This crucial story in the LA Times explains the link between the California energy crisis and the collapse of Enron. As the excerpt below indicates, Enron needed huge amounts of cash to act as a market maker in energy futures. The company then assumed that its early profit margins in this segment of their business would continue into the future and by "marking to market" they recorded as present day revenue those expected future returns.
http://www.latimes.com/business/la-000010818feb12.story?coll=la%2Dheadlines% 2Dbusiness "The only reason the contracts were worthwhile was that mark-to-market," he said. "You were able to take today 10 years' worth of minimal profit. But once you're into it, if your curves aren't as good as what you hoped for, your revenue line deteriorates. You lose money." And lose money EES did. Unforeseen problems with California deregulation threw off the models that predicted profits for the California book of retail customers. The exact amount is unclear, but Dickson said, "We had a couple hundred million dollars of position that EES had taken for that regulatory risk, where we predicted one thing and now it was different." Stephen F. Diamond School of Law Santa Clara University [EMAIL PROTECTED]
