Schumpeter’s Perennial Gale Of Creative Destruction

This Financial Times article analyzes Dynegy’s recent sale of a pipeline it acquired from Enron to bolster its balance sheet and reduce its debt. Dynegy’s stock price increased accordingly yesterday. The first paragraph of the article says it well:

When Dynegy snatched the Northern Natural Gas pipeline company from a collapsing Enron for $1.5bn, it did not know how valuable the asset would become. On Monday, it proved to be Dynegy’s salvation.

Warren Buffett bought this pipeline for $928 million (note how much less that is than what Dynegy paid in December, a big price decrease, but Dynegy is desperate). This chain of capital transfer, from Enron to Dynegy to Warren Buffet, is a beautiful illustration of the value that Schumpeter’s perennial gale of creative destruction has the possibility of creating. Entrepreneurial, opportunistic risk taking (such as buying a pipeline in this market, even if it was at a good price) works with other factors like technological change to create value where no one had anticipated it or considered it before. That’s the big reason why our economy continues to thrive.

Interestingly, though, Buffett has been wanting to increase his investments in the electricity industry, apparently because he sees the potential to create a lot of value. He has been stymied in many dimensions by the byzantine and, in many ways, obsolete layers of regulation in the industry. He has particularly hit the wall of PUHCA — the Public Utility Holding Company Act of 1935, a stultifying relic of the early abuses and lack of transparent financial information in the industry. See also my earlier analysis of PUHCA and the arguments for and against repeal.