Article about the energy trading marketplace:
SAN JOSE MERCURY NEWS
MARKETPLACE FOR ELECTRICITY SPARKS ONLINE ENERGY TRADING
STATE POWER CRISIS UNDERSCORES THE NEED AND THE CONTROVERSY
Monday, February 26, 2001
Section: Business
Edition: Morning Final
Page: 1E
BY DAN PILLER, Knight Ridder
Memo: E-Business
E-Commerce: A Mercury News Special Report
The E-Commerce Revolution
RELATED STORY: page 1E - 15E
Dan Pillar writes for the Fort Worth Star Telegram.
The California power crisis has underscored a burgeoning online marketplace for electricity brought about by the advent of the Internet and deregulation.
Following the lead of Houston-based Enron, utilities and energy providers have joined together to create Tradespark, which started trading electricity and natural gas in November.
Analysts say the popularity of online trading is creating a marketplace for energy and commodities that is likely to take its place alongside -- if not ahead of -- the traditional floor commodity exchanges in Chicago and New York.
Within a short time, the daily spot and futures prices for electricity could become as much a part of the financial lexicon as prices for crude oil and natural gas.
''Electricity has become a commodity, traded daily just like oil and gas and metals,'' says Gregory Smith, analyst with J.P. Morgan in San Francisco.
However, this business-to-business marketplace has proven controversial.
In California, skyrocketing electric prices and rolling blackouts have focused attention on daily power supplies. Shortages have forced California's utilities, and eventually the state itself, into the unregulated -- and highly volatile -- spot market for wholesale electricity.
Rising spot prices -- driven by higher natural gas costs and, critics charge, the knowledge that power-strapped California is a beggar's market -- have attracted political outcries against energy trading.
''California has made the electricity marketplace a political hotbed right now,'' says Harry Fry of New York-based Tradespark. ''But a trading network like Tradespark can be part of the solution to the problem.''
Since it launched in the fall, Tradespark has exchanged $16 billion worth of commodities.
But it was Enron, the onetime sleepy natural gas company, that laid the route for this new electronic trading highway.
Enron operates a bilateral trading system, meaning it is either the buyer or seller of commodities. Tradespark is a multilateral system that brings buyers and sellers together through a neutral system.
From its founding through the end of last year, Enron has traded $336 billion worth of commodities, led by electricity and natural gas.
Enron's move into wholesale energy trading is paying off on the bottom line.
The company, which includes its EnronOnline operations within its wholesale services division, said fourth-quarter operating profits in that sector increased 72 percent. Chairman Kenneth Lay, in reporting Enron's year-end financial results, described EnronOnline's year as a ''breakout performance.''
For the full year, the enhanced wholesale business helped Enron report a 32 percent increase in profits to a record $1.3 billion.
''EnronOnline's features has contributed to both the expansion of Enron's existing wholesale business as well as the growth of new businesses,'' Lay said.
When electricity was made a tradeable commodity by federal regulators in 1998, the fledgling market started on traditional telephone platforms long favored for exchanging commodities such as oil and gas. But in the last 18 months, electricity trading moved online, either through a private network or over the Internet.
The e-business energy marketplace is so new and fluid that the delineation between competitor and partner can be transparent. Tradespark says that EnronOnline is welcome to use the Tradespark network. Enron, for its part, says it logs onto Tradespark to check prices but, as of yet, not much else.
Dynegy of Houston says it plans to become a partner in Tradespark, but it also has its own DynegyDirect online trading network.
Smith says that the electricity markets will need a neutral platform for trades, and that Tradespark can be a good vehicle if it develops enough volume and liquidity.
Justin Hughes, an analyst with Robertson Stephens in San Francisco, says utilities are vital to making wholesale online trading of electricity work.
''They will be the only ones who will have the volume to build a market with sufficient liquidity,'' he said.
Dallas-based TXU, which provides electricity and natural gas service to 3 million customers in North Texas, paid $2.5 million last year to be a founding partner in Tradespark. Jeff Shorter, a TXU vice president who handles the company's energy trading operations, says TXU wanted to be in on the ground floor of the new B2B electricity market.
''E-commerce and B2B platforms are the growth vehicle for the entire utility industry,'' Shorter says. ''By being in Tradespark, we can help shape the development of a new segment of our business.''
In the first couple of years, Shorter says energy traders have learned that switching electrons from system to system isn't as easy as it looks.
''I may have a surplus of electricity here and Chicago may have a shortage,'' said Jeff Shorter, a TXU vice president who handles the company's energy trading operations. ''But to get the electricity to Chicago, I have to go through the wires of other providers who may be closer. That type ofrestriction cuts down on the liquidity of the marketplace.''
By contrast, Shorter said, natural gas is considered by traders as a near-perfect commodity. Natural gas consumed in the United States is produced largely in the Southwest and Gulf Coast regions, then piped north where everybody has equal access.
''We're not sure that electricity markets will have the same liquidity as natural gas, ever,'' Shorter said. ''But the market is still in development.''
Tradespark uses a network platform built by ESpeed, a newly-independent electronic trading company that was spun off from the securities brokerage firm Cantor Fitzgerald in 1999.
The new e-business model for energy trading complements existing telephone voice transaction models that already are well developed. The online trader, after getting a credit approval, can log on, check real-time prices, maturities, delivery points and other benchmarks of the market. The trader then can make a sale or purchase with a mouse click. Tradespark's Fry says ''credit approval is instantaneous.''
Tradespark came into being last year. Original energy partners are Shell's natural gas subsidiary, Coral Energy of Houston; Dominion Energy of Richmond, Va.; TXU, Williams Energy of Tulsa and Dynegy of Houston came together along with ESpeed and Cantor Fitzgerald to form the partnership. |
