By Michael Rieke  11/02/1999 Dow Jones Energy Service  (Copyright (c) 1999, 
Dow Jones & Company, Inc.) 


 
 HOUSTON -(Dow Jones)- Enron Corp. (ENE) is currently testing hardware and 
software in order to start trading telecommunications
 bandwidth capacity early next month. 

 The installations, in New York City and Los Angeles, are key steps in a 
pioneering proposal that could create a market worth "hundreds of
 billions of dollars a year," Tom Gros, Enron Communications vice president 
of global bandwidth trading, told Dow Jones Newswires. 

 Enron has proposed trading Time Division Multiplexing, or TDM, and Internet 
Protocol, or IP, bandwidth. TDM is used mostly for voice
 transmission and IP is used mostly for data transmission. 

 In non-technical terms, TDM and IP have been compared to two different 
systems for moving commuters. TDM is comparable to a rail
 system moving commuters by train, with only one train at a time moving on 
the track between two points. IP is comparable to commuters
 moving in smaller groups in several cars between the same two points. The 
route between those two points can be used by other
 commuters (or other data) at the same time. 

 In other words, TDM sends one signal at a time between two points. IP breaks 
a single transmission of data into packets of data, moves
 them to another point where they are reassembled into one message. With IP, 
packets of many separate data transmissions can be sent
 simultaneously over a path. 

 Trading of TDM bandwidth will start in December and trading of IP will start 
early next year, Gros said. Trading will begin with TDM
 because it's a more liquid market. 

 Three types of TDM bandwidth will trade: DS-3, OC-3 and OC-12. DS-3 moves 
about 45 million bits per second, OC-3 moves 155.52
 Mbps and OC-12 moves 622 Mbps. 

 Enron's proposal would establish a master agreement covering quality 
specifications and the delivery mechanism for trading bandwidth as a
 commodity. 

 After companies sign that agreement, all their trades would be covered by 
it. Individual deals could then be negotiated over the phone to
 cover price, time period, segment and quantity in a few minutes, Gros said. 

 The standard terms and conditions Enron has come up with should make deals 
happen more quickly, said Amanda McCarthy, an analyst
 for Forrester Research, a technology research company. 

 Each deal's contract would be confirmed the same day by facsimile or 
electronic communication between the buyer and seller. They would
 be unregulated, over-the-counter transactions. 

 If a company fails to make or take delivery according to the deal 
specifications, it would be subject to liquidated damages. 

 By installing the hardware and software needed for trading, Enron will 
become the first pooling point developer called for in its proposal.
 The hardware and software will establish connections with other carriers, 
enabling trades of TDM bandwidth capacity between New York
 and Los Angeles. 

 The path between New York and Los Angeles is the most liquid in North 
America, Gros said. It's also an excellent launching point to
 connect with European and Asian markets. 

 Because that path is volatile, it will motivate industry players to mitigate 
price risk and will give speculators trading opportunities, according
 to Enron's proposal. 

 Developers will build up to 100 other pooling points in North American 
cities in the next 24-36 months, Gros said. Those pooling points
 will allow bandwidth between other pairs of cities to trade under the 
standard terms and conditions. 

 As many as 100 more pooling points will be built outside of North America, 
particularly in Western Europe and the Pacific Rim, creating a
 global market for bandwidth, he said. 

 Enron Chairman Ken Lay said recently that bandwidth would be trading under 
Enron's proposal in Europe by the first half of next year and
 in Asia by the second half of next year. 

 Enron is willing to build all the pooling points, at a cost of "a few 
million dollars" each, Gros said. But other companies also are interested in
 being pooling point developers. "Once we build the first two and prove the 
concept, we're looking forward to pretty healthy competition
 for people who want to be pooling point developers." 

 Having Enron own any of the pooling points is a problem, said Forrester's 
McCarthy. "Enron is not a disinterested party. It has its own
 network and (it) owns hubs, so a company like AT&T won't fully participate 
in that market. The idea of a neutral third party is important,"
 she said. 

 Gros said Enron has addressed that potential problem with the concept of a 
pooling point administrator, or PPA. The PPA, a neutral third
 party, would help to arrange physical delivery of the bandwidth. The PPA and 
both parties to the trade would monitor quality of service
 and other terms of the deal as it runs its course. 

 Enron is talking to PricewaterhouseCoopers about being the pooling point 
administrator. PricewaterhouseCoopers already has been
 working with Enron for months to develop the role of the pooling point 
administrator. 

 Pooling point developers will have to build to meet specifications of the 
bandwidth trading organization, or BTO, Gros said. The bandwidth
 trading organization will be made up of traders in industry and will be 
authorized to approve pooling point developers and the pooling point
 administrator. 

 "We hope that...by the end of the first quarter of 2000, we (will) have the 
founding members of the trading organization," Gros said. "That's
 not a firm date but a reasonable time frame." 

 The BTO wasn't part of the original trading proposal Enron released in May. 
It was added recently to help allay any fears about Enron or
 any other company developing and owning pooling points. 

 Some skeptics doubt there will be a rush to sign up for the BTO or to accept 
Enron's proposal for trading. They cite what they call a poor
 turnout at Enron's "industry summit" in September in California. 

 Gros wouldn't name specific companies that attended the meeting. He said 
only that it was attended by telecommunications "carrier firms
 that have significant physical capacity in the Pacific, Atlantic and North 
American segments." There were also hardware firms and "a couple
 of consulting firms represented." 

 An attendee, who didn't want to be identified, said only two carriers 
attended, Global Crossing Ltd. and Williams Communications Group.
 "They were having a tough time with (the proposal)," he said. 

 Gros said Enron had the turnout it expected. Attendance was limited 
purposely so the meeting would be a round-table discussion. "We
 turned away dozens who had asked to come," Gros said. 

 He isn't bothered by skeptics. Enron encountered skeptics when U.S. natural 
gas and electric power markets were commoditized in the
 last two decades, he said. The company worked to establish both of those 
markets and now it is the largest player in each of them. It also
 plans to be a "first-mover" in the bandwidth market. 

 When trading starts in December, Enron will be a market-maker, buying or 
selling as needed to get the market moving, Gros said. 

 And he won't be discouraged if the market doesn't grow quickly. The 
commodity market for gas and power each took off slowly, he said. 

 Instead, he continues to promote the benefits of a bandwidth commodity 
market. "Even if you don't own any physical capacity, it will be so
 easy for you in...a couple of phone calls to effectively nail up a national 
or possibly international telecommunications grid." 

 If the market develops as Enron has predicted, it could prevent major 
headaches for telecommunications carriers and their customers. 

 When Uunet, a unit of MCI Worldcom Inc. (WCOM), had a system problem 
recently, the Chicago Board of Trade, one of its customers,
 lost its online trading system for a few days. 

 "If bandwidth had been trading as a commodity when MCI had its problems last 
month, it would have given the company a range of
 choices to solve the problem," said Forrester's McCarthy. 

 Gros agreed. A real-time market in bandwidth could develop. If that market 
had existed when Uunet had its problem, the CBOT would
 have been able to get its online trading system back up "in a matter of 
minutes or hours," he said. 

 -By Michael Rieke, Dow Jones Newswires, 713-547-9207 
michael.rieke@cor.dowjones.com