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 Maurer School of Law
March 1, 2005
26 Energy Law Journal 35 (2005)
Indiana Legal Studies Research Paper No. 18
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.
Number of Pages in PDF File: 80
Keywords: Enron, Insull, electricity, deregulation, New Deal, securities, SEC, FERC, PUHCA, PURPA, Energy Policy Act of 1992
JEL Classification: B15, B25, B31, G18, G38, K22, K23, L51, L94
Date posted: May 9, 2005 ; Last revised: November 5, 2014