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Enron Electrified


Business Week e.biz -- Strategies

Enron Electrified

Its Net ventures are poised to generate powerful profits

Enron Corp. President Jeffrey K. Skilling was nearly the last person in his company to hear about the energy giant's $15 million effort to begin online trading of natural gas and electricity. In September, when developers were locking in the site's black-and-orange color scheme--just two months before its launch--they finally consulted the boss. That was four months after the team of 380 employees started an around-the-clock effort to build EnronOnline, which has since handled billions of dollars in trades.

Was Skilling ticked off at being out of the loop on such a big project? Hardly. He welcomed it as evidence that the flexible culture he'd been nurturing for 10 years at Houston-based Enron was perfectly suited to the Internet Age. "This was a sign that the organization's health was good," crows Skilling, 46, a McKinsey & Co. consultant before joining Enron in 1990. The best part: The work was funded from existing budgets, never requiring the approval of Skilling or CEO Kenneth L. Lay.

If anyone still confuses Enron with the sluggish pipeline business from which it sprang, they won't for long. The company that revolutionized the marketing of natural gas and electricity after deregulation began in the mid-'80s is wielding a powerful new weapon: the Web. "It puts the afterburner" on Enron, says Skilling.

Consider this: Enron is the largest wholesale marketer of natural gas and electricity in North America, with more than 20% of the business. By creating the financial tools, such as gas futures, that made energy tradeable, Skilling has boosted Enron's revenues tenfold, to $40 billion, during his tenure. Plug in the Web, and the mixture becomes, well, electric. More than $90 billion worth of energy and financial instruments has been traded on EnronOnline since its launch in November--making it one of the biggest e-commerce sites.

That's just for starters. Via the Web, Enron trades everything from gas to copper to financial instruments that let snowmobile makers and others hedge their risk to bad weather. Enron is building a nationwide fiber-optic network that can zip movie-quality videos across the Web. It has created a unit that buys and sells high-speed telecommunications capacity. And it is partnering with America Online Inc. and IBM to market electricity to residential customers with the help of the Web.

Expect Skilling to test Enron's Web limits even more. He has launched a new organization, Enron Net Works, to look for more e-commerce opportunities. High on the list: paper, chemicals, and data-storage capacity. "Anything in the marketplace viewed as a commodity is something we'd look at," says Greg Whalley, head of the new unit. Other possibilities: trading airport landing rights or space on railroad tracks. "The real risk is you don't move fast enough to capture the opportunity," says Skilling.

Yet some question whether Enron is moving too fast to get it all right. Enron's foray into residential power sales, for example, follows the company's 1998 retreat from the same market in California. And the company's boldest initiative--bandwidth trading--is far more complex than buying and selling natural gas or electric power, critics say. "Gas is gas, and electricity is electricity, [but telecommunications bandwidth] is brain surgery," says Leo Hindery Jr., CEO of rival telecom carrier Global Crossing Ltd. Skilling's projection that 30% of U.S. bandwidth will be traded by 2004 is "laughable," says Hindery, who expects Enron to remain a bit player.

That sounds sweetly familiar to Enron execs. When they started trading electricity six years ago, naysayers warned it would never be bought and sold like gas. Now it is. Skilling predicts bandwidth will be, too, and that the market will explode in coming years as Internet customers demand high-quality video. "The telecom guys just don't get it, which is fine," says Skilling.

For Enron, the "aha" moment came in 1998, when Skilling wanted a videoconferencing link to the company's New York office. He was shocked at the cost: $20,000 a month for a high-speed line that Enron needed just a few hours daily. What's more, Enron was locked into a 10-year deal. To Enron execs, this was the gas market all over again. Why, they wondered, couldn't they get just the bandwidth they needed? Enron Broadband Services was born.

Its job was to establish a system for trading bandwidth. To help create liquidity in the market, Enron is building a fiber-optic network that connects with other companies' systems. With that network in place, customers will be able to trade capacity and ultimately buy and sell bandwidth in chunks that are measured in hours or days instead of the now-typical years, Skilling says. While the amount of bandwidth traded in the six months the system has been running is tiny, Enron predicts the unit could contribute $1 billion a year in operating profits within four years. Analysts are more cautious. "I would question whether it will take off as quickly as they're predicting," says analyst Rolf De Vegt of telecom consultancy Renaissance Strategy Inc.

Whoever's right, the risk is remarkably small. Sure, Enron wouldn't see those fabulous profits. But the effort will cost Enron $1.3 billion this year and next--a pittance compared with, say, the $8 billion AT&T will spend on infrastructure this year. And if Enron can't create a market for trading capacity, its network should still be worth plenty. "We haven't seen any [investments in bandwidth infrastructure] that have proven to be a waste of money," says analyst Richard G. Klugman of Donaldson, Lufkin and Jenrette Inc.

In fact, Enron already is using its network in a separate Web initiative. The company has signed more than 60 deals to deliver video for content providers such as Austin (Tex.)'s Road-Show.com, which uses Enron's network to deliver financial presentations. Before turning to Enron, Road-Show tried to create its own network to stream video, but couldn't get the quality it wanted. "It was a nightmare--and too expensive," says Trey Fecteau, Road-Show's president.

With so much profit at stake, Enron won't have the online trading market to itself. Energy rivals such as Williams Cos., based in Tulsa, and Dynegy Inc. in Houston, are teaming up to challenge Enron in online trading. And Kansas City's Aquila Energy Corp., the nation's second-largest power marketer, has joined with five other energy partners to build an alternative online electric- and gas-trading network. Both groups say their exist yet.

Some of the problems are more mundane. Battery life is an area that has shown very little improvement in recent years, and no breakthroughs are on the horizon. That's a problem for the Handy21, which needs more power than conventional technology can supply. To cope, the Oxygen team has come up with a new processor designed to save power. It will use only as much power as a particular task requires, then go into hibernation when not in use. The chip, called Raw, is in its final design stages, andors, expecting the Net to fuel Enron's profit growth, have pushed the company's shares up 55% this year, to $67. Earnings this year should jump 12%, to nearly $1.1 billion, while revenues should grow to some $55 billion from $40 billion last year, says analyst Zach G. Wagner of brokerage Edward Jones.

To ensure that Enron doesn't run out of steam, Skilling is adjusting the open culture that allowed the online-trading project to develop undetected. The company now rewards risk-taking by employees, as measured by their peers. And Enron is incorporating innovation into its new headquarters, to be opened next summer. Top executives will abandon their 50th floor digs for 7th floor offices that open onto the trading room, putting them closer to the action.

Even foes acknowledge that Enron's flexible culture and track record for innovation should serve it well. "Enron has a history of being quick on its feet and redefining a solution to match the problem," says James Q. Crowe, chief executive of Broomfield (Colo.)'s Level 3 Communications Inc., a telecom carrier that both sells to and competes with Enron. In the tumultuous world of e-commerce, that might be Enron's most valuable asset of all.For a Q&A with Skilling, go to ebiz.businessweek.comBy Wendy ZellnerReturn to top


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