{"id":11523,"date":"2020-08-01T13:39:00","date_gmt":"2020-08-01T17:39:00","guid":{"rendered":"https:\/\/www.shortform.com\/blog\/?p=11523"},"modified":"2020-08-13T15:34:01","modified_gmt":"2020-08-13T19:34:01","slug":"enron-energy-services","status":"publish","type":"post","link":"https:\/\/www.shortform.com\/blog\/enron-energy-services\/","title":{"rendered":"Enron Energy Services: How It Contributed to Enron\u2019s Failure"},"content":{"rendered":"\n

What was Enron Energy Services? How did it contribute to the fall of Enron?<\/p>\n\n\n\n

Like Enron Broadband<\/a>, Enron Energy Services was a failed venture with serious consequences. Enron Energy Services was a major money loser and undoubtedly a reason why Enron failed.<\/p>\n\n\n\n\n\n\n\n

Enron Energy Services – Retail Utilities<\/strong><\/h2>\n\n\n\n

Enron\u2019s historical bread and butter was large wholesale contracts with commercial buyers. But it believed there was a coming wave of deregulation, where federal\/state governments would release municipalities from local monopolies to allow the free market to drive prices down. Enron could then sell directly to businesses and homes. Thus, Enron Energy Services was formed. <\/p>\n\n\n\n

In reality, the federal government wasn\u2019t interested in intervening in state affairs, and only a few states started pilot programs toward deregulation<\/strong> (New Hampshire, Pennsylvania, California). <\/p>\n\n\n\n

In the few hotspots it could work in, Enron campaigned aggressively to recruit consumer households to sign up, promising lower utility costs. However, the local suppliers<\/a> fought back, pulling their political strings and running ads against the big guy coming into town.<\/p>\n\n\n\n

In the end, few consumers really signed up for Enron\u2019s services<\/strong> – 50k in California (1% of the market) and 300 in New Hampshire.<\/p>\n\n\n\n

After the residential failure, Enron Energy Services targeted businesses<\/strong>. This was enticing – a big company spends millions a year for light, heating, and cooling. Couldn\u2019t Enron get a share of this?<\/p>\n\n\n\n

The commodity part of this business was actually a money-loser – Enron\u2019s hope was that it would make money on contracts to reduce energy costs and increase efficiency.<\/p>\n\n\n\n

Enron signed lots of deals at below-market utility rates<\/strong> – Ocean Spray for a $116MM 10-year agreement; Owens Corning for a $1B 10-year contract. The \u201ctotal contract value\u201d (TCV) was $8.5 billion – an impressive number on the surface. But TCV bore no relation to revenue or profits – it merely represented the cost of all the utility needs a customer had outsourced to EES<\/strong>.<\/p>\n\n\n\n

Regardless, this new TCV became the sought-after metric of the day, since it gave the appearance of Enron signing big business. As usual, Enron deal makers were given bonuses on total TCV and the projected profitability of the deal (which were wildly optimistic). Naturally, a lot of bad deals were signed very quickly.<\/strong><\/p>\n\n\n\n

The operational requirements of this new business put Enron out of its depth – servicing customers directly required customer service, attention to detail<\/a>, and hard manual work that Enron executives<\/a> referred to derisively as \u201cbutt crack\u201d work.<\/p>\n\n\n\n

Enron tried to argue that efficiency improvements would help them make the deals profitable, but soon it became clear those efficiency improvements wouldn\u2019t pay for themselves. Enron Energy Services was a failure\u2014but Enron wasn’t going to let anyone know that. <\/p>\n\n\n\n

Energy Traders Take Bigger Risks<\/strong><\/h3>\n\n\n\n

Meanwhile, the energy traders were making lots of money in the volatile markets. They were one of the few really profitable centers of the company, giving credence to Skilling\u2019s vision of a next-generation, asset-light energy company with Enron Energy Services.<\/p>\n\n\n\n

In the early inefficient markets, traders used fundamental research to make smart trades – like finding dam water levels to estimate future water prices or using weather to estimate fuel prices. Money came so easily they were bewildered.<\/p>\n\n\n\n

They made even more when they launched Enron Online<\/a><\/strong> – a virtual trading floor for energy futures.<\/p>\n\n\n\n