Karen Broyles
OGJ Online
HOUSTON�The bandwidth and e-commerce markets remain largely untapped by energy companies, but utilities and some large energy players are making headway into both arenas, said broadband and energy industry officials speaking at the Banc of America Securities Energy Conference Tuesday in Houston.
The potential market for bandwidth trading is huge, says Nick Cioll, vice-president of trading operations for RateExchange, a San Francisco-based neutral exchange platform for bandwidth. Analyst firms such as JP Morgan and Piper Jaffray Corp. are estimating a potential market of $16-30 billion to as much as $500 billion or more in the next few years.
The bandwidth market's current stage of evolution is reminiscent of the natural gas market of the late 1980s and the electricity market of the early 1990s, says Cioll. Inefficiency in trading operations still abounds in the fragmented bandwidth markets, with most players brokering deals over the phone. Most of those deals are for 1-year contracts.
Utility companies are taking aggressive steps to wade into the market, however, as are telecommunication players, says Cioll. He estimates that utilities and energy companies will dominate roughly half of the total trading volume within the next 6 months.
Early leaders
Williams, Tulsa, has brokered a few deals over the phone for bandwidth, but Cioll says Enron Corp., Houston, is the clear leader in building the market's trading volume and liquidity. It's mostly operating on the buy side but is quoting both sides of deals on its trading platform Enron Online. "The market's coming up a lot quicker than it would have because of Enron," said Cioll.
Enron has already built up its Intelligent Network, a broadband service, using assets it acquired when it bought Portland General Electric. It spun off the electricity assets acquired in that purchase.
Players currently active in the bandwidth market include phone companies with no networks, enterprise businesses, and brokers.
Right now, building market liquidity and establishing a standard contract for bandwidth deals need to be dealt with for bandwidth trading to take off. Another hold-up is the fact that access through the carrier "hotels" of phone companies such as the Baby Bells is slow, despite the forced opening of phoneline access by the Federal Communications Corp., Cioll says.
Rather than try and connect their services through a carrier hotel operated by a phone company in a major city, Cioll says Williams may try and develop a system of fiber rings around major cities to bypass phone carriers.
Lou L. Pai, chairman and CEO of Enron Energy Services, says the company's approach of developing business unit networks by breaking down basic services into components and then rebuilding that infrastructure into contracts, and complementing hard assets into components, can be used to develop its new broadband services unit. It has already used that business approach to develop its trading operations in natural gas and power, and has leveraged the approach to gain top market positions in gas and electricity.
By using that approach, Pai says Enron has become the largest market maker for gas and power, using contracts to create delivery capability and storage and transmission opportunities. It has recently developed a software system that allows it to track and manage price risks nationwide.
Pai cites the structure of the gas market, with individual wells connected to pipelines that were linked to distribution systems prior to deregulation. Breaking up the business components�as production, transmission and distribution, and storage services were broken out�can help develop the bandwidth market, he says. That process can also break down volatility by building the market separate from its components.
Pai says 155,000 transactions valued at over $70 billion have been conducted on EnronOnline, a trading platform for 800 energy products and bandwidth.
Enron first announced it would begin trading bandwidth in May 1999. Enron said bandwidth trading was expected to revolutionize the internet industry by enabling the competitive enterprise market to order and reserve bandwidth necessary to utilize a new generation of desktop applications, such as streaming media, internet video conferencing, and high-quality multimedia graphics.
Already an active player in the communications field, Williams says it's recently signed $2 billion worth of new carrier contracts, 110 carrier customers for an average term of 6 years or longer, and 600 new circuits. The company also has installed 29,000 miles in its communications network. It also overbuilt its Houston-Washington line, depleting its cable bundle, says Keith Bailey, president and CEO of Williams.
The company currently owns 33,000 miles of US fiber optic network and 2 million sq ft of data centers and holds or is pursuing interests in overseas fiber optic networks in Asia, South America, and Europe.
Williams and Houston-based Dynegy Corp. also both recently acquired stakes for $25 million apiece in New York-based eSpeed Inc. (OGJ Online, April 30, 2000), a new electronic trading platform. The three companies plan to build business-to-business marketplaces for bandwidth, petrochemicals, crude oil, and natural gas liquids.
Matt A. Schatzman, president of energy trading at Dynegy, said at the conference that his company's recent interest acquisition in the trading platform eSpeed is only one component of its e-commerce vision. Dynegy also has plans to move into the bandwidth market, he said.
The company plans to unveil more of that strategy sometime during this year's third quarter. "Unless energy companies move their trading functions to the internet, the industry's system will stagnate under the current manual way of doing business," says Schatzman.
Part of the plan includes constructing a web portal, through which trading can be done through a neutral exchange. The eSpeed technology engine will help facilitate that business, Schatzman says.
Dynegy's e-commerce vision also includes business-to-business links with wholesale and industrial customers and with Chevron Corp., which in 1996 combined its natural gas and gas liquids business with Dynegy's predecessor company, NGC Corp. Business-to-consumer trading will be done through Dynegy Energy Services and its links with retail and commercial customers.