As the Enron trial of Ken Lay and Jeff Skilling continues in Houston, we're dusting off our January 2001 interview from The Motley Fool Radio Show . Skilling, who was Enron's president and chief operating officer at the time, talked to David Gardner about the company's presence on the Internet, as well as his views of the California power shortage. Today, Skilling faces 31 counts of conspiracy, fraud, insider trading, and lying to the company's auditors.

This is part 1 of 2. Come back tomorrow for the conclusion. And while you're at it, check out the Ken Lay interview we published on Monday.

David Gardner: Welcome back to The Motley Fool Radio Show. And now we are joined by Jeff Skilling, the president and chief operating officer of Enron. Enron is the country's largest trader and marketer of natural gas and electricity [and] trades over a thousand different commodities. Enron offers broadband services and a host of other businesses. The company had revenues of $40 billion in 1999 and $60 billion for the first nine months of the year 2000. The stock has traded under the ticker symbol "ENE" on the New York Stock Exchange. Jeff Skilling, a pleasure to have you on The Motley Fool Radio Show.

Jeff Skilling: Glad to be here, David.

David Gardner: Let's begin by taking a look at your business model. Many people associate Enron with energy, ticker symbol "ENE" . the first three letters of "energy." But the last couple of years, Enron has expanded its reach well beyond the energy market. In the year 2001, then, Jeff, I have to ask you: What is Enron?

Jeff Skilling: Well, it is a company in transition, but it is along a very, I think, very pre-planned route. Let me see if I can describe it. We were a natural gas company. We were a natural gas pipeline company back in the 1980s, when that industry began to go through deregulation.

What we found out was that as businesses go through deregulation, you have to basically remake all of the internal architecture of the industry. In the old days, you had these regulatory contracts that were attached to pipelines for as long as a pipeline existed. It was basically a regional monopoly. They had an obligation to serve gas distribution companies. Really, it was an open-ended obligation. It went on forever.

As you went through deregulation, all of those linkages that had been in place for, in some cases, a hundred years, broke up. You had to create markets to replace those old linkages, and so we were on the forefront in all of the 1980s on developing the original market for natural gas. We developed the original forward market for natural gas. We have developed a range of other markets like peaking supplies, regional markets, just so that customers could get access to the commodity.

We did it because we were a gas company, and all of a sudden, I think we realized: Wait a minute. We are pretty good at creating these markets, and maybe this is what we are -- a company that creates markets. So in the early 1990s, we did the same thing in the electric business as it deregulated.

In the United Kingdom, which was our first big expansion outside of North America, as they deregulated those markets, we went into the United Kingdom. We became the largest marketer of natural gas and electricity in the United Kingdom. Scandinavia opened up next. We are now the largest buyer and seller of electricity in Scandinavia. Australia opened up. We are the largest buyer and seller of electricity in Australia.

So we just moved, developed this model, and moved it into new markets until those new markets became available. I think that is the business model. It is a de-integrated, service-intensive, brain-power intensive model that provides customers high value and lower prices.

David Gardner: OK. You have said in the past, I know that in terms of dollars transacted, Enron is the world's largest online site by a factor of 10. I want you to explain how Enron uses the Internet to make money.

Jeff Skilling: Well, if you take that original premise, that what we are doing is creating markets, the Internet is perfect to help facilitate the development of those markets.

So last year, actually in 1999, we started Enron Online, which is a Web-based, online transactions system where customers in the wholesale markets all around the world can call up our screen. Once they call up the screen, they are getting a real-time feed on prices on over 1,200 individual products, and if they like the price, they can either buy or sell at the price that is posted on that screen.

And so people have a real simple service. It is free. That allows them to very quickly transact -- and with great certainty -- transact for natural gas and electricity and a range of other commodities, and the customers clearly like it. Since we brought that up in November of 1999, we have done, David, believe it or not, over 350 billion, that is billion, dollars of transactions on that system.

David Gardner: That is a lot.

Jeff Skilling: We have done over a half a million individual transactions. It is by far the largest Web-based transaction site in the world.

David Gardner: Wow. Jeff, let me then ask you: Where do you think Enron would be in 2001 without the Internet?

Jeff Skilling: Well, we certainly couldn't do a lot of what we have done. Over the past year, our physical volumes are up about 60% from the prior year. That is gas, electricity, and a range of other commodities, but primarily natural gas and electricity. There is no way we could have grown by 60% without the adoption of the Internet and that new communication and computational technology.

David Gardner: OK. Let's shift gears now. Jeff, I want to ask you about a story that is playing out in the news right now -- the power problems in the state of California. Now, beyond a vague sense that there is a shortage, it is hard for me to get a handle on exactly what is happening in California. I am wondering if you can take a minute to explain what is going on and how Enron might fit into that picture.

Jeff Skilling: It is actually pretty simple, what is going on in California. Demand grew very quickly over the last couple of years, much faster than people expected, and we basically brought on no new additional capacity in California. So what we have got is . an imbalance of supply and demand. There is too much demand for the available supply.

David Gardner: OK. That takes me back to my undergrad economics. I can understand that.

Jeff Skilling: (Laughs.) Now the magnifying problem here, David, is that it is occurring in a marketplace that has been designed by the government. (Laughs.) What has happened is we have got a very unusual market structure. For example, the utilities were encouraged -- in fact, almost forced -- to move to total spot purchases. They could not contract longer-term for many of their supplies, and so when the supply-demand imbalance hit, it is magnified by the fact that people have to be in the day-ahead market. They can't go out five years or 10 years, as the industry traditionally did, to lock up supplies.

So as we have had this imbalance, prices have gone up a lot, and this is flowing through into the system, and it is causing enormous financial dislocations for the utilities in California because they basically have to buy very, very expensive spot power [and] are mandated that they have to charge very low prices for the end-use customers. So they are building up this huge deficit to finance this thing, and it is causing some big problems.

David Gardner: Now, how does Enron fit in?

Jeff Skilling: Well, there are a couple of things we are doing. We are doing everything humanly possible to get more power into California from places where power is in surplus. There are a lot of places in the country, and in North America, where there is a surplus of power, so there are a lot of things that can be done to move more power into the state. That is one of our primary roles . making that happen.

David Gardner: Now, Jeff, earlier, when I asked you that question, you chuckled briefly when you described the California situation as "a marketplace designed by the government." Why did you chuckle there?

Jeff Skilling: Well, people said that the problem in California is that they deregulated the market. That is just not the case. It is one of the most regulated markets in the country. We have price caps on wholesale power. We have price controls on retail power. We have a mandated, or state-mandated, power exchange that is required to do all purchases and sales of power. I mean, it is something that I think a central planner from the old Soviet Union would understand exactly.

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