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

(ii) EES entered into demand-side-management ("DSM") contracts, which
bundled energy-related products and services for its customers, including providing power and
equipment as commodities to large companies, along with long-term management and consulting
services on the customer's usage of the power over the life of the contract. Enron booked 100% of
the commodity portion of the contract up front, and 70% (on average) of the estimated long-term
services revenue. Because the revenues from each contract were pulled into the single quarter when
the contract was signed using mark-to-market accounting, EES had to close increasingly higher
revenue-producing DSM transactions to show growth in EES's revenues and profits. This was called
"continually feeding the monster" inside EES; and
(iii) The Enron DSM contract with JC Penney had losses of $60 million,
the IBM deal was a significant loss for Enron from the outset, while the CitiGroup contract was
known at its inception to cost Enron millions in losses. In the 4thQ 99 EES deal with Owens Illinois,
EES recognized a multi-million dollar profit when the deal closed, even though it was known this
deal would lose money for EES. When CitiGroup and other money-losing EES deals were discussed
inside EES, people said "EES always sells at a negative."
(h) The purported prospects for, and actual success of, Enron's EBS division was
grossly overstated. First, Enron's broadband network – the so-called Enron Intelligent Network
("EIN") – was plagued by serious and persistent technical difficulties, which prevented it from
providing the type of high-speed and high-quality transmission that was indispensable to any hope
of commercial success. Second, Enron was encountering significant difficulties in completing the
build-out of its broadband network and, as a result, did not have currently, and would not have at any
reasonable time in the foreseeable future, a functioning broadband network. For instance:
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