InformationWeek: The Business Value of Technology

November 6, 2000

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Enron Surges Into E-Markets

Skeptics thought trading energy products online wouldn't work. One year and $200 billion later, Enron is just getting started.

By Robert Preston and Mike Koller

More on marketplace:

E-marketplaces have work to do before it's easy to trade on multiple platforms, many choices so little integration (10/16/00) Electric Shock (9/18/00) E-marketplace vendors take aim at integration issues (9/18/00)

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ost E-businesses--even the visionaries--tap the Internet mainly to enhance what they already do. Then there's Enron Corp., a 15-year-old energy company that's seized on the Net to redefine its entire business and the industries it dares to dominate.

In fact, the Internet is transforming Enron so fast that its executives aren't quite sure how to describe the company anymore.

Enron's 1990s mandate, to be the World's Leading Energy Company, is passé now that the company is applying its E-trading model to all manner of commodities: telecom bandwidth, paper, metal--even financial instruments that let snowmobile makers hedge against mild winters. While chairman Ken Lay says Enron is evolving into "an energy and broadband company," president and chief operating officer Jeff Skilling (whose license plate still reads WLEC) suggests a wholly new moniker: We Make Markets.

Enron doesn't just make markets; it assaults them. The company's main E-marketplace, EnronOnline, has logged close to $200 billion on 380,000 transactions since its launch just a year ago, making it the world's largest E-commerce site in terms of dollar volume.

Those transaction numbers can be misleading, because Enron acts as both buyer and seller and counts each side of the deal. Nonetheless, the $200 billion figure is impressive, given that the company's own ambitious projections at the beginning of this year had EnronOnline doing $40 billion in volume by year's end.

"Nobody in this building will say that we expected Enron-Online's success to be this big," says Mike McConnell, CEO of Enron's Global Markets unit.

The company doesn't break out EnronOnline's contribution to revenue--though in the third quarter, revenue for Enron's wholesale energy business, which includes trading operations, more than doubled from the year-earlier period to $28.1 billion. More than half of that growth is attributed to EnronOnline.

EnronOnline offers more than 1,000 products, traded in 13 currencies. While most trades are still of natural gas and electricity products, the company is moving aggressively outside the energy market.

For instance, Clickpaper.com, a separate site from EnronOnline, has done about $675 million in pulp and paper trades since late July--mostly financial and risk-management deals as well as some physical products. Enron also started trading physical metals in July and is considering a separate metals-only site similar to Clickpaper.com. The company has done more than 100 telecom bandwidth trades, though this market is still immature.

Unlike E-marketplaces that act as impartial go-betweens for buyers and sellers--letting companies post their products in as many specs as they want and then taking a small percentage of the transactions--Enron's marketplaces create a benchmark product at a set price. The company acts as a "counterparty" in each trade, guaranteeing that commodities purchased on its site are delivered at the price and terms agreed upon. Enron makes money on the spread between what it pays for a commodity and what it sells the commodity for.

Creating such marketplaces is nothing new for Enron. Seizing on deregulation of the natural gas industry in the late 1980s and electricity in the early '90s, Enron pioneered telephone-based markets of those products. The company saw that as long as it could create large, diversified pools of supplies in those industries and wire them together, it could ensure liquidity.

The arrival of the Internet made that coordination cheaper and easier. Enron gets into most industries with pure financial trades--derivatives and other instruments that protect companies from big price or supply swings. Then it moves into physical product, buying mills or building network infrastructure as backup for what it can't get its hands on in the open market.

But Enron sees its future in carrying out E-commerce transactions rather than in owning the infrastructure and commodities themselves. In the natural gas sector, for instance, the company sells about 20 times its pipeline capacity (and owns 5,000 fewer miles of pipeline than it did in 1985, when the merger of Houston Natural Gas and InterNorth in Omaha, Neb., created Enron). For each industry it serves, Enron figures it needs about 2% of the physical product in the right locations.

The rationale? What you know is more important than what you own; Internet connectivity with everyone in the value chain makes ownership less important.

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Photo of Jeff Skilling by Craig Hartley
Photo of Mike Mcconnel by Craig Hartley

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