Roxane Richter
Energy Marketing Editor
In the dash for electronically traded wholesale and retail power, the rule is: “Be quick or become yesterday`s electronic road kill.” The digital exchange of electricity through electronic trading systems and exchanges has fast become a sky-high-stakes game of wits, nerve, investment capital, marketing savvy and up-to-the-second technological advances. But mainly, it`s a break-neck e-commerce competition-where whoever drives the most business wins.
In general, electronic trading systems and digital exchanges offer loads of high-tech gadgetry and real-time market information, giving traders increased market transparency, efficiency and accessi- bility. Electronic forums also provide new traders with a standardized process, allow smaller players to have equal buying and selling power through anonymity, improve price discovery, reduce the per-unit cost of a trade and speed overall trade execution. Plus, through computer wizardry, electronic trading systems can track all positions sold and purchased, pre-approve and manage counterparties and real-time credit limits, maintain high data integrity, better monitor and control traders, plus reduce the risk of human error and personnel administration cost.
Within the swelling e-business inventory of energy-specific software, you`ll find numerous trading platforms, each fostering its own distinct business model and customer base. For instance, in the wholesale arena, you`ll find the likes of HoustonStreet.com, Enron Online, the Automated Power Exchange, Altra Energy Technologies and others. In retail, you can access the online sites of Essential.com, BrightOptions.com and Enermetrix.com, all suppliers to large retail buyers. Taking a more “market-monitoring” role are exchanges like the California Power Exchange and the New York Mercantile Exchange, which offer value via their neutrality, stringent credit management practices, more efficient trading through independent buying and selling, improved price discovery and reduced risk through an open, deep and liquid market.
Welcome to the e-world
Electronic trading forums are all about matching buyers and sellers-no matter the industry, product or price. And the e-craze of electronic web-based exchanges has seemingly reached out and re-vamped the overwhelming majority of industries and markets. Take for example, recently hatched Internet bidding exchanges and electronic trading systems like priceline.com (name your price for a car, airline ticket or mortgage and they`ll try to find a willing seller); Petrochem.net (uses CheMatch, an anonymous, real-time Internet-based trading system for bulk commodity chemicals); narrowline.com (an electronic exchange for Net advertising); makeusanoffer.com (billed as “the most fun you`ll have haggling online”); and aucnet.com (a used-car auction exchange).
Why does power seem particularly well suited to e-commerce? Experts point to variety of characteristics which are deemed key in determining e-commerce success over traditional market habits, including:
– A low, non-perishable inventory;
– An inefficient and fragmented market, which accelerates consolidation through e-commerce;
– Commodities, which are based on price and availability;
– Repetitive purchases, translating to significant time savings through online transactions;
– “Low-touch” products (i.e., more time than money on purchase) that are easily displayed online;
– Unbranded services;
– Industries affected by real-time (or high-frequency) of information changes;
– Large customer base markets (grocery, financial services, transportation, etc.); and
– Low-margin businesses, which can more effectively compete via e-commerce.
So seemingly, electricity is a “natural fit”for e-commerce, with industry experts expecting the energy market to account for hundreds of millions of transactions and hundreds of billions of dollars in booked revenues within just a few years.
Yet most energy industry insiders will tell you that some 90-plus percent of power deals are still transacted over the phone. So what will make traders get off the phone and transact via the keyboard?
Turkey bucks for megawatts
Ask any trader-it`s all about liquidity. The ease with which assets can be converted into cash, is what will, in the long term, make or break a digital exchange.
Rusty Braziel, chairman of Altra Energy Technologies, puts power`s liquidity, maturity and activity into perspective: “We trade natural gas at 140 locations and power at nine. There`s something wrong with that picture. Power`s still quite immature.”
There are about 1,000 to 2,000 spot trades every day, and on an active day, a couple hundred are done electronically, according to Braziel. “Right now, the vast majority of power trades are done at nine locations.” Depending on the pace of state and national deregulation, Braziel believes that ultimately, sometime in the next three years, some 40 to 50 percent of all power trades will be executed online.
As for current volumes transacted online, according to HoustonStreet.com, 270,000 MWh of power were traded on the company`s Web site in the first four weeks after its July 1999 launch. Then, in October, a consortium of Internet-based trading technology companies and traditional voice brokers-Altra Energy technologies, Prebon Energy and Amerex Power Ltd.-combined to launch a business-to-business e-commerce site. ALTRAde Power went live on October 14th, and more than 210 installed users logged on to complete more than $24 million in wholesale power trades in two days. “On a bad day, we hit one-half million megawatts. On a good day we`ll see one million megawatts, or about 100 transactions,” Braziel said.
The good news is, while exchange volumes are eking their way up slowly, they are rapidly offering new-fangled goodies like incentives, free new user trial offers, very “negotiable” rates, free vacations, reduced user rates based upon monthly traded volumes, round-the-clock system access and icon-happy point-and-click screens.
And when all else fails, enticements can sometimes work. For instance, HoustonStreet.com announced its “Street Rewards” user loyalty program in October. Though the company quickly put the program “officially on hold” and may plan a re-launch, the Rewards program was based on trading activity, and promised to earn users points toward gifts like portable disc players, all-expense-paid trips to exotic locations, Jet-skis, big-screen televisions and Rolex watches. HoustonStreet.com, Altra and Dallas-based Allegro Development said they`ve all run aground of corporate policies which specifically nix trader participation in incentive programs. Yet, in the natural gas liquids arena, Altra continues to take its top 10 traders on an annual vacation.
As for usage fees, HoustonStreet.com attempts to boost liquidity by reducing its per-transaction fee, which is based on monthly traded volumes. For instance, based upon a per-megawatt fee, there`s a two-cent charge for less than 175,000 MWhs; 1.50-cent fee for up to 350,000 MWhs; 1.25-cent charge for up to 700,000 MWhs, and a one-cent fee for volumes over 700,000 MWhs. Though Altra was unwilling to publish its fees, Braziel said ALTRAde`s charges were comparable to HoustonStreet.com`s.
As for trading software licensing, Allegro`s CEO, Eldon Klaassen said the company`s systems run from “the low six-figures to low eight-figures” in price.
Also, in order to pump-up usage, many electronic systems offer traders can`t-miss, color-coded, point-and-click screens, making them easy to use. For instance, HoustonStreet`s system is packed with colorful icons of green and red houses (indicating in-house bids), flags, padlocks, checks, minus signs and plus signs (denoting counterparty credit risk status). But, to its credit, the `Street offers a live “Squawk Box” chat window to talk with other traders, links to sports and stock information and, just recently, it instituted a much-needed “No Flaking” trading policy, whereby all trades are completed upon acceptance.
Some exchanges, in order to compete more effectively, have begun offering improved systems and all-electronic trading access. In November 1999, the New York Mercantile Exchange (NYMEX) voted to list the exchange`s five sets of electricity futures and options contracts for both daytime and overnight trading on the NYMEX ACCESS electronic trading system, with an all-electronic trading implementation to follow. The five current contracts are based on delivery at the California-Oregon border (COB); Palo Verde; into the Cinergy transmission system; into the Entergy transmission system, and the western hub of the Pennsylvania-New Jersey-Maryland (PJM) interconnection. ACCESS has been active since June 1993 for NYMEX and COMEX division members and NYMEX ACCESS trade firms.
Pending a contract market designation by the Commodity Futures Trading Commission, NYMEX plans to create a wholly owned, for-profit subsidiary, intended to become a forum for electricity trading, as well as electronic trading of other potential new markets. Currently, ACCESS allows trading on an overnight basis only, not during daytime sessions. David Scheinberg, vice president of NYMEX`s ACCESS said, “On average, only about two to four percent of trades are conducted through ACCESS in a liquid market, like gold, heating oil, gas and crude. In power, we can`t even accurately assess a number.”
But while most digital exchanges and web-enabled systems are vying for a bigger, sweeter chunk of the power market`s activity, each seems to have its own unique way of conducting business and managing credit risk.
Who takes the risk?
While most system vendors and exchanges can agree that liquidity holds the key to success for their system, they differ significantly in their approach to the trading process. Some manage and guarantee a transaction`s performance and payment, actually taking title to the traded commodity, while others serves as an online broker, merely forming a real-time link between seller and buyer. For instance, in all trades Altra discloses buyer and seller identities after match-up, but only manages and guarantees transaction performance (taking title to traded gas) in physical natural gas trades.
As for any price-setting measures, the deep and liquid California Power Exchange (CalPX) uses a market clearing price based on supply and demand curves (called an unconstrained market clearing price), so there are no bid-ask spreads. CalPX claims that 90 percent of the time, its price volatility remains less than 3.5 cents/kWh (day-ahead hourly price duration curve for April 1998-March 1999).
Since its launch in March 1998, CalPX`s day-ahead market now represents about 84 percent of the total market, or $5 billion in energy, averaging 21,576 MW an hour. As for credit management and credit risk, the counterparty for both buyers and sellers is CalPX itself, so all CalPX participants must maintain security deposits commensurate with their exposure to cover potential defaults.
As if penny-scraping margins and sky-high volatility weren`t enough, power trading is highly susceptible to credit risk disasters due to the high number of separate contracts (50 or more) in a single power transaction (or daisy chain) from generator to end-user. Plus, deals are often consummated for small marketers under the “parental guarantee” of a large utility, and new power marketers can foster unrated, unknown or undisclosed credit rankings. Exacerbating the problem is the fact that the power market is nascent, and traders and credit risk managers are still fast-stepping to gain experience in dealing with electricity`s monstrous volatility, poor liquidity and low margins.
Once you`ve made the foray into the open energy commodities market, how can you protect yourself from unwanted credit risk exposure from unrated counterparties, unknown third-party power marketers, and best safeguard yourself against credit defaults and non-guaranteed subsidiaries?
Fortunately, electronic trading systems which are seamlessly integrated with risk management modules offer high-tech solutions to risk exposure-like the time- intensive mark-to-market credit evaluation (deemed more accurate on short-term price volatility) on a real-time basis.
Much as two trading floor managers` appetite for risk will differ; each trading system`s credit and risk management functionality varies greatly. For instance, Altra`s offers a customer-customized selection of trading counterparties, open credit lines, plus a real-time trading credit limit to safeguard against multiple traders exceeding a counterparty`s trading limit. On the other hand, HoustonStreet.com`s anonymous rating system allows users to catalog companies based on a stunningly minimal rating structure-a plus (+), a check, or a minus (-).
As with any mission-critical software system, trading systems should be fully integrated with a robust risk and transaction management system, so real-time data flow can be seamlessly intertwined throughout the company`s front-, mid- and back-office functions.
Electronic frontiers
As for the future of electronic trading in power, the electronic forum that can most effectively help traders deftly manage the nascent market`s meager liquidity, mammoth volatility and nominal margins will, in the end, succeed.
Allegro`s Klaassen said he believes free Internet-based systems are sure to ride high on the crest of e-power`s future wave. “The attraction of venues like Enron Online is a lot like booking my air travel. Either I go to an agent to see all the airlines` prices, or I go straight to what I know is the lowest fare provider in a certain area,” he said. “It`s the same with energy, sometimes you want to see a variety of bids on an exchange and pay a fee for that service, or you know what liquid market you want to buy from and you don`t have to pay a fee.”
No matter who can carve out the lion`s share of energy`s estimated $300-billion-pie, there are surely enough slices to satiate even the most voracious of corporate e-commerce appetites.
E-power proliferates:
Electronic trading systems and virtual marketplaces emerge from the woodwork
Editor`s note: Vendors and exchanges were selected for inclusion based on industry market share, core functionality, niche performance and general space considerations. System rates are often negotiable, and trial periods are normally offered to new clients.
Allegro Development (www.allegrodevelopment.com)-One of the few to offer a coal trading system. Allegro Natural Gas, Natural Gas Liquids (NGLs), Coal, Crude Oil and Electric Power System(s) manage the buying and selling, generation, consumption and transportation/transmission of the commodities.
ALSTOM ESCA (www.esca.com)-ALSTOM`s E-terradealmaker is powered by Distributed Event Notification Architecture and features filtering and querying capabilities and book-out functionality to capture upstream and downstream daisy chains.
AMDAX.com (www.amdax.com)-Not a commodities trader, but an interesting new national retail clearinghouse (or auction) where energy suppliers can real-time bid on posted contracts. An Internet-based “virtual” marketplace for commercial, industrial, governmental users and aggregators of natural gas and electricity.
ARC Information Technologies (www.arcit.com)-ARC`s InTENSE (Integrated Trading and Event Notification System for Energy) claims it`s a “bid-to-bill” business-wide system, utilizing a distributed object-based architecture.
Automated Power Exchange Inc. (APX) (www.energy-exchange.com)-A privately-held company that operates Internet-based exchanges for the buying and selling of electricity, energy transmission and related products. This company operates the APX California Markets, Green Power Market and Ohio Market, with more planned in New York and Illinois.
Bloomberg (www.bloomberg.com)-These Wall Streeters offer Global Tradebook, an electronic platform that interacts with general order flow across the Nasdaq system or specifically accesses liquidity from individual market makers or electronic community networks (ECNs). Provides access to and settlement in 65 worldwide markets.
BrightOptions.com (www.brightoptions.com)-Energy Advisors` new online site for home and business owners that tracks energy suppliers and allows consumers to shop, switch and cost-compare their rates online-all in under ten minutes and at no cost to the user.
Caminus LLC (www.caminus.com)-These risk wizards offer software branded under Zai*Net, including Zai*Net Manager, Physicals and Risk Analytics for power, gas, crude, refined products, NGLs, coal, S02/NOX and foreign exchange. Complete support for all traded instruments: physicals, swaps, OTC options, listed options and futures and front-to-back office trading features. On Nov. 5, 1999, Caminus announced it had called off plans to acquire Orion (see Orion listing), but will continue to work together through a strategic alliance.
California Power Exchange (CalPX) (www.capx.com)-CalPX is a non-profit, public benefit corporation created by the state of California to provide an efficient power marketplace (but regulated by FERC). An open exchange where qualifying traders (now about 68) buy and sell wholesale electricity-approximately $23 billion in annual revenues and 246 million MWh annually (about 10 percent of U.S. market). There are 15 exchanges worldwide, and CalPX is the first of its kind in the U.S. and the largest in North America.
Continental Power Exchange, Inc. (www.cpex.com)-The Catalina energy brokering and trading system features anonymous bidding, counterparty filtering and deal execution. At a user`s request, the system alerts voice brokers to negotiate, execute and confirm deals off-line.
Enermetrix.com (www.enermetrix.com)-Dubbed an “Internet commerce system,” Enermetrix.com features a real-time post and bid environment, matching buyers and sellers of retail natural gas and electricity. Claims about 52 clients (including Duke, Enron and PG&E) and licensing fee is based on volume of customers.
Enron Online (www.enrononline.com)-An Internet-based transaction system for wholesale energy and other commodities. Allow traders to view commodity prices in real-time and directly transact with Enron free of commission. The company will leverage its wholesale market expertise to publish real-time prices for power, natural gas, coal and other commodities.
Essential.com (www.essential.com)-Dubbed an “energy and communications” online superstore, essential.com allows small businesses and individuals to shop for retail energy deals (if in available area). Enter your ZIP code and the New England-based company searches for your “best deal.” Customers who sign up early get a $25 certificate for electricity or gas from essential.com when their area becomes available).
Henwood Energy Services (www.hesinet.com)-The ETRM (Electric Trading and Risk Management) system captures wholesale supply agreements, trade capture, indexes and market data to perform risk management, wholesale scheduling and settlements.
HoustonStreet.com (www.houstonstreet.com)-Certainly the flashiest of the competitors vying for space on the energy exchange scene, HoustonStreet.com offers a simple Web-based wholesale power auction with no sharp learning curves. Or, as they say on the `Street-“Bid. Ask. Deal. Done.”
kW International (www.kwi.co.uk)-kW2000 is a suite of 25 integrated applications, which includes power and gas deal capture, real-time mark-to-market, VaR and other multiple commodity trading and risk management goodies.
Nucleus Corp. (www.nucleuscorp.com)-Houston-based Nucleus` flagship Power Trading System (PTS) is Oracle-based and claims a strong scheduling system which interfaces with counter-parties (for NERC tagging, etc.) and flexibility to schedule any required wheeling for power delivery.
New York Mercantile Exchange (NYMEX) (www.nymex.com)-NYMEX utilizes its ACCESS system to give its traders after-hours trading sessions. Plans are currently under way to allow power to trade all-electronic.
OM Technology Energy Systems, Inc. (www.omgroup.no)-The company`s POMAX Trader is a front-office system solution for trading bilaterally or on formal power exchanges.
Open Link Financial, Inc. (www.olf.com)-Open Link`s Enterprise features front-office financial and physical deal capture, real-time position management and user-defined pricing curves and volatility.
Orion Systems AS (www.orion.no/english/about/default.htm)-Norway-based Orion`s Trading Desk product provides depth, prices and volumes of the power exchange Nord Pool ASA. Primary markets are Scandinavian power markets in Norway, Finland and Denmark.
Powertrade (www.powertrade.com)-The company`s INDIGO power trading system is a third-generation integrated financial and physical system for electricity.
SunGard Energy Systems (www.sungard.com)-The Epsilon Energy suite (trading, risk &scheduling) and Panorama Energy (trading & risk) offer deal capture and analytics (leveraging Primo and Risk Works acquisitions).
Telerate (www.telerate.com)-Initially developed for the Western Systems Power Pool (WSPP), the PowerHub Trading System is available as part of Telerate Energy over the Telerate network or as a stand-alone application via the Internet. Flat monthly fees and over 150 electric utilities, municipalities and marketers have access to service. Plus, users who are also members of WSPP are able to see posted bids and offers made by users of the WSPP Hub Service/ PowerHub Bulletin Board.
Tenfold Corporation (www.10fold.com)-New on industry radar, the company offers TenFold Contract and Fulfillment Manager, an application used to plan, schedule, contract, trade, track, settle, invoice and account for multiple energy commodities and derivatives.
Triple Point Technology (www.tpt.com)-The FRANKLIN 2000 is an integrated front-to-back office power and natural gas trading system for trade capture, trade processing, position management and credit/client exposure.
