Enron Vs Bombay

Introduction

In our case study we try to look at the Enron versus Bombay politicians case, this case is drived from real events which took place on August 3, 1995 in India. The main subject of the case is Enron Corporation, an American energy company based in Houston, Texas founded in 1985 by Kenneth Lay after merging Houston Natural Gas and InterNorth.

The other main player in this case study, The Maharashtra state government of India dominated by the nationalist, right wing BJP (Bharatiya Janata Party) abruptly canceled the $2.9 billion power project in Dabhol. The news of the cancelation of the project was immediately followed by the fall of Enron’ share prices by about 10 percent. Rebecca P. Mark the then chairman and chief executive of Enron’ sprang to action to resuscitate the deal by promising concessions, unfortunately to Enron this effort was met with scorn from BJP politicians.

Enron was involved in this project in 1992 when the then new reformist government of the congress party was keen on attracting foreign investmen in infrastructure. Enron was awarded the Dabhol project, construction of a 2,015MW power complex, within 10 days without any competitive bidding, which was then followed by the agreement that Maharashtra State Electricity Board was to purchase 90 percent of the power Dabhol produces.

Enron made a major political miscalculation about the backlash against foreign investment by the opposition coalition led by BJP. BJP called for revaluation of the project and threatened to close it if it’s found necessary. Enron then proceeded to close the deal in rush and begin construction without waiting for the election results, believing that it will be hard to unwind the deal once construction is under way.

After Enron was forced to reveal details of the contract, it was found out that Enron would receive 7.4 cents per KWH, which would make Enron’ rate of return 23%, which is well higher than 16% that  the Indian government guaranteed to others This lead to critics citing it as proof of cost exaggeration and corruption.

After BJP won the election, Manohar Joshi promptly canceled the project, citing inflated project costs and too high electricity rates. At the time of cancelation of the project Enron had already invested $200 million and proceeded to push the U.S Energy Department to make a statement in the sense of canceling this deal could adversely affect other power projects, which then wasn’t well taken by the BJP politicians.

Enron and Maharashtra negotiated and finally agreed to revive the Dabhol project with the major alterations, which included the project cost to be downgraded form $2.9 billion to $2.5 billion also lowered the proposed electricity rates and make a stated-owned utility a new 30% partner of the project.

Background on Enron

ENRON CORPORATION. Enron, a corporation headquartered in Houston, operated one of the largest natural gas transmission networks in North America, totaling over 36,000 miles, in addition to being the largest marketer of natural gas and electricity in the United States. Enron managed the world's largest portfolio of natural gas risk management contracts and pioneered innovative trading products. The company was on Fortune's "Most Innovative" in the United States listing for several years running and reached #7 on the Fortune 500 list in 2000. Its bankruptcy in December 2001 was the largest such filing in United States history. The name Enron became synonymous with corporate greed and corruption, and its demise cost investors and employees over $70 billion in lost capitalization and retirement benefits.

Enron was formed by a merger between Houston Natural Gas (HNG) and InterNorth. HNG was formed from the Houston Oil Co. in the 1920s and provided gas to retail customers in Houston. In 1976 it sold its retail gas business in Houston to concentrate on gas exploration and production and other businesses. By 1984 HNG had assets of $3.7 billion, sales of over $2 billion, and profits of $123 million. InterNorth began as Northern Natural Gas Company, organized in Omaha, Nebraska, in 1930. When InterNorth, with one of the nation's premier pipeline networks with revenues of $7.5 billion in 1984, found itself the potential takeover target of corporate raiders, CEO Sam Segnar sought to buy out HNG, and a deal was announced in May 1985 in which InterNorth would acquire HNG for $2.4 billion. The arrangement stipulated that the merged entities would be known as HNG/InterNorth and be headquartered in Omaha with Segnar as chairman and CEO. However by 1986 Segnar had retired, Kenneth Lay was chairman and CEO, and the company was renamed Enron with corporate headquarters in Houston. The new company had the second largest pipeline network in the United States with over 36,000 miles of pipe stretching across the continent and north into Canada.

In 1994 Congress gave the states the authority to deregulate gas and electric utilities. The newly opened California market was a major target, and Enron spent $100 million a year to generate business there. That effort was cancelled in 1999, but Enron continued to supply wholesale power to California. The ensuing power shortage in California in 2000 rocked the state, and Enron was accused of manipulating supplies. Eventually two Enron traders were indicted for criminal fraud.

In the mid-1990s it appeared that water, like natural gas, was on its way to being deregulated. In July 1998 Enron purchased Wessex Water of Great Britain for more than $2 billion and renamed the new business Azurix. However, economies of scale did not work because there were no means to interconnect the supply and transmission facilities. Azurix was liquidated within two years after its public offering. Enron financed Azurix's debt with Special Purpose Entities (SPEs) called Marlin and Osprey, which kept the debt off Enron's books for a period but was eventually recognized during Enron's last few months before bankruptcy in 2001.

In January 2000 Enron announced its entry into the broadband fiber optic business and created Enron Broadband Services. Enron Online, launched in late 1999, became the largest e-commerce site in the world. Many analysts saw this expansion as a logical extension of Enron's commodity trading and transmission business. However there was an oversupply of capacity, and technological innovation also more than doubled the carrying capacity of fiber already in the ground. Within months of Enron's announcement, there was a glut of "dark fiber" (unused fiber connections) across the country, and numerous Internet startups that had promised to swallow much of the anticipated bandwidth failed, causing prices to fall by fifty percent. It was estimated that Enron lost over $1 billion in its broadband venture. Nonetheless, Enron was able to use accounting mechanisms to record a profit of over $100 million on a deal with Blockbuster that, in reality, never saw a single dollar of revenue.