Enron Case

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9-200-051

REV: APRIL 4, 2003

BENJAMIN ESTY

PETER TUFANO

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Contractual Innovation in the U.K. Energy Markets:

Enron Europe, the Eastern Group, and the Sutton

Bridge Project

On December 4, 1996, Stewart Seeligson of Enron Europe and Paul Danielsen of The Eastern

Group shook hands and said goodbye as they left yet another late night negotiating session. These

two men and their colleagues had met at least three times weekly over the past two months as they

attempted to reach an agreement on an innovative business relationship. Seeligson, who had been

transferred recently from the risk management department of Enron’s global headquarters in

Houston, was a member of Enron’s Asset Development team in London. Danielsen was the Head of

Contract Trading at Eastern Electricity, the fourth-largest power generator and one of the largest

marketers of natural gas in the United Kingdom. The deal that had occupied their attention would

deliver to Eastern much of the economics of building a new combined cycle gas turbine (CCGT)

power station.

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The innovative deal would give Eastern the right to run a “virtual” power plant at will. Enron

would sell to Eastern a long-term option to convert natural gas into electricity. Enron planned to

hedge its exposure by constructing an actual CCGT plant and by trading in the gas and electric

markets. While Eastern’s right to receive power proceeds and Enron’s right to operate the plant were

similar in character, there was no legal or physical connection between Enron’s physical plant and

Eastern’s virtual plant.

No

Seeligson and Danielsen had agreed on a 13-page, single-spaced term sheet describing the

proposed deal, but still had to resolve many issues before they could draft a more definitive

agreement. This structure was vastly different from the traditional independent power plant (IPP)

structure, and both men would have to convince their superiors of its wisdom—once they had...