Fueling Bandwidth Trading

How energy companies plan to change telecom

Paul Racicot shouldnt have been so confident. Just 27 hours earlier, Enron had announced that its broadband business had been crushed in the telecom downturn, losing $102 million in the second quarter on revenue of $16 million. That revenue was about one-tenth of the Enron broadband units sales in the year-earlier second quarter.

Yet Racicot, head of Enrons bandwidth trading business, could barely contain his bullishness. Looking out his 44th floor window in downtown Houston on a broiling mid-July morning, he insisted that Enrons outlook on the bandwidth business hadnt changed and that the business was "growing faster than we expected it to grow." And, he said, "Anything we want to intermediate, we can."

Few people have charged Enron or its employees with excessive humility. But the energy giant and a few of its neighbors in downtown Houston believe that — regardless of the current wreckage — they are going to transform the telecommunications business and the way bandwidth is bought, sold and traded.

If they succeed, the energy companies will one day "sell you bandwidth when you need it, at a price you want to pay, for a duration you are comfortable with." So predicted Stan Hanks, a principal of Portland, Ore., technology and communications consulting firm Network Mercenaries, who also spent three years at Enron helping the company develop the technology for its fiber networks. Better yet, Hanks said, I-managers will be able to buy contracts for bandwidth that "have a price tied to a market index price, instead of to a number some salesman pulls out of his nose."

To illustrate his point, Hanks said that when gas station owners buy fuel, they are able to compare the price they are paying with the benchmark price of that commodity on the New York Mercantile Exchange. Buyers of telecommunications services dont have a comparable way to gauge prices. Bandwidth trading, Hanks said, will make pricing more transparent.

But are the energy companies that are spending billions of dollars on fiber-optic networks, pooling points and telecom gear making the same mistakes that were made by the struggling telecom carriers they seek to supplant? Or are they steadily laying the groundwork for a coup detat that will allow them to dominate the market for bits in the same way they dominate the markets for British thermal units?

Regardless, the entry of the Houston companies — along with a growing number of electric utilities — into the telecom business could have long-term effects on I-managers and how they buy telecom services. Some companies are already offering metro rings and storage and data-crunching capabilities to enterprises.

For the most part, though, Enron and the energy giants are primarily targeting the wholesale market. Given their size, trading expertise and market savvy, they could end up forcing the major telecommunications companies and the regional Bells to change how they manage their networks and how they treat customers.

If they can overcome basic issues like mistrust and the reluctance of traditional telecoms to use their pooling and connection points, the energy companies could force a stratification of the telecom sector. Brokers like Enron might end up selling, monitoring and provisioning backbone traffic on the wholesale level while the regional Bells and other companies run the retail business. Long-distance companies like AT&T might not own their networks anymore. Instead, they might focus on billing and customer service, and lease or buy fiber capacity from network operators like Global Crossing or brokers like Enron.