Uncertainty has debilitated many e-businesses, with staffers and managers alike wondering when things will pick up. But optimism is still in the air at Enron Net Works, the e-business arm of Fortune 7 energy company Enron Corp., which continues to expand its electronic trading model into all manner of commodity markets.

Net Works oversees EnronOnline, where Enron buys and sells more than $4 billion a day of mostly natural gas and electric power, plus steel, coal, telecom bandwidth, data storage, freight services and 1,500 other products.

Net Works is also a new-business incubator, repackaging applications Enron originally developed for internal use into revenue- generating online services. For example, EnronCredit.com, an offshoot of software Enron created to help its traders manage credit risk, offers a service to some 10,000 companies to quickly determine the cost of extending credit to their own trading partners. EnronCredit.com, which broke even in its first year, is expected to turn a profit this year.

Net Works is part software development house and part IT department, responsible for routine tasks, such as desktop support, and critical functions, such as keeping Enron's e-business infrastructure running. The group, with 1,500 employees, grew some 30 percent in the past year, occupying more than four floors of Enron's downtown Houston headquarters.

"Our job is in two parts," says Net Works COO Greg Piper. "Help Enron expand horizontally in markets for new commodities like forest products and freight services, and build a business around the tools that helped to transform Enron."

e-commerce apex

While Enron's e-business gains have been spotty in some areas-it has struggled to create liquid Web markets in bandwidth and on paper, for instance-EnronOnline is one of the most successful e- marketplaces. It conducted its millionth transaction late last month, and the total value of trades on the site exceeds $590 billion. Online trading now accounts for almost 75 percent of Enron's energy transactions in North America, the company says.

Enron counts both purchases and sales in its volume numbers- unlike e-marketplaces that simply take a cut of transactions on their sites-because the company is a "counterparty" to every trade on EnronOnline. Enron makes its money on the spread between what it pays for commodities and what it sells them for.

When a customer clicks to buy gas, electricity, steel or any other commodity, Enron guarantees price and delivery time. The key for Enron isn't to own massive amounts of physical product or storage and delivery capacity, but to arrange for third-party supply and logistics electronically. Enron stays informed about the vast array of factors that can influence price and delivery on a minute-by- minute basis by employing thousands of researchers, analysts, weather forecasters and other market specialists.

Enron isn't just moving physical product on the site. Much of its online deal-making is in financial derivatives and risk management.

For example, Enron is now in the market for DRAM chips. But it doesn't buy and sell the chips; it sells financial instruments that let companies lock in a price for DRAMs for a set period. Ultimately, Enron hopes to buy and sell the chips itself, just as it buys and sells gas, electric-ity and other commodities.

energy Trading redone

Enron is reticent about disclosing exact volume figures for the different commodities traded on its sites. The large majority of trades are still conducted in natural gas and electricity.

The Internet is transforming energy trading from something of an art form, dominated by person-to-person deals negotiated over the telephone, to an automated science. By openly displaying its "bid" and "ask" prices-and the spread between them-Enron drove trade volumes through the roof in 2000. Forrester Research estimates that the "notional value" of online energy trades grew 750 percent in 2000, with EnronOnline accounting for most of them.

But competing energy firms are banding together to form online marketplaces of their own. American Electric Power, Aquila, BP Amoco, Duke Energy and others joined with Goldman Sachs and other financial firms to form Intercontinental Exchange, while Axia Energy, Coral, Dominion TXU and Williams have formed TradeSpark.

While these consortia may view each other as competitors, they see EnronOnline as complementary, says Forrester analyst Jim Walker. "Everyone loves to have Enron trade on its site because Enron brings the most valuable thing to the market, which is liquidity," Walker says.

Enron has purchased physical assets to ensure its own supply in several key markets, such as pulp and paper and metals, Piper says. Metals trading, he says, is up to about 1,000 transactions daily, representing about 25,000 metric tons of steel.

Enron conducted 580 bandwidth trades in the first quarter, compared with 321 in the past year, and it expects to handle more than 2,200 trades in 2001.

However, Enron's total online trading volume represents everything from storage services to long-haul circuits to dark fiber to IP services. None of the bandwidth commodities has achieved liquidity yet, notes Kevin Hannon, president of Enron Broadband Services, which completed an 18,000-mile fiber optic network in 2000 and built 25 "pooling points" to tie in with other provider networks.

a helping hand

Enron has plowed ahead so aggressively online that some trading partners that haven't invested in back-office automation simply can't keep up, Piper admits. Enron is responding with CommodityLogic, software modules designed to help trading partners streamline the fulfillment process and reduce data re-entry errors.

Enron will create and maintain a centralized database of information pertaining to trades. Partners access that information with CommodityLogic software modules designed for such tasks as quality assurance, scheduling and invoicing. The three modules in tests are InvoiceLogic; ConfirmLogic, an order confirmation system; and NomLogic, which handles delivery scheduling for natural gas trades.

"Scheduling that natural gas would typically involve three to 10 phone calls and two to three faxes, and for a deal done over the course of a 30-day month, you might have had to repeat that every business day," says Tom Gros, the Net Works vice president in charge of CommodityLogic. "With NomLogic, that process now takes seconds. I enter it on the screen and automatically, if it's a month-long deal, the previous day's data appears for me so I don't have the chance to create an error."

The business model for developing CommodityLogic is the same one Enron used for EnronCredit.com and its other online initiatives: Net Works develops an application to save time or improve efficiency internally and then repackages the app for external use. The software for EnronCredit.com's Cost of Credit service, for instance, was originally developed to help Enron's own traders manage credit risk.

Much of Cost of Credit information

is free with registration to EnronCredit.com, but Enron charges a fee to download information or get e-mail alerts of significant changes to the credit risk of companies in a prespecified portfolio. But the main way Enron makes money from the site is by selling "bankruptcy swaps" to enterprises that want a hedge against the possibility that a partner will go out of business.

Whereas EnronCredit.com grew out of software Net Works developed for Enron's commodity trading business, Enron's latest ASP offering, DealBench, came out of software designed to make it easier and faster for Enron to negotiate large structured deals for complex assets, such as power plants.

Enron's procurement department has used the auction functions in DealBench to buy more than $1 billion of goods, everything from broadband networking gear to carpeting for the new 40-story skyscraper Enron is building across the street from its 50-story headquarters in downtown Houston.

DealBench's collaboration tools manage the complex communications that are part of any large structured deal. Features include secure two-way messaging and the ability to deliver multimedia presentations and give participants varying levels of access to sensitive information.

Last month, Enron added Data Room, a document management system that lets companies set up "virtual data rooms" to streamline the bidding process for complex physical assets, such as refineries and manufacturing plants. Normally, companies selling these types of assets have to staff a physical room hosting lawyers and engineers from every potential bidder, each of whom require several days to pore over hundreds of thousands of pages of technical documents. Enron has used Deal Room to syndicate some $3 billion of its own credit to more than 81 financial institutions and sell more than $240 million in assets.

With all DealBench services, companies can host any number of potential bidders simultaneously, giving each participant the exact level of access necessary. Bidders download a piece of client software that decodes encrypted documents on the site, so even if sensitive documents are sent to unauthorized users, they can't be opened, says Jeffrey Bartlett, a principal at DealBench.

Rather than take a percentage of the overall deal, Enron sells DealBench licenses to the deal managers and hosts the platform. Enron wouldn't reveal specifics about pricing, which varies based on the length of contract, number and size of prospective deals and the number of potential bidders.

centerpiece of e-biz

For the time being, energy trading-and trading in financial products related to those trades-will remain the centerpiece of Enron's online business. Forrester estimates that notional trading for U.S. natural gas futures and options contracts amounted to about 3.6 times the total quantity of physical trades and 12 times the amount of physical delivery in 2000.

"Electricity in the U.S. is a $300 billion market, but the velocity at which that $300 million is being turned over is increasing," says Bob Christensen, an energy industry analyst with First Albany Corp. "The same power-and all the fuels related to it- can churn and change hands a dozen times a day."

As other companies convert their trading systems to online models, Enron hopes to sell its expertise in this area. (Enron says its own online-enabled back-end systems reduced its marginal cost per transaction by 75 percent in 2000.)

Enron stands to gain twice: first, by providing the services itself, and second, by further increasing online trade volumes in a market where it has a clear ownership stake.

---

ENRON

Headquarters: Houston

Line of business: Energy production and marketing; online exchange operator

2000 Revenue: $100.79 billion

2000 Net Income: $979 million

Percentage of revenue from e-business activity: N/A

CEO: Jeffrey K. Skilling

Top e-business executive: Philippe Bibi, president and CEO, Enron Net Works

E-business highlights: EnronOnline conducted its millionth transaction in May; total trade volumes on the commodity-trading site have exceeded $550 billion since it was established in November 1999. Enron Broadband Services conducted 580 online transactions in the first quarter, compared with 321 for all of 2000

E-business challenges: Re-creating its success in online energy trading in dozens of other commodity businesses including bandwidth, data storage, forest products, metals, coal and freight logistics

top e-business accomplishment: With EnronOnline, Enron brought immediate and transparent pricing to energy markets; the site is one of the world's leading e-commerce platforms, with daily trade volumes in excess of $4 billion

SERVICES

By The Numbers

CUSTOMER ISSUES

Expansion of customer base because of Internet capabilities 16%

Percentage of Internet sales orders that are perfect 83%*

Percentage of visits to Web site that are converted into orders 2%

SUPPLIER ISSUES

18% Percentage of purchase orders done over the Internet

16% Percentage of strategic suppliers sourced over the Internet

15% Percentage of strategic sourcing dollars spent over the Internet

ELECTRONIC MARKETS

Percentage of sales orders conducted via an e-marketplace 17%

Percentage of purchase orders conducted via an e-marketplace 17%

E-BUSINESS REVENUE

8% Percentage of revenue achieved via the Internet

9% Percentage of orders received online

7% Percentage of revenue growth in last fiscal year resulting from the Internet

19% How much Internet revenue is expected to grow in the current fiscal year

78% Percentage of companies expecting profitable online operations in 2001

COST CUTTING

Cost reductions from indirect materials procurement on the Internet 9%

Cost reductions from direct materials procurement on the Internet 6%

Cost reduction in customer management via the Internet 16%

Cost reduction in fulfillment and delivery via the Internet 7%

Figures are averages for InternetWeek 100 companies in this industry

Source: InternetWeek

* Orders that are fulfilled accurately, on time and in the right quantity

http://internetweek.com

Copyright 2001 CMP Media LLC