Fueling Bandwidth Trading - Page 3

Blame It On Williams

For decades, energy companies have been investing heavily in information technology. But the real convergence between the energy and information businesses began with The Williams Cos., the Tulsa, Okla., energy and pipeline company.

In 1985, Williams saw the value in its rights of way and began installing fiber in some of its old pipelines. In 1995, the company sold its WilTel subsidiary, which had an 11,000-mile fiber network, to LDDS WorldCom — now WorldCom — for $2.5 billion in cash. In 1998, Williams started building a new network. Today, its recently spun-off subsidiary, Williams Communications Group, has 40,000 miles of fiber connecting 125 cities.

Although Williams Communications is a good example of the convergence of the energy and information businesses, its also loaded with more than $4 billion in debt, and it can no longer rely on cash from Williams energy businesses to sustain it. In early July, Williams Communications cut 400 jobs.

Still, a broad array of energy companies is investing in fiber networks.

Montana Power, a utility with 285,000 electric and 150,000 natural gas customers, is seeking to sell off its power and energy assets so it can focus on its TouchAmerica telecom subsidiary, which has an 18,000-mile fiber network. Duke owns a fiber network in the southeastern U.S. Last October, the Norfolk Southern railroad leased some of its rights of way to a subsidiary of Virginia utility Dominion, which serves natural gas and electricity to 3.8 million retail customers; Dominion Telecom plans to spend half a billion dollars over the coming months to lay 9,000 miles of fiber. Last year, six electric utilities banded together to form Americas Fiber Network, which is set to build a 10,000-mile fiber network in the eastern U.S. In September, San Diegos Sempra Energy will begin construction on a 200-mile fiber-optic line between San Diego and Phoenix that will cross through the state of Baja, Mexico.

Although all of those companies are intriguing, none has the size, trading capabilities and the swagger of Dynegy, El Paso and Enron. Indeed, without Enrons aggressive push, its doubtful the bandwidth trading market would even exist today.

Enron got into the business when it bought utility Portland General Electric in 1997. The utility was building a fiber-optic ring around the city and was planning some long-haul fiber projects. Enron executives quickly saw the similarities between telecom and electricity: Both were commodities that couldnt be stored and had to be delivered immediately, and both had historically been controlled by monopolies that were now dealing with a deregulated market.

With characteristic brashness, Enron quickly began hyping its entry into telecom as the Next Big Thing. Wall Street analysts loved it. In early 2000, one Merrill Lynch & Co. analyst projected that Enrons broadband business would be profitable by the end of this year, and that the companys operating profits from broadband would reach $2.1 billion by 2004. Those estimates helped send Enrons stock into the stratosphere; it reached about $90 per share last fall.

Today, Enrons stock trades for half that amount, and its broadband play is looking haggard. The shine on Enrons broadband business began to fade in March, when the company announced that its plan to deliver movies over the Web with help from Blockbuster had fallen apart. Although Blockbuster was tight-lipped about the breakup, Enron was quick to blame the problems on its former partner, saying Blockbuster couldnt deliver the content it had promised.

The loss of the video deal, which would have helped Enron use some of the capacity on its fiber network, was a major blow to Enron, but the company says it is now negotiating with other entertainment companies for a similar content distribution deal. And Racicot said the companys recent losses are no reason for concern. "People forget how long it took for electric power to become an actively traded market," he said.