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Skilling: Gas Trading Advances Coming to Power

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 &amp 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 investments."

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 OK."

Joe Fisher, Houston

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