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ADEclass2_10-11_72_students - ORGANIZATIONAL ECONOMICS...

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ORGANIZATIONAL ECONOMICS 2010-2011 Pablo Ruiz Verdú
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Session #2 Outline: Enron: discussion
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For next session: Readings: M&R, 35-48 Problem set 1, part 1.
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Enron Why Enron? Illustrates many of the topics we’ll address in the course Illustrates organizational failures that may have also contributed to the latest financial crisis Keep in mind: until just before its demise, Enron was considered a model to imitate! US investment banks were greatly admired just until the current crisis hit.
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Since we did not have time in class to discuss all questions, here you will find some ideas about those questions that illustrate how Enron’s case is related to the course.
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Enron Enron expanded into different lines of businesses. What do you think determined Enron’s choice of the particular lines of business into which they expanded? What kind of problems may have been caused by this expansion?
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What was Enron’s business? Founding: 1985. Merger of two natural gas pipeline firms: Houston Natural Gas and InterNorth Largest privately owned natural gas pipeline network Oil and gas exploration and drilling. Natural gas deregulation: largest market intermediary in the US natural gas market Wholesale electricity market deregulation: intermediary in the electricity market
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What was Enron’s business? Traditional natural gas market Regulated prices Monopolies (production, transportation, distribution) LDC: local distribution company. Source: NGSA Current market (simplified) Prices not regulated Key role of marketers Variety of distribution paths No monopolies Source: NGSA
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Enron’s business Market intermediary : Initially: simple spot and future contracts on natural gas Increasing number and complexity of financial contracts : long term contracts, different derivatives on gas and electricity,… Different underlying assets: wood pulp, bandwidth use, weather derivatives …
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Enron’s business EnronOnline (1999): Internet commodity trading platform (250.000+ transactions, revenues $100 (US) billion 2001) EnronOnline: all trades have EnronOnline as counterparty (buyer or seller) Enron’s main business by 2000 : operation of markets (“the firm’s goal is “the commoditization of everything”)
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Enron’s business
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