Fueling Bandwidth Trading - Page 2

Deep Pockets

While its not clear if or when such broad changes will take place, its apparent that — in addition to their Texas-size egos — the energy giants are bringing a host of valuable assets and skills to the telecom business. First and foremost, theyve got money.

Enron, Dynegy and El Paso had a combined 2000 revenue of $152 billion. All are very profitable and able to finance their telecom dreams with cash from their energy businesses. They own or have acquired rights of way on or near their gas pipeline infrastructures, in which theyve laid fiber-optic cable. They have years of experience in trading and risk management, skills that should help them develop a more transparent pricing structure in telecom. Plus, and perhaps most important, they have all been involved in the development of markets in other nascent commodities — namely, natural gas in the late 1980s and electricity during the 1990s.

Many Wall Street analysts believe Enron and the others will succeed in telecom, but there are plenty of doubters. "Will they fundamentally be able to change the way the industry operates? I dont think thatll happen," said John Kane, CEO of metro carrier Telseon, which recently signed an access deal with Dynegy. "The telecommunications industry is primarily a bunch of monopoly companies that have been reinventing themselves over the past 20 years. And they still control the telecom market."

The energy companies are finding that things are tougher in the telecom business than they expected. Last month, Enron CEO Jeff Skilling said the companys lousy second-quarter earnings in the broadband business were "absolute evidence that there is a serious problem in the telecom industry." Dynegy, which has invested $700 million in its fiber network, reported a second-quarter loss of $20 million in its subsidiary, Dynegy Global Communications. El Paso didnt reveal profit or loss information for its Global Networks division.

Despite the current woes, a pipelineful of other energy companies are eager to jump into telecom. Aquila, Duke Energy, Koch Industries and Reliant Energy are all sniffing around the edges of the telecom business. And all of them have begun trading bandwidth. "We see a market that looks very similar to natural gas and electricity," said James Blalack, Reliant Energy Broadbands director of risk management and trading.

Reliant, another Houston company — and a controversial player in Californias electricity mess — delivers electricity and natural gas to 4 million customers and sees the telecom business as fertile ground. Blalacks division did 600 bandwidth trades in the first half of this year, and he said the company is making money on its trades. Reliant doesnt own any fiber assets right now, though Blalack said the company is looking at lots of potential deals.

"There are plenty of intermediation roles we can play," Blalack said. "We think we can bring our asset management skills to the market. And its a huge market."

Jeff Blackwell, managing director of Reliant Energy Broadband, said the company, with $29 billion in sales last year, will bring something else to the struggling telecom industry. "We are bringing our balance sheet," Blackwell said. "In a transaction, do you want to do business with a carrier whose stock was $60 and is now $2, or us?"