Mark to market accounting allows companies to count as current earnings profits they expect to receive in the future from energy-related contracts.
It was this accounting practice that, in part, brought about the fall of ENRON. More than half of Enron's originally reported pretax earnings for 2000 and a third of its profits in 1999 were unrealized gains based on mark to market accounting.
While this practice is legal, there are no regulatory guidelines delineating how they should be calculated - giving companies wide latitude in their reporting. The lack of regulation is a result of successful lobbying efforts on the part of the energy industry.
Abuse of this accounting method can lead to seemingly large profits, but little or no cash flow (since the actual money hasn't come in yet). Overestimating the value of a contract can necessitate the restatement of earnings, as happened with ENRON. This can mislead investors and cause overly high stock valuations in the short term. Again, see ENRON.
Similarly, the 2001 federal budget was essentially a mark to market proposal. Tax cuts were passed based on future revenue surpluses. Revenue projections have always been known to be little better than guesses and many opposed putting tax cuts into law based on supposed surpluses in the future, but the huge tax cuts were passed nonetheless.
Now, just one year later, opponent's fears have come true; the tax cuts still exist, but the pipedream of neverending surpluses has shattered. Even rosy scenario economists see budget deficits - not surpluses - for the immediate future.
In an earlier era, tax cuts, increased defense spending, and the resulting budget deficits were called Reaganomics. Now, the triumvirate of tax cuts, increased defense spending, and budget deficits ought to be called Enronomics.