As Tom Gros left work one night in 1997 and saw several Federal Express packages sitting in front of the office next door, he had a Eureka! moment worth billions of dollars.

Gros was head of marketing for Enron’s commodity-trading services and had just set up an office in midtown Manhattan. To keep his team connected to Enron headquarters in Houston, he had leased an expensive, high-speed, T-1 telecommunications line. When he saw the packages sitting in front of the office of a publishing company, he thought, "I bet those guys would love to have our T-1 line while we’re not using it. They could save a lot of money on overnight delivery." Gros says he didn’t even make it to the elevator before he thought, "Why not?"

He headed to a bar and began scribbling his thoughts on a napkin. He reasoned that he could bring together companies that had excess bandwidth and those that needed it. By setting up a bandwidth brokerage, he could collect a cut of every transaction.

Gros says, "If I hadn’t worked at Enron, I’m not sure what I would have done next. I probably would either have become discouraged or I would have left and attempted to do it on my own." But he was working at Enron, whose reputation for creativity was what had attracted Gros in the first place. "I saw what others had done here, so I knew executives were open to new ideas," he says.

It is a good thing for Enron that he stayed. Gros took his idea from bar-napkin to reality. When Enron unveiled a bandwidth trading system late last year, its market value rose $10 billion that day and has been rising ever since. Its current market cap of more than $50 billion is about twice what it was immediately before the announcement.

Like those around it in downtown Houston, the Enron building rises like a standard, nondescript 1980s glass box. Don’t be fooled. Behind its unremarkable lobby, uniformed security guards, and polished elevator banks lies a sort of giant, corporate hothouse of innovation. Its many floors are almost organically designed to nurture creativity, right down to the open cubicles, hallways-cum-meeting rooms, and indirect "mood lighting."

As recently as the mid-1980s, Enron was a sleepy pipeline company that carried natural gas. But Kenneth L. Lay, who was raised as a Missouri farm boy and trained as an economist, saw that gas could be traded just like corn or any other commodity. He established a private market both for gas and for electricity, earning large profits for Enron, as it became the world’s largest buyer and seller of both commodities. Now, as chief executive, the unpretentious 57-year-old nurtures an environment that encourages employees to relentlessly pursue oddball thinking in search of new markets.

"Enron does business differently from other energy companies," says Bill Hyler, an analyst with brokerage CIBC Oppenheimer. "It’s the type of people Enron hires and the way it uses those people. Enron tightly controls its business side, yet it gets people to take chances. It’s a delicate balance, but Enron seems to do it well."

Indeed, Enron doesn’t hire just hordes of engineers. It recruits a wealth of M.B.A.s and even the occasional liberal-arts major. Then, the company doesn’t simply usher these neophytes into an office and tell them to innovate. Rather, using internships and mentor programs, experienced executives encourage and guide new employees to find something they’re interested in and generate ideas.

Some, like Gros’s bandwidth trading, build on Lay’s idea for new types of commodities markets. For instance, Enron has also developed markets where people buy and sell coal.

Others spring from financial models, such as "real options theory," which takes classical theory on stock options and other financial instruments and applies that to "real" decisions, such as whether to attempt a new product. Based on the real options theory, Enron last summer opened two gas-powered electric plants in Tennessee and Mississippi that run counter to most thinking. Most companies strain to build efficient plants, but Enron deliberately built inefficient ones whose cost to produce electricity is at least 50% higher than best-of-breed competitors’. But Enron can let its cheap plants sit fallow when electricity demand is low, then turn them on whenever rates are high enough to make them profitable.

Some ideas simply spring from the fertile minds of employees. David Cox, once in the company’s graphics department, came up with an idea for a financial instrument that would guarantee paper users predictable prices. He now manages a $4 billion-a-year business for Enron. Lynda Clemmons figured out a way to let companies that have weather-related risks hedge their bets by selling that risk to someone else. [See "Weathering Heights," Context, Winter 1999.] The liberal-arts major now runs a $1 billion-a-year business at Enron.

With so many new ideas being generated, almost 85% of Enron’s $40 billion of revenue in 1999 (up 28% from the year before) came from businesses that didn’t exist five years earlier. For four years running, Fortune magazine has ranked Enron "the most innovative company in America." The company is treated as a growth stock, with a price-to-earnings ratio in the low 50s, compared with mid-teens for others in the pipeline business.

Gros didn’t just take advantage of Enron’s innovative culture. He also got lucky. In 1997, Enron acquired a small Oregon utility, Portland General Electric, which was laying fiber-optic cable to build its own telecommunications network. When the powers-that-be at Enron heard that Gros was interested in developing a bandwidth-trading group, they sent him to Portland. "It was perfect timing," Gros says. "Suddenly, Enron had 13,000 miles of fiber, and it was looking at how best to utilize it."

Enron gave him plenty of leeway. He spent freely on travel to sell the concept to the telecommunications industry. His boss allowed him, on his own authority, to approve individual expenditures of as much as $50,000. "It was like having a venture-capital firm with you the whole time," Gros says.

As he developed his bandwidth ideas, Gros confronted large inefficiencies in the telecommunications market. The "phone network" is really a host of networks, such as MCI WorldCom, Sprint, and AT&T. Getting these networks to connect and reserve a pathway for each other’s traffic is a Byzantine mess that can take months to negotiate and results in prices that are locked in for years. When a large company leases a high-speed line, it essentially reserves a small piece of the pipes that are shared through these umbrella negotiations. So it, too, gets a locked-in price and pays for the line, whether or not it is in use. To establish a market in bandwidth, Gros was going to have to somehow convince phone companies to cooperate better and to think in increments of minutes, seconds, or even milliseconds, rather than months and years.

While that was a hard problem, Enron had faced it before, in the fragmented and inefficient natural gas market of the 1980s. Enron gave Gros its full backing when, in 1998, he began pitching his concept of a broadband-trading system with industry heavyweights AT&T, MCI WorldCom, and others.

He met with some polite interest and some outright skepticism. Even today, some analysts aren’t sure how quickly bandwidth trading will take off. "There will be producer-to-producer trading, that’s for sure," says Lisa Pierce, a telecommunications analyst at Giga Information Group, a research firm. "But the infrastructure still needs work before business customers can just go to a trading floor and satisfy their bandwidth needs," she adds.

Others, though, have ratified Gros’s napkin idea by starting to develop similar markets. This year, for example, Williams Communications Group, a fiber-optic network provider, and El Paso Energy, a natural-gas distributor, announced plans to trade bandwidth. Start-ups Arbinet and RateXchange already have set up Internet-based exchanges for wholesale telecommunications capacity.

Hyler, the CIBC Oppenheimer analyst, says the Enron market would falter if it attracted too little capacity. It could also falter if there is too much capacity, which would drive prices too low. But, he says, "with demand for bandwidth expected to increase 100% a year, I doubt that [either problem] is going to happen."

Hyler adds: "We don’t really expect this to take off until 2004 or 2005, but it’s good to get in this game early, and Enron has done this. It was a very savvy move on Enron’s part, and its stock has been rewarded for it."

Gros says, "If you look at bandwidth on even the heaviest-trafficked routes, such as New York to Los Angeles, the load factor [the amount of capacity that is actually used] for circuits is less than 25%." It would cost phone companies essentially nothing to use the remaining 75%, so they have enormous incentive to figure out some way to charge for it." Gros adds that Enron could generate significant profits "even if we could just raise the load factor by five percentage points."

After the initial expressions of at least some interest from the phone companies, Enron began building a bandwidth trading floor at corporate headquarters. The initial plan was to have trades take place by phone, simply because that is how companies are accustomed to buying bandwidth. But Enron also built the capability to have trades executed over the Internet. While the inefficiencies in the phone network initially limit Enron to trading monthlong leases in bandwidth, it soon will be able to trade 15-minute increments. It plans to get to the point where it can trade fractions of a second.

Gros’s group chose as its symbol a large, red, Harley-Davidson motorcycle, which sits smack in the middle of the entryway to the 44th floor of headquarters, which it occupies. "The bandwidth hog," as it is called, represents both the speed at which the division is growing—it now has 650 "bikers," up from 100 a year ago—and the rate of change in the bandwidth industry.

Gros has kept his group on a rapid schedule from the start. In May 1999, Enron announced it would begin bandwidth trading by year end. On Dec. 2, Enron announced its first trade. "We’ve made a number of trades since that time," Gros says. "The first trades have been producer-to-producer. But 2001 will be when it starts to take off, as firms get more comfortable with the trading mechanism, and the contractual documentation is put in place."

Enron Chief Executive Lay proclaims, "We intend to be the world’s largest buyer and seller of bandwidth." He also recently predicted broadband services may bring in as much revenue in five years as the entire company makes today. "This could end up being our biggest and fastest-growing business of all," he says.

There is, of course, risk. Despite its innovativeness, or maybe because of it, not every Enron idea pans out. Enron’s foray into providing residential electricity was a flop. The company’s goal was to become the nation’s premier marketer of electricity to consumers, as states such as California deregulated. After spending tens of millions of dollars—$30 million in television commercials, alone—Enron pulled the plug. The consumer market simply wasn’t a good fit for the company. Now, Enron has a more attainable goal—supplying natural gas and electricity to large commercial customers.

The bandwidth market could be a home run, perhaps a grand slam. Even if it isn’t, it sends a signal to others at Enron that innovation isn’t merely tolerated, it is required. "I think you get a reputation [for innovation] by stirring the pot," Gros says. "By looking at things in different ways; by pulling lessons from other markets and applying them where they’ve never been heard of before; by not accepting that things should happen today the way they happened yesterday."

The company’s funky advertising campaign speaks to the essence of Enron’s culture. The ads show a series of unrelated events: A building topples, children grin, adults speak in many languages. A synthetic, computerized voice repeatedly asks: "Why?"

A deep baritone answers that "why" "is a small word, but it can bring years of conventional thinking to a jarring halt."

Francis is a free-lance writer based in Fort Worth, Texas. He can be reached at francis.r@worldnet.att.net.