Bus 3190 - Enron: Smartest Guys in the Room

BUS 3190

Mark Hicks

November 21, 2011

Professor Peterson

ENRON: The Smartest Guys in the Room

1. Does this case argue for the deregulation of electricity markets? Why?

Regulated electricity markets are regulated by the state government, meaning that there is only one provider of the electricity service in each market. The single “provider” of the electricity service in that specific market is responsible for generating, transmitting, distributing and selling to the customer. Now when you have a corrupt business making deals with that one specific “provider”, both sides can make serious money if foul play is involved, and that is exactly what happened with Enron and the energy markets they used. This is the main reason why this case argues for the deregulation of energy markets. Deregulation helps inhibit things like increased customer protection through the elimination of monopolies, and helps create jobs through the start-up of multiple REP’s (retail electric provider).

2. Why did the traditional checks and balances at ENRON not work?

The failure of traditional checks & balances at ENRON can be attributed to many things. One of the first “things” is the wrong inputs in the company. No one was watching the cash flow, monitoring conflicts of interest, or stopping conflicts from happening in the first place. Outputs were also wrong; mark-to-market accounting exaggerated ENRON’s assets and made their stock rise while the company fell. The SPE’s (special purpose entities) also helped to keep risk off their table.

3. What is mark to market accounting? What did it enable ENRON to do?

Mark-to-market accounting can change values on the balance sheet frequently, as market conditions change. In contrast,