In the deregulating world of energy and power markets, Enron Corp is the number-one player. But there’s no room for complacency at the Houston-based firm

The head of trading at a rival US energy major habitually refers to Enron as: “that five letter word”. That’s the grudging respect you get when you dominate a business. With $34 billion in assets, Enron is one of the largest energy and communications companies in the world. As well as being the largest seller of power in the US, with a nearly 16% share of the market, it produces electricity and natural gas; develops, constructs and operates energy facilities worldwide; and delivers physical commodities and financial risk management services.

But Enron is not just big. It wins our award for the energy trading markets because of its ability to take a lead in new areas of risk management.

In June, it was one of the six founder members of the Weather Risk Management Association (WRMA), which aims to serve businesses worldwide that require general information on weather derivatives, or are seeking specific weather products. Lynda Clemmons, head of weather risk management at Enron, is also the WRMA’s vice-president. Weather derivatives are financial contracts that can protect firms, particularly in energy, agribusiness and the leisure sector, against business risks posed by extreme weather conditions.

Enron was also involved in a new aspect of weather risk management last October, when it launched a temperature-linked bond. The five-year $105 million issue – called weather-indexed return securities, or WINRS – was tied to the value of portfolios of heating and cooling degree-day options at several US cities at expiration. A degree-day at a given location is a measure of the variation of one day’s temperature against a standard reference, usually 65 degrees Fahrenheit (18 degrees Celsius). If the temperature hits a previously defined trigger level, the issuer of the bond is allowed to default.

With weather derivatives transactions worth an estimated $3.5 billion in the US so far, Enron has entered the fledgling market in Europe. It conducted Europe’s first weather deal towards the end of 1998, and followed with the second one in March 1999. And weather derivatives are just one product that Enron plans to trade on EnronOnline. Launched in late November, this is an Internet-based trading system for wholesale energy and other commodities. The initial trades on the system are US power products and US and Canadian natural gas products. But the company expects European natural gas and power products to follow in 2000, together with crude oil and refined products, coal, emission credits, weather derivatives and pulp and paper.

Although on-line commodity trading is not a first in itself, Enron claims that this system is different. Skilling says: “Unlike other Internet commodity service providers, EnronOnline doesn’t match buyers with sellers. Customers will be able to instantaneously conduct transactions directly with an Enron company as principal.”

EnronOnline’s president, Louise Kitchen, says the system uses Enron’s own communications fibre-optic network to make it as fast as possible, with transaction times of between one and 10 seconds.

Enron is keen to make the most of the opportunities presented by Europe’s liberalising energy markets. It launched an Internet-based electricity trading system in April last year with its Strommarkt Online and has joined forces with international consultants Andersen Consulting to make its energy trading and risk management
systems available to the European energy market through its European subsidiary, EnergyDesk.com.

Energy trading in most of Europe is still in its infancy, with many companies unfamiliar with the risk management process. Enron’s experience in this area is likely to be useful.

In December, Enron Communications, a wholly owned subsidiary of Enron, announced the first forward trade of bandwidth. Bandwidth is a measurement, in bits per second, that describes the size and frequency for transferring information across telecommunications. The growth in Internet usage and new generations of computer networks that are requiring large increases in data transmission has spurred growing interest in bandwidth futures.

Jeff Skilling, Enron president and chief operating officer, describes this as “day one of a potentially enormous market”. Indeed, the company feels it has the short-term potential to develop more rapidly than the US electricity market, where in some states, it says, there is resistance to the process of deregulation.

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