Skilling: Gas Trading Advances Coming to Power
Change in the electric industry will mirror what took place in
the gas industry following deregulation and the introduction of
competition, particularly with regard to trading, Enron President
Jeffrey K. Skilling told attendees at Ernst & Young LLP's ninth
annual Energy Conference last week in Houston.
"I am of the opinion that there has been a very significant
change in competitive advantage and what it takes to be a
successful player in today's energy industry," Skilling said. "You
cannot earn a compensatory rate of return by making a traditional
asset-based investment in our industry. That's a pretty important
comment because that's the way the industry has operated for
literally 100 years, by making traditional asset-based
As it has with the gas industry, trading will play a major role
in creating competitive advantage and bringing costs down, Skilling
predicted. In the old days of the gas business, supply and markets
were matched directly. The first change in this area spurred by
competition was the pooling of supply and markets, leading to a
decrease in capital intensity of 25%, Skilling said. "You could get
by with the same functionality with 25% less capital just by using
a different commercial concept in this business."
The next step was the disaggregation of risk components from the
supply and market pools. "By splitting them apart and managing them
separately and then ultimately making markets - which is where we
start getting into the trading side of the business - you also
capture cost efficiencies."
Today, Enron has more than 450 separate risk components in its
business. "The reason that that's important is because the more
finely you cut those risks, and if you can make markets in each of
those risks, then when you repackage and rebundle to provide
functionality of service to customers, you're taking the cheapest
component and rebundling that to make the cheapest overall
commitment, the cheapest overall service package to customers.
"This has had a key impact in the market. It's the reason we've
seen the creation of enormous traded markets for natural gas. This
same technology is being applied today in the electric business,
and what you're going to find is this will lead to significantly
cheaper services for [electric] customers in the future."
None of this would have been possible five years ago as the
computing technology necessary did not exist. Skilling beseeched
listeners to invest in new information technology to provide
real-time access to information. The all-important front office
deserves the most attention and the most investment, Skilling said.
Being the area where companies interface with their customers, the
front office is where companies can gain a competitive advantage
through information technology investment. "For back office
systems, buy the cheapest stuff you can buy. Even if it's old it's
Joe Fisher, Houston
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