet, or megawatt laundering, under which Enron circumvented price caps by exporting power out of California, only to bring the power back later, when the State, desperate for supply, had to pay a premium price. Eventually, with an energy-starved California up in arms and the Federal Energy Regulatory Commission investigating energy sales to the State, Enron\u27s lawyers paid the traders a visit. The traders walked the lawyers through the transactions, demonstrating legality under what must have been highly technical applications of the rules. The lawyers, expecting litigation, said, Alright, but is it too late to change the names? Can\u27t you just call the strategies Puppy Dog and Mama\u27s Cooking ? Enron\u27s North American trading desk made a profit of $2.2 billion in 2000, much of it due to activities in Western region electricity and natural gas. The crisis in California implied political scrutiny of Enron\u27s results, and the firm did not want the public to see the extent of its profits. So, still gaming the system, it booked $1 billion of pot as a reserve against potential liability, without actually showing the reserve in its published financials. In a legal regime of form without substance, an opportunistic actor can exploit the system in much the same way as Enron\u27s traders and accountants. In such a world, all law is rules-based and literally interpreted, and there are no backstop interpretive controls in the form of principles (to use the accountants\u27 term) or standards (to use the lawyers\u27 term)