To prosper in the new energy economy, Enron COO Jeffrey K.Skilling says oil and gas companies need to trash their traditionalbusiness models and instead reshape themselves to resemble Toyotawhen it captured the imagination and pocketbook of U.S. consumers30 years ago.

In a somewhat back-to-the-future treatise on how Enron expectsto continue its monumental success, Skilling told Arthur AndersenEnergy Conference attendees to define themselves not by theirindustry, but rather by their skills base. Toyota changed the industry by outsourcing its production, offering customersexactly what they wanted cheaper and faster. The energy industryhas to do the same thing into the future, he told the Houstonaudience.

“In 1982, the energy industry was a very rigid industry,” hesaid, pointing to a similar business model that had been used byGeneral Motors and Ford Motor Co. Those companies did every bit ofthe manufacturing process, keeping all of its pieces within thecorporate structure. Then Toyota turned things upside down.

When a customer wanted a different radio, Toyota relied onoutside producers. It didn’t stop the production line to please thecustomer. And it was able to do it faster. Enron has used the samemodel to shape its achievements, packaging components for customersto save time and money. Other energy companies are now adoptingthat method.

In many ways, Skilling said Enron views itself as the Toyota ofthe energy industry. “We don’t feel we have to provide allcomponents, but package them the way the customer wants them. Thisis a pervasive trend we are seeing all over the industry.”

Enron, which has had a shareholder return of 1,333% in 10 years(January 1990 to November 2000), saw the changes required by newtechnology and deregulation and redefined its core competencies,which grew from its pipeline business. Skilling said to remainsuccessful, the Houston-based corporation plans to continue tomorph.

“It all hinges on one good idea Enron had in the 1980s, thatvertically integrated structures had dominated our industry and thestructures were starting to break up. In the energy industry, thereason was deregulation. Fundamentally, this is a better businessstructure for two reasons: you can be supplied with cheaper costcomponents and it allows you to change much more quickly.”

Instead of bigger energy companies, Skilling said he expects tosee many smaller companies, “maybe thousands tied togetherelectronically and vertically.” The transformation and interactioncosts are “collapsing across the economy.” As an example ofinteraction costs, Skilling used bank tellers. In 1985, it cost abank $1.50 a transaction. To bank on the Internet today, it costs abank less than a penny.

This drop in interaction costs is a major reason Enron finds thebandwidth market so attractive. In 1995, the length of time toprovision bandwidth was six to eight months. Today, it’s two tothree months. And next year, Skilling predicts it will take onesecond.

“We will have bandwidth on demand by next year,” he said, andadded that Enron plans to be the leader in the field.

Similarly, long-term gas contracts in 1982 took two to threeyears to execute. In 1989, they took nine months. Three years ago,they took two weeks to execute. Today, using EnronOnline and othersimilar Internet trading systems, it takes less than one second.

“All of the sudden the world has changed. We have the samemanufacture cost, but interactive costs collapse. I think thatbecause of this, we’ll see the collapse and demise of integratedenergy companies around the world,” Skilling said.

To survive, Skilling advised companies to “virtuallyreintegrate” what they need. “If you have an old verticallyintegrated mind set, it’s tough. Give it up. I know there are stillpower producers who are buying gas reserves. I don’t get it. Itmakes no sense whatsoever. You can get it online at the lowestcost. If your business strategy is dependent on this, it will be avery hard row to hoe.”

Each stage of production will become increasingly competitive inthe next 10 years, predicted the Enron president. “You’re not justcompeting against three people in West Texas, but thousands aroundthe world.”

Opportunities exist, he said, for those companies that “go withthe flow and find ways to compete. Create low cost, dependablemarket interfaces…provide packaged turnkey solutions forcustomers through complex structures, differentiation andcustomization.”

The only threat is from the old way of doing business, he said.”But there is tremendous opportunity to do things for customeryou’ve never been able to do.” He suggested a “new” energy modelbased on brainpower, networking, offering real options tocustomers, moving quickly and being entrepreneurial.

“At Enron, this has been the whole premise: to be able to changeby responding and reacting to the environment. By gettingcomponents together and packaging them for the customer.”

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