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Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit X-From: Comnes, Alan </O=ENRON/OU=NA/CN=RECIPIENTS/CN=ACOMNES< X-To: Alonso, Tom </O=ENRON/OU=NA/CN=RECIPIENTS/CN=Talonso<, Alvarez, Ray <Ray.Alvarez2@ENRON.com<, Badeer, Robert </O=ENRON/OU=NA/CN=RECIPIENTS/CN=Rbadeer<, Belden, Tim </O=ENRON/OU=NA/CN=RECIPIENTS/CN=Tbelden<, Blair, Kit </O=ENRON/OU=NA/CN=RECIPIENTS/CN=Kblair<, Calger, Christopher F. </O=ENRON/OU=NA/CN=RECIPIENTS/CN=Ccalger<, Choi, Paul </O=ENRON/OU=NA/CN=RECIPIENTS/CN=Pchoi<, Dasovich, Jeff </O=ENRON/OU=NA/CN=RECIPIENTS/CN=Jdasovic<, Driscoll, Michael M. </O=ENRON/OU=NA/CN=RECIPIENTS/CN=Mdrisc3<, Fischer, Mark </O=ENRON/OU=NA/CN=RECIPIENTS/CN=Mfische2<, Foster, Chris H. </O=ENRON/OU=NA/CN=RECIPIENTS/CN=Cfoster<, Gang, Lisa <Lisa.Gang@ENRON.com<, Gilbert, Scotty </O=ENRON/OU=NA/CN=RECIPIENTS/CN=Sgilber<, Guzman, Mark </O=ENRON/OU=NA/CN=RECIPIENTS/CN=Mguzman3<, Hall, Steve C. (Legal) </O=ENRON/OU=NA/CN=RECIPIENTS/CN=Shall4<, Heizenrader, Tim </O=ENRON/OU=NA/CN=RECIPIENTS/CN=Theizen<, Kaufman, Paul </O=ENRON/OU=NA/CN=RECIPIENTS/CN=Pkaufma<, Mainzer, Elliot <Elliot.Mainzer@ENRON.com<, Mallory, Chris </O=ENRON/OU=NA/CN=RECIPIENTS/CN=Cmallor<, Malowney, John <John.Malowney@ENRON.com<, Mara, Susan <Susan.J.Mara@ENRON.com<, Motley, Matt </O=ENRON/OU=NA/CN=RECIPIENTS/CN=Mmotley<, Perrino, Dave <Dave.Perrino@ENRON.com<, Platter, Phillip </O=ENRON/OU=NA/CN=RECIPIENTS/CN=Pplatte<, Rance, Susan </O=ENRON/OU=NA/CN=RECIPIENTS/CN=Srance<, Rawson, Lester </O=ENRON/OU=NA/CN=RECIPIENTS/CN=Lrawson<, Richter, Jeff </O=ENRON/OU=NA/CN=RECIPIENTS/CN=Jrichte<, Rosman, Stewart </O=ENRON/OU=NA/CN=RECIPIENTS/CN=Srosman<, Savage, Gordon </O=ENRON/OU=NA/CN=RECIPIENTS/CN=Gsavage<, Scholtes, Diana </O=ENRON/OU=NA/CN=RECIPIENTS/CN=Dscholt<, Semperger, Cara </O=ENRON/OU=NA/CN=RECIPIENTS/CN=Csemper<, Stokley, Chris </O=ENRON/OU=NA/CN=RECIPIENTS/CN=Mstokle<, Swain, Steve </O=ENRON/OU=NA/CN=RECIPIENTS/CN=Sswain<, Swerzbin, Mike </O=ENRON/OU=NA/CN=RECIPIENTS/CN=Mswerzb<, Symes, Kate <Kate.Symes@ENRON.com<, Thome, Jennifer <Jennifer.Thome@ENRON.com<, Walton, Steve </O=ENRON/OU=NA/CN=RECIPIENTS/CN=Swalto2<, Williams III, Bill </O=ENRON/OU=NA/CN=RECIPIENTS/CN=Bwillia5< X-cc: X-bcc: X-Folder: \ExMerge - Williams III, Bill\Inbox X-Origin: WILLIAMS-W3 X-FileName: Forward this to your friends and coleauges who are starting to wonder if you experimented on small children while at Enron. GAC Could Enron's Business Model Actually Work? January 28, 2002 By DANIEL ALTMAN Is Enron (news/quote)'s business model still a good one? With fuzzy financing and arcane accounting stripped away, the answer may be yes. Despite Enron's collapse, its goal of merging the best thinking in energy, finance and information technology as an online commodity trader still garners respect. "Enron failed because they were scamming, but the basic virtual market part was fine," said Dale Kutnick, chief executive and research director of the META Group (news/quote), an information technology consultancy. "There is still a real market for virtual trading companies, no question about it." Enron traded contracts for electricity and natural gas and, later, other products like rights to high-speed telecommunications networks and financial hedges against changes in the weather. It used a sophisticated online platform backed by a financial apparatus meant to hedge the company's bets. In the words of Kurt Launer, an analyst who follows Enron for Credit Suisse First Boston, the company had "the pioneering online venture for real-time availability of information" used in trading commodities. * Enron's basic business model, in other words, may yet serve as a model for other companies. In the wake of Enron's bankruptcy filing, some of the best support for that model model came from its competitors. Reliant Energy (news/quote) is one of several companies that followed Enron in offering online exchanges for electricity and natural gas. "Our commodity markets worked just fine the day after Enron went away," said Joe Bob Perkins, president and chief operating officer of the wholesale group at Reliant. "Everybody got gas, everybody got power, and prices stayed basically the same," Mr. Perkins said. "The loss of one intermediary just proves that these competitive markets work." Other companies offering similar services rushed to fill the gap after Enron suspended its trading. "We've picked up market share," said Stephen L. Baum, the chairman, president and chief executive of Sempra. He noted, though, that unlike Enron, "our trading, although extremely important and a big income earner for us, is not the centerpiece of our business." Another company that sees continued value in the Enron approach is UBS Warburg, the Swiss investment bank, which bought Enron's electricity and gas trading business in bankruptcy proceedings and plans to restart them under its own brand. "We're confident we can re-establish the business," David Walker, a UBS Warburg spokesman, said. "It is a first-rate trading platform." Similarities between UBS Warburg's financial derivatives business and Enron's trading of energy contracts were one factor that made the deal appealing, Mr. Walker said. "The characteristics of trading these types of products and betting on interest rates, which is a core ability of UBS, are similar," he said. "They're kind of neighbors." Mr. Kutnick, the research chief, added that Enron had "outstanding" information technology organization that was backed by "tremendous amounts of money." In that way as well, he said, the company "was certainly comparable to the best financial companies out there." Because of Enron's technological advantage, Mr. Kutnick predicted, UBS would have little difficulty regaining Enron's market share. "They were far enough ahead that it shouldn't be an issue," he said. "If you are a couple seconds faster in terms of spotting and executing a market inefficiency, obviously you're going to make money." According to experts who consulted for Enron in the field of finance, the company did not necessarily come up with a lot of powerful new ideas. Its strength was in synthesizing existing ideas, which sometimes led to innovative methods. "They took a lot of finance theory and applied it in the context of their business," said Ramesh K. S. Rao, a professor of finance at the University of Texas who once consulted for Enron. "There was no magic to what they were doing." Robert L. McDonald, a professor of finance at Northwestern, advised Enron on the use of derivatives from 1993 to 1995. He said the company needed advanced financial tools to price its derivatives, which specified energy products to be delivered at various times and sites while demand was uncertain. "That's a hard problem, so they were probably breaking some new ground trying to deal with that," he said. "It's the kind of thing that's easy to describe and may be hard to do." Peter Tufano, a professor at the Harvard Business School who studied Enron, said the company had been using what would be considered "best practices" for using derivatives by any "serious financial firm" in the early 1990's. Had Enron stuck to those practices, Mr. Kutnick said, it might still survive today. "Enron could have done extremely well with betting on market inefficiencies and hedging bets," he said. "People stop hedging because they get too enamored of their own theories." As a parallel, he cited Long- Term Capital Management, the hedge fund, which failed in 1998 when it could no longer cover the ever-higher risks it began taking. Enron also betrayed its success, Mr. Launer said, by throwing money at ventures that failed to generate cash flow. For example, Enron spent around $2 billion on its network capacity, or bandwidth, exchange, which never turned a profit. "The fact that Enron became a dot-com, financed itself like a dot-com, and then suffered a demise like a dot-com," he said, "is one of the central parts of this story." But Enron's failed attempts to expand its online trading system to products beyond electricity and natural gas might not rule out future, similar endeavors. "In any commodity, there are always people who have too much and others who have too little, so there's always going to be a need for them to trade and exchange," Professor Tufano said. Mr. Launer suggested that Enron's efforts were simply ill-timed. "These things take a while to get going," he said. He noted that the deregulation of electricity and natural gas led to a long period during which the market for energy products and their derivatives evolved. "It does take a while before users of a commodity get comfortable with the idea that they should risk-manage and out-source their use of that commodity." http://www.nytimes.com/2002/01/28/business/28NECO.html?ex=1013231198&;ei=1&en=b419a4892b911727 HOW TO ADVERTISE --------------------------------- For information on advertising in e-mail newsletters or other creative advertising opportunities with The New York Times on the Web, please contact Alyson Racer at alyson@nytimes.com or visit our online media kit at http://www.nytimes.com/adinfo For general information about NYTimes.com, write to help@nytimes.com. Copyright 2001 The New York Times Company
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