Rise and Fall of Enron

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By John K

In 1985 Huston Natural Gas merged with InterNorth, a natural gas company and decided to come up with a new company name ENRON. It profited by promising to deliver so many cubic feet to a particular utility or business on a particular day at a market price. That change with the deregulation of electrical power markets, a change due in part to lobbying from senior Enron officials. Under the direction of former Chairman Kenneth L. Lay, Enron expanded into an energy broker, trading electricity and other commodities. The Business of Enron

Enron was originally involved in the transmission and distribution of electricity and gas throughout the United States, and the development, construction, and operation of power plants, pipelines and other infrastructure worldwide. The corporation had a variety of products that it offered such as petrochemicals, plastics, power, pulp and steel. Enron also had a variety of service lines such as Energy and Commodities Services, Broadband Services, Capital and Risk Management Services, Energy Transportation and Upstream Services, and Commercial and Industrial Outsourcing Services. Enron became a giant middleman that worked like a hybrid of traditional exchanges. But instead of simply bringing buyers and sellers together, Enron entered the contract with the seller and signed a contract with the buyer, making money on the difference between the selling price and the buying price. Enron kept its books closed, making it the only party that knew both prices. Over time, Enron began to design increasingly varied and complex contracts. Customers could insure themselves against all sorts of eventualities such as a rise or fall in interest rates, a change in the weather, or a customer's inability to pay. Government regulation is one way that society shows it cares about responsible conduct in business. In the early 1990s the Congress of the United States of America passed legislation deregulating the sale of electricity like natural gas a year earlier. . Enron took advantage of the lack of regulation of its energy trading business to influence government officials and play games with the numbers. Enron rapidly changed its business from a regulated natural gas company into one of the world’s largest energy traders. The corporation became an unregulated derivative –trading company. It generated funds by entering into extremely volatile, risky, and expensive hedging transactions. The company changed its business focus from primarily delivering and brokering energy domestically to focusing on three new key business areas: water, international energy brokerage, and broadband communications. . As the corporation grew rapidly, the emphasis was more on short-term effects and not on the long-term. It became all about living up to the expectations of growth. The system of internal control and control by the management could not keep up with the way Enron was growing. No one outside of the company could figure out how Enron was able to generate so much revenue compared to its counterparts. In order to continue to grow, increase its profits and push up its share price, Enron needed additional capital despite its substantial debt load. Therefore, it formed a series of partnerships between various Enron directors and outsiders that appeared to be independent but were effectively controlled by Enron executives. These were named “Special Purpose Entities” (SPE). These SPEs were of doubtful legality and served a number of purposes. (Walsh, 2002) At first Enron apparently set up these SPEs correctly with the help of its independent auditors, Arthur Anderson. When Enron ran into some difficulties finding replacement for these SPEs, it started using key management personnel for this purpose. What Enron was in fact doing, was using these Special Purpose Entities to move debt off the balance sheet and using the company stock as collateral. These...
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