FROM INSULL TO ENRON: CORPORATE (RE)REGULATION AFTER THE RISE AND FALL OF TWO ENERGY ICONS Hon . Richard D . cudahy* & William D . ~enderson** I . INTRODUCTION ....................................................................................... 36 I1. INSULL AND ELECTRICITY ................................................................... 39 A . Insull's Origins and Early Career. 1859-1 892 ....................................... 39 B . Insull's Early Years as a Utility Operator. 1892-1912 ........................... 41 1. Chicago Edison ................................................................................. 41 2 . Insull Creates and Perfects a New Industry: Electric Utilities.......... 45 3 . Insull and the Movement for State Regulation of Electricity ........... 46 C . Middle West Utilities and the Coming of the Holding Company Era, 1912-1926 ............................................................................................... 51 D . The Rise and Fall of Insull as an Icon, 1926-1932 ................................. 55 1. The Public Utility Holding Company ............................................... 56 2 . The Frank Smith Episode and the FTC Investigation ...................... 59 3 . Cyrus Eaton. the Great Crash. and Control of the Insull Empire .... 62 4 . The Collapse of the Insull Empire .................................................... 65 E . Insull's Criminal Trials ........................................................................... 69 I11 . POST-INSULL UTILITY REGULATION: THE RISE AND FALL OF NEW DEAL REFORMS ............................................................................. 72 A . The New Deal Reforms and the Regime of State Regulated Utilities .... 73 B . Exhaustion of Economies of Scale and the Environmental Movement .. 78 C . PURPA, the Energy Policy Act. and the Deregulatory Ethos ................. 79 D . Enron Moves into the Limelight ............................................................. 83 IV . INSULL AND ENRON: REFLECTIONS ON TWO ENERGY ICONS ... 91 A . Leverage. Disclosure and Risk ................................................................ 93 B . Politics. Speculation. Regulation ............................................................ 98 * Senior Circuit Judge. U.S. Court of Appeals for the Seventh Circuit; B.S., U.S. Military Academy; J.D., Yale Law School. ** Associate Professor. Indiana University-Bloomington School of Law; B.A., Case Western Reserve University; J.D., University of Chicago Law School . The authors thank Alfred Aman, J . William Hicks, John Moot, and John Wasik for comments on various drafts of this Article and Joseph Efeyemineni Abugu, Bradley Klein, Jody Madeira, and Shawn Zawisza for their excellent research assistance . In addition, we would like to acknowledge the substantial editorial contributions of Lauren Mohr and Terry Allen of the Energy LmJour- 36 ENERGY LAW JOURNAL [Vol. 26:35 C. How Do We Regulate Electricity? ........................................................ 104 V. CONCLUSION.......................................................................................... 110 For most Americans, the sudden and horrific collapse of the Enron Corpora- tion will go down as the most shocking and significant corporate event of their generation. Yet, remarkably, it is a surprise to many people that the New Deal regulatory framework - which was recently reformed and toughened in response to the Enron debacle - was itself created in the wake of a strikingly similar cor- porate crash. In late 1931 and early 1932, investors, business executives, and or- dinary citizens looked on in horror as Samuel Insull's grand and seemingly in- vulnerable electric utility holding company empire foundered without warning and slipped into receivership. This debacle wiped out the holdings of 600,000 shareholders and 500,000 bondholders,' most of whom believed that they had entrusted their savings to a safe and secure electric utility enterprise. As Insull (much like Enron seventy years later) was vilified in the press, candidate Franklin D. Roosevelt seized upon this business disaster to press his case for corporate reform during the 1932 presidential campaign. Though Insull and his crash are today largely forgotten, we are still subject to its regulatory af- termath-measures that were adopted "in direct response to Insull's real or al- leged doings ...."2 This legislation, a substantial part of the New Deal regula- tory agenda, includes 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 Ru- ral Electrification ~dministration.~As noted by one Insull historian, "It is no ex- aggeration to see in the legislative innovations of the New Deal a phoenix arising from the ashes of the Insull empire."4 At least superficially, the Insull failure and the Enron collapse seventy years later appear to have followed virtually identical scenario^.^ For example, both companies rose to dizzying levels of economic power and political and public adulation. Virtually overnight, both icons plummeted ignominiously into bank- ruptcy, giving rise to frantic hand wringing and finger pointing by politicians and 1. See JOELSELIGMAN, THE TRANSFORMATIONOF WALL STREET:A HISTORYOF THE SECURITIESAND EXCHANGECOMMISSION AND MODERNCORPORATE FINANCE 22 (Houghton Mifflin Co. 1982) [hereinafter SELIGMAN]. 2. FORRESTMCDONALD, INSULL 335 (Univ. Chi. Press 1962) [hereinafter MCDONALD]. 3. Id. 4. ROBERTGRANT & JOSEPH KATZ, THEGREAT TRIALS OF THE TWENTIES:THE WATERSHED DECADE m AMERICA'SCOURTROOMS 245 (Sarpedon 1998) [hereinafter GRANT& KATZ]. 5. See, e.g.,John Micklethwait & Adrian Wooldridge, A Corporate Crisis? No, Just Business As Usual, WASH.POST, June 23, 2002, at B1 (discussing corporate crises in the aftermath of the Insull and Enron deba- cles and noting that "the echoes of the current crisis are uncanny"); Peter G. Gosselin, Enron a Rerun of His- tovy, L.A. TIMES,Feb. 22, 2002, at A1 (opining that "Lay, Skilling and Enron could rightfully claim to be In- sull's historical heirs"); Rebecca Smith, Enron's Rise and Fall Gives Some Scholars a Sense of Deja Vu, WALL ST. J., Feb. 4,2002, at A1 (discussing the Insull debacle and noting that "many students of corporate history get a sense of deja vu as they watch the Enron saga unfold."). 20051 FROM INSULL TO ENRON 37 the press. Apparently, everyone had been duped. Yet, a careful examination of the rise and fall of Samuel Insull reveals many interesting (and sometimes ironic) differences from the Enron debacle. Perhaps most striking is the fact that all of the Insull criminal and civil proceedings, which dragged on until Insull's death in 1938, ended in acquittals for Samuel In- sull and his large coterie of executive^.^ In contrast, the federal laws that were passed in the aftermath of Insull have been successfully deployed to obtain sev- eral criminal convictions of Enron figures (with possibly more to come17 and numerous civil settlement^.^ Another fortunate and arguably related distinction between the Insull and the Enron eras is that, notwithstanding similar stock mar- ket colla~sesin 1929 and 2000, the country has thus far averted a severe eco- nomic depression in the wake of Enron. Thus, Insull's most consoling legacy may be that the full force of history has not repeated itself in full. There is nothing like a narrow escape from ruin to produce sober, level- headed reflection on matters of public policy. This Article suggests that our ru- minations on government regulation are more likely to draw the right conclu- sions if we understand the historical continuum that connects Insull with Enron. The setting for our analysis is the growth and maturation of the electric power industry over a span of 120 years. At two junctures - separated by a nearly sev- enty-year interval - the collapse of two energy titans, Insull and Enron, helped to galvanize major changes in the regulation of financial markets. Since the Enron experience is current and ongoing, as well as the subject of numerous discussions and analyses in a continuing torrent of books and article^,^ its specific facts will be dealt with in a summary fashion. The Insull story, by contrast, is not well known to the modern reader, and will be described in some detail. The central lesson that emerges from a comparison of the Insull and Enron eras is not so much that we need to strengthen laws on corporate wrongdoing-it is in recognizing that during a financial bubble driven by rapid changes in net- work industries (e.g., electricity and the Internet) regulatory officials will inevi- tably buckle under political pressure and (a) fail to issue new rules that might in- 6. GRANT& KATZ,supra note 4, at 242-44 (discussing criminal proceedings); MCDONALD,supra note 2, at 338 (noting that after the criminal trials, Insull executives continued winning the "barrage of civil suits," though Insull himself did not participate because "his personal estate and debts were [turned over to] trustees for his creditors"). 7. See, e.g.,Greg Farrell, White-Collar Cases Become N.Y. Specialty, USA TODAY,Sept. 20, 2004, at B4 (reporting that through September 2004 the Enron Task Force had charged 32 defendants in connection with accounting fraud at Enron and that "[slo far, 15 defendants have been convicted or have pleaded guilty"). 8. See, e.g.,Kurt Eichenwald, Ex-Directors of Enron To Chip In On Settlement, N.Y. TIMES,Jan.