Enron Blazes A Trail In Europe

If you polled utility chiefs as to the competitor they most admire and fear, Enron is likely to be cited with greatest frequency.

Enron is a Houston-based utility that re-invented itself more than a decade ago. It changed from a company owning gas pipelines to one of the worlds biggest energy traders and a leader in exploiting the merging of the gas and electricity markets that has gathered pace in the 1990s.

In Europe, Enron has been blazing a trail it hopes will lead to a commanding position from which to exploit electricity and gas deregulation throughout the European Union.

 

It recently signed a memorandum of understanding with Enel, the Italian state-owned electricity company, jointly to operate 5,000MW of generation. At the same time, it is working on an innovative financing package for a gas-fired power station in Poland and has just financed a gas-fired power station in the UK.

When the UK power station starts running in 1999, it will take Enrons ownership of UK electricity generation to about 7 per cent. Our ultimate goal is the continent, says Mark Frevert, president and chief executive of Enron Europe. As these markets liberalise, you will see a lot more price instability. The need will grow to manage price risks, and thats where the strengths of Enron in risk management will give us an edge on the continent.

Frevert says Enron has spent up to $300 million over the past five years on developing proprietary trading and computer systems which help the company, and its clients, to manage and define risks. He believes that this will help Enron better penetrate energy markets in Italy, Germany, Spain, and the Netherlands. He has a warning for European utilities: Markets will deregulate quicker than people expect. That is the main lesson from the US, where deregulation is now happening at the retail level, he says.

Enrons financial statements do not disclose how much the company earns from its European operations, and Frevert will say little about profits other than that Europe makes a significant contribution to earnings.

The Enel deal represents an important step in Enrons European plans, as the company does not own significant assets on the continent. There is a good fit between Enron and Enel, Frevert says.Enel does not have a lot of experience in competitive markets, while Enron has risk management and trading expertise.

The joint venture, which Frevert says could be publicly listed in due course, will take on 5,000MW of Enels generation. Most of this plant will be converted to combined-cycle gas-turbine generation which would make it very competitive in the Italian market.

Energy trading is an important arm of Enrons activities in Europe. The most open markets are in the UK and in northern Europe, where Nordpool sets prices for electricity in Scandinavia and Finland.

Electricity trading has increased sharply this year. Frevert claims Enron traded as much electricity in the first six months of this year as it did in the whole of 1996. He says there is an advantage for companies such as Enron in being first into a new market.

If youre in there and understand how markets move, you do have an advantage over companies that are resistant to change, he says. When markets do open up we want to be the first in there. Underpinning Enrons move into Europe is a sophisticated approach to financing power stations.

In Poland, it is building a 125MW combined- cycle gas-fired power station. This is backed by a 20-year power purchase agreement, and Enron hopes to raise $100 million of debt.

What is innovative in the Polish deal is the terms of the financing. Enron wants to raise 17-year finance which, if it succeeds, will be the first time a Polish entity has been able to tap international capital markets for loans longer than 12 years.