Energy firms begin to embrace bandwidth trading

Trading bandwidth seems a question of not if but how fast the market will develop, compared with just 6 months ago. Enron Broadband Services Inc. is quoting prices daily on 20 routes globally both as buyer and seller, Vice-Pres. Stewart Seeligson said Monday. Other energy companies, including Williams, Dynegy, Duke, and American Electric Power, have begun to investigate trading broadband capacity.

Kate Thomas
OGJ Online

Trading bandwidth seems a question of not if but how fast the market will develop, compared with just 6 months ago. Enron Broadband Services Inc. is quoting prices daily on 20 routes globally both as buyer and seller, Vice-Pres. Stewart Seeligson said in Houston Monday.

He says that activity is steadily increasing at the Enron Corp. subsidiary and that, importantly, the number of counterparties involved is also rising. Enron, which plans to complete its 20,000 route-mile fiber-optic network by the end of the year, pioneered the concept of trading telecommunications capacity about a year ago. Trading telecommunications capacity as a commodity was considered a novel and, by some players, not especially attractive idea because commoditization usually drives down prices.

Since then, however, other energy companies, including Williams, Dynegy Inc., Duke Energy Corp.'s Duke Energy Merchants, and American Electric Power Co., have begun to make up for lost time by laying the groundwork for trading broadband capacity. Many are already actively building fiber-optic networks or forming joint ventures to leverage existing rights-of-way. About 20 companies, not all of them energy firms, are presently laying fiber-optic networks in the US, Brent Wilkins, president of Chapel Hill Broadband Inc., told a conference sponsored by the Interstate Natural Gas Association of America and The Energy Daily.

Broadband network growth
Broadband�communications systems that can transmit large amounts of digitized video, data, and voice�is expected to drive industry growth.

Similarly to the gas pipeline and electricity industry, the telecommunications market is divided among wholesalers who provide services to other carriers and retail carriers that provide services to end users. The wholesale market is growing about 30%/year, compared with about 15%/year for the total telecommunications market, said Mary Regan, a research analyst with the Yankee Group.

Up to now, purchasing capacity on a network involved negotiating a one-time contract between two parties, a time-consuming process. Proponents of broadband trading say a commodities market say will increase efficiency, provide real-time pricing, introduce accountability, and reduce financial risk. Long-term, fixed-price contracts will be replaced by short-term segmented contracts, predicted Mark Perlis, an attorney with Dickstein Shapiro Morin & Oshinsky LLP. Master agreements will become widely accepted and nonperformance penalized.

Quality of service and reliability of delivery will be separated from the basic commodity. "That way, you can price out higher quality of firmness compared to a benchmark," he said.

Speakers agreed one of the biggest existing hurdles to a liquid market is the absence of interconnections among the networks in place and currently under construction. "Connectivity is essential," said Kenneth R. Epps, senior vice-president of Williams Communications, which plans to have more than 33,000 route-miles connecting 125 cities by yearend.

"We have to have interconnection points for trading. We believe the existing pooling points represent a golden opportunity to facilitate a bandwidth trading market." He predicted customers who will take advantage of bandwidth trading will be relative newcomers to whom quality, service, and connectivity are not as critical as large old-line telecommunications companies.

Epps said a liquid market could take 3 years to develop, and he does not fear that a commodity market for bandwidth will drive down prices that much. Historically, as prices decline 1%, demand increases 3%, he explained. "I don't expect trading will put us in a 10X decline," Epps said.

Williams has already successfully reduced its exposure and increased returns, said Christian Lemmer, Williams director of bandwidth risk management and optimization. The market is supporting between one and five deals a month in total, he said, although not all trades are publicized. Most believe city pairs will be traded in the broadband market, compared to the hubs that have developed in natural gas trading.

Initially, speakers said physical trading will dominate the market, but, in time, a secondary market will develop in which contracts will turn over several times before delivery of the product. The industry is still struggling over how to define the commodity or the units of commodity to be traded, said Perlis.

Long-distance wholesale carriers should welcome bandwidth trading because it will allow them to make the most of existing assets, said W. Theodore Pierson Jr., chairman of LighTrade Inc., noting that "every hour unsold is an hour lost." Moreover, trading will allow carriers to manage the financial risk of new construction and smooth gyrations in the supply-demand cycle. He said studies show that every 1% decline in price will lead to a 1.5% rise in revenue.

An active bandwidth market will lead to route arbitrage, increasing the value of secondary fiber routes, he said. Recently, a DS-3 circuit from New York to Los Angeles to San Francisco sold for 30% less than the same circuit direct between New York and San Francisco, Pierson said.

More in General Interest