Change in the electric industry will mirror what took place inthe gas industry following deregulation and the introduction ofcompetition, particularly with regard to trading, Enron PresidentJeffrey K. Skilling told attendees at Ernst & Young LLP’s ninthannual Energy Conference last week in Houston.
“I am of the opinion that there has been a very significantchange in competitive advantage and what it takes to be asuccessful player in today’s energy industry,” Skilling said. “Youcannot earn a compensatory rate of return by making a traditionalasset-based investment in our industry. That’s a pretty importantcomment because that’s the way the industry has operated forliterally 100 years, by making traditional asset-basedinvestments.”
As it has with the gas industry, trading will play a major rolein creating competitive advantage and bringing costs down, Skillingpredicted. In the old days of the gas business, supply and marketswere matched directly. The first change in this area spurred bycompetition was the pooling of supply and markets, leading to adecrease in capital intensity of 25%, Skilling said. “You could getby with the same functionality with 25% less capital just by usinga different commercial concept in this business.”
The next step was the disaggregation of risk components from thesupply and market pools. “By splitting them apart and managing themseparately and then ultimately making markets – which is where westart getting into the trading side of the business – you alsocapture cost efficiencies.”
Today, Enron has more than 450 separate risk components in itsbusiness. “The reason that that’s important is because the morefinely you cut those risks, and if you can make markets in each ofthose risks, then when you repackage and rebundle to providefunctionality of service to customers, you’re taking the cheapestcomponent and rebundling that to make the cheapest overallcommitment, the cheapest overall service package to customers.
“This has had a key impact in the market. It’s the reason we’veseen the creation of enormous traded markets for natural gas. Thissame technology is being applied today in the electric business,and what you’re going to find is this will lead to significantlycheaper services for [electric] customers in the future.”
None of this would have been possible five years ago as thecomputing technology necessary did not exist. Skilling beseechedlisteners to invest in new information technology to providereal-time access to information. The all-important front officedeserves the most attention and the most investment, Skilling said.Being the area where companies interface with their customers, thefront office is where companies can gain a competitive advantagethrough information technology investment. “For back officesystems, buy the cheapest stuff you can buy. Even if it’s old it’sOK.”
Joe Fisher, Houston
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