Enron And The Natural Gas Industry

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Enron Background: Enron, based in Houston, Texas, was founded by Kenneth Lay as an energy and pipeline company in 1985 from the merger of two natural gas pipeline companies, Houston Natural Gas and InterNorth. The impetus for Lay to start Enron was the deregulation of the natural gas market in the mid 1980’s, which relaxed the rules on natural gas prices and allowed for more flexible agreements between natural gas producers and pipeline managers. These changes essentially eliminated the practice of using long-term contracts between producers and suppliers in the industry and allowed for prices to fluctuate more freely. The price setting model that resulted is known as “spot pricing”. This was a big advantage for Enron, which at the time owned the largest network of interstate pipeline in the US. The natural gas industry, due to the same deregulation that motivated Kenneth Lay to found Enron, was operated in a peculiar way. Natural gas suppliers relied on pipeline operators to transport their supply to natural gas buyers and these three entities all operated independently from one another. The elimination of long-term contracts in the industry created a system in which suppliers could interrupt the delivery of natural gas to buyers without penalty, depending on and in order to manipulate natural gas prices. Enron saw an opportunity in this system that they intended to exploit. By creating a “gas bank” from suppliers, Enron was able to offer utility companies long-term

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