It’s been over ten years since Enron collapsed due to financial shenanigans. Outside of the shenanigans, I’m not sure exactly what their business was from a practical purpose. When they were in business, what did they do on a day to day basis and for what purposes did customers do business with them?
E.g.,
Guy 1: “We’re having trouble with <object, concept, etc.>”
Guy 2: “Uh oh, better call Enron! They are experts at <object, concept, etc.> and their prices are so so low!”
Basically, they bought and sold energy.
To elaborate, the energy industry isn’t some giant monolithic entity that controls all the powerplants in the USA and pulls a lever that decides how much the electrons in your home should cost. It is a complex network of suppliers, distributors and re-sellers controlled by a combination of private companies and government entities.
Basically the way energy traders like Enron work is buy buying commitments to purchase energy when prices are low and selling those commitments when energy prices are high. The end result is they make money and your energy bills don’t fluctuate as much.
Problem was, they apparently sucked at it, and hit that fact from the rest of the world.
They also weren’t just traders. They built and operated powerplants globally.
Also, not to be too snarky, try Wikipedia first next time.
edited to reduce snarkiness
Their original business was natural gas pipelines and distribution.
The business that got them in trouble was their “Gas Bank”, which I went into in a post about… Jesus, was it 6 years ago? : old :
Trading operations require vasts amounts of cash, which is where Enron got into trouble - they booked plenty of revenue, but the cash just dribbled in.
Steal, basically.
One of the main things that got them in trouble was deliberately manipulating supply to influence prices to their advantage.
Some of their behavior was glaringly obvious. Before I’d even heard the word “Enron,” California began to experience power brownouts – right after deregulation. Someone asked me what I thought was going on. “Crime,” I said. After all, there’d been plenty of electricity available in California right before the rules had been castrated. It was immediately obvious someone was manipulating the system.
Wikipedia appears to support my contention:
There’s little room for moral ambiguity here. Because people with medical conditions are sometimes dependent on electricity for life support (and prenatal infants always are), and elderly people are particularly vulnerable to California’s heat waves unless they have air conditioning, we’re talking about killing infants, old people, and the sick for personal gain.
Not just crime, but a combination of crime, loos-making activities and dishonest book-keeping.
Enron basically started many decades ago as a natural gas producer and pipeline operator. The companies that merged to form Enron got into electric generation, natural gas distribution (basically operating natural gas utilities that provide gas to homes and businesses) and a few other side markets (like pulp and paper etc.)
Basically they were an “energy” company that operated pipeline (both oil and gas), power plants, and gas utilities. That part of their business is basically very stable and part of the “utilities industry” which is defined by heavy public regulation, public monopolies, and very stable but typically mediocre returns (versus the rest of the market.)
However around the time all the companies merged into Enron the guys at the top decided to move out of stable industries and started selling off large shares in their gas pipeline business and even eventually seemed to be moving away from any “hard” assets at all. The new money maker was basically buying and selling large amounts of energy as marketers, and running a huge website where companies from all over the country could enter into energy deals. This is a highly speculative business (but one that is definitely possible to make money in), where Enron started to really get insidious is they basically represented themselves as just and safe as stable as they were when they were mostly a utility company. They also started to use their utility assets to manipulate the market, as buyers and sellers of energy who also operated parts of the grid they could directly control supply. They would take power plants down for unnecessary maintenance to cause a short term surge in demand, and then sell energy at massive profit.
They also started to drive significant amounts of corporate profit based on long term energy deals in which they recorded all theoretical profit from the deal as present-day profits. So as said upthread, if price variations long term meant the deal might be bad, that wasn’t reflected on the present day balance sheet because they had marked the profits from the entire deal as already realized. What then happened is as energy prices fluctuated the actual money coming in was nothing like what they had “realized” already, and in some cases they were losing money on some of their long term deals.
This would have been revealed under ordinary accounting rules, but their independent auditor basically helped them fraudulently hide it from the market so investors kept treating Enron as a blue chip stock. When the curtain fell down the market reacted swiftly and Enron was bankrupt.
Not to mention their “Big Five” accounting firm, Arthur Andersen, which did not survive the scandal (in any recognizable form, anyway).
Didn’t one of the wiretaps record Enron bigwigs chuckling about cutting off grandma’s AC in the middle of summer?
Fun fact: When Ken Lay first set up the company, he named it “EnterOn,” until someone pointed out that enteron means the human intestines.
It wasn’t “bigwigs” but rather floor traders. The immortal quote was:
Can someone translate that into regular EvilSpeak?
They basically intentionally, and knowingly, shut down generation capacity during times of peak demand so that Grandma Millie saw her rates shoot through the roof. California had to buy energy from neighboring states in the deregulated market (often through Enron). So Grandma Millie was paying $250 per megawatt-hour rather than the <$50 she was paying a year earlier.
At the worst of the crises California wholesale prices jumped to $1400 per megawatt-hour. Largely due to Enron’s manipulation of the market.
And miss an opportunity to interface with so many interesting and socially adept message board denizens?
Perish the thought!
Thats less than 5¢ per kWh. I find that hard to believe that. I’d expect more like 10¢. A meteoric increase, to be sure, but still. . . .
You’re right, that was the wholesale price. Wiki had it quoted as $45 per MW·h. But now I see that it is an uncited claim. Here is the quote I was going on:
Here is a cite that does back up those low energy cost claims: Powering A Generation: Power History #8b
It cites bids as low as $20/MWh when the market opened in 1998.
That article is interesting in that it appears to be before the full range of Enron’s manipulation became apparent.
They were the smartest guys in the room.
:rolleyes:
One interesting side-note is that a lot of “socially responsible” mutual funds were heavily invested in Enron because they were one of the only energy stocks that didn’t have any major environmental problems. Of course, a lot of that was simply because Enron wasn’t actually generating all that much energy, but one of their more tangible assets was a fairly large wind energy division.