Fueling Bandwidth Trading - Page 5

Enrons Competitors

Mark Stubbe didnt waste much time talking about why Dynegy is getting into the telecom business. "We are economic bounty hunters," said Stubbe, president of Dynegy Global Communications.

Dynegy hasnt collected any telecom booty so far. But next month, the company expects to finish lighting the last segments of its 16,000-mile domestic fiber network. The company already has a 5,250-mile fiber network in Europe that it obtained when it bought Iaxis. Through its partnership with Australian phone company Telstra, which owns 20 percent of Dynegys U.S. telecom subsidiary, Dynegyconnect, the company has fiber access to numerous Asian markets.

Like other executives in Houstons Energy Alley, Stubbe isnt good at concealing his contempt for the struggling telecom carriers. "Just for them to cover their debt is a huge number. Thats why the potential to go bankrupt is pretty real for Williams [Communications] and for Level 3 [Communications]."

Stubbe said hell offer services that are unheard-of right now. Currently, he said, telecom companies try to sign up customers for three-year or five-year contracts. Once his companys network is up and running, "well do a one-hour contract," Stubbe said. "Well do a one-day contract or one-month contract. Well give you a fixed price today and a floating price in the future. Or well give you an option now and an option to keep the price floating in the future."

The ability to customize bandwidth transactions and provide financial contracts, as well as hedge opportunities and options, is the future of the telecom business, Stubbe said. And he believes its only a matter of time — 18 months to 24 months, he predicted — before the industry adopts those methods.

In the meantime, while the telecom industry shakeout continues, Dynegy wants to make sure it has the ability to deliver bandwidth if it needs it. Toward that end, it will have a nationwide mesh network with 15 to 20 OC-48 circuits. If traffic demand warrants it, Dynegy will be able to increase the network to handle up to 190 circuits.

Like El Paso and Enron, Dynegy believes it needs to have significant telecom assets in order to leverage its trading expertise. As bandwidth trading ramps up, the companies will use their fiber assets to hedge their own risks.

For instance, if Dynegy owned a 12-month lease on another carriers OC-48 circuit from New York to Los Angeles, over that time, Dynegy could trade shorter increments of capacity on that line to other customers. If Dynegy were to oversubscribe that leased line and could not get a good price on additional capacity, it could always rely on its own fiber network to deliver capacity to its customers.

While Enron and Dynegy are concentrating on long-haul networks, El Paso is focusing on the short-haul business. In February, the company announced it would spend up to $2 billion buying its way into the metro market, where it will sell capacity to other carriers and to corporate users. El Paso is teaming with Cisco Systems, which will provide routers and other equipment worth about $1 billion for a fiber-optic network that will eventually cover 34 cities.

"We think its a great time to enter the market," said Balu Balagopal, senior managing director and chief commercial officer of El Paso Global Networks. "The capital markets have encouraged a lack of attention to fundamentals and capital efficiency."

El Paso has already installed fiber among 200 central offices operated by SBC Communications in Texas five biggest cities. It recently bought Fiber America, a San Marcos, Texas, company that owns fiber rings in Austin, San Antonio and several smaller Texas cities.

"The fundamental need and demand for telecom services is robust," Balagopal said. "The constraints are in the metro space."