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Category: Business and Industry
Date Submitted: 04/08/2016 12:59 PM
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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.
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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...