Enron Corp. - University of California | Office of The President

and indeterminate outcomes of long-term contracts. This resulted in EES improperly and
prematurely recognizing hundreds of millions of dollars of revenue that not only boosted its financial
results, but allowed top EES managers and executives to collect huge bonuses based on these
improperly inflated contract valuations.
(g) EES was, in fact, losing hundreds of millions of dollars on many of its retail
energy contracts. To induce customers to enter into these agreements – so that Enron could claim
its EES business was growing and succeeding – Enron had, in effect, "purchased" their participation
by promising them unrealistic savings, charging low prices Enron knew would likely result in a loss,
and spending millions of dollars in the short term to purchase purportedly more energy-efficient
equipment, a significant portion of which costs Enron knew it was likely never to recover and
certainly never to make a profit on. Enron executives knew that Enron would lose money on the
EES deals, but had to make them more and more attractive to generate new clients, while the
Company utilized unrealistic projections and mark-to-market accounting to mislead investors into
believing that the EES contracts were making money. For instance:
(i) EES had originally targeted residential retail customers, but this failed
due to insurmountable hurdles, including the fact that Enron did not have sufficient infrastructure
to bill residential customers monthly. In 97, Enron transformed EES into a commercial-industrial
business and then purportedly signed up several major customers. However, EES still faced
insurmountable hurdles: One, because each customer's contract was individualized, there were no
economies-of-scale savings and the cost of performance precluded making a profit. Two, Enron still
did not have sufficient infrastructure to do the monthly billing. Three, a prerequisite for each
contract was for Enron to upgrade the customer's facilities with huge current capital expenditures,
which was uneconomical and guaranteed losses on most contracts;
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