Trading Desk: Energy Merchant Buys Into Capacity Trading

By Khali Henderson

Posted: 10/2000

Energy Merchant Buys Into Capacity Trading
By Khali Henderson

In a deal that puts yet another energy merchant at the forefront of capacity trading, Dynegy Inc.
(www.dynegy.com) announced Aug. 2 that it will acquire Extant Inc.
(www.extant.net), a provider of transport, OSS interconnect and clearinghouse solutions to ICPs for $60 million in cash and 1.25 million shares of Dynegy common stock.

“Our approach to entering and developing a communications business will be to utilize the marketing and trading skillset that has made us a leader in power and gas,” said Chuck Watson, chairman and CEO of Dynegy, in a press statement.

Exactly how that will manifest was still being determined at press time in late August, according to Extant chairman Larry McLernon, who will become the CEO and president of the new division, Dynegy Global Communications, formed by the acquisition.

“Our clearinghouse function fits with Dynegy’s bandwidth trading vision,” McLernon says. Extant pairs its optical mesh network backbone service with its EXchange clearinghouse service, which offers fulfillment and settlement of capacity order under a single connection and single contract agreement. The company’s ExtantNET e-commerce platform gives EXchange members the ability to place all orders online through a standard Internet browser. ExtantNET contains a database for locating termination options for on-net building connectivity, and facilitates response to bids and offers.

Extant’s activities in Asia and Europe will continue under the Dynegy Global Communications banner following the transaction, which was expected to be completed by the end of third quarter. In the United States, its efforts will be conducted under a limited partnership called Dynegy Connect in which Telstra Corp. Ltd.
(www.telstra.com) will own a 20 percent interest. The Australian carrier owns a 17 percent interest in Extant.

Dynegy Connect will assume Extant’s previously announced plans to own a broadband data communications network and establish an Internet-based independent clearinghouse service between CLECs and ILECs in major U.S. markets. The Extant network has been deployed in 28 U.S. cities. Forty cities are expected to be operational by year-end 2000, with more than 100 cities to be fully deployed by 2003. An estimated $400 million will be spent to complete the joint venture network, which will consist of approximately 80,000 fiber miles and 20,000 route miles.

Like Extant, Dynegy Connect will facilitate a global footprint for regional and super-regional local service providers by providing a single source for administrating end-to-end termination with every other local service provider in the EXchange community. McLernon says the company will work toward making trading completely electronic. Its current bid-offer bulletin board, for example, requires that the counterparties contact Extant or one another. In fact, he expects a web-enabled interface will be developed for use by large end users ordering transport solutions online instantly.

“The significance of this deal is the notable impact we expect it to have on the future development of bandwidth trading as a new distribution channel for bandwidth capacity services,” says Elizabeth Moore, program manager of energy communications for the Yankee Group
(www.yankeegroup.com). “That Dynegy has chosen to acquire a potential principal in the bandwidth trading market suggests that the company is looking to take a very active position in the market. In doing so, we believe that Dynegy could have the effect of accelerating the pace of market development for bandwidth trading.”

Indeed, other energy-backed communications companies, such as Williams Commu-nications
(www.williamscommunications.com 
) and Enron Broadband Services (www.enron.net), have been at the forefront of the emerging communications commodity trading business. The difference with Dynegy Connect is that it will be a clearinghouse with ready trading partners and an installed base of trading hubs. “[Unlike pooling points being established by Enron and others], our customers don’t have to find a way to connect to the hub. Most of the time, it is only a floor or a building away,” says
McLernon.

The company will begin marketing under the new banner in fourth quarter pending approval.