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EnronOnline Market Power Under Fire

EnronOnline Market Power Under Fire

The simmering pot of market concerns regarding the market power of EnronOnline finally boiled over in public at last week's LDC Forum near Chicago.

A representative from EnronOnline had to fend off verbal attacks from competitors and from the audience, which criticized the system as giving Enron the ability to manipulate prices and gain an unfair advantage over competitors.

Scott Coleman, an official at Altra Energy Technologies, said proprietary systems like EnronOnline, and systems being developed by a consortium of large market players, represent a danger to the health of the energy industry because of their current or potential market power.

"Over the long term I think the market will always correct itself," said Coleman. "But in the short term, I think if any one player has enough of a presence in any one market they can cause prices to move in one direction or another."

Altra operates its own independent online exchange, Altrade, which is one of Enron's biggest electronic competitors (see related story this issue). It differs from EnronOnline in that various buyers and sellers trade with each other while Altra provides a clearing function. On EnronOnline, Enron is the sole counterparty in every transaction.

The proprietary EnronOnline trading system has been accused of market manipulation mainly because of its tremendous growth since going live last November and because of the market strength of its operator, Enron Corp. Many traders admit that prior to entering the market each day they look to see where EnronOnline is trading.

EnronOnline Director Bob Shults said the company is simply "providing a service for our customers, particularly a bid and ask. But I don't think Enron has the ability to move markets. We are just putting a bid and ask out there, and if people want to buy at our prices, then fine. If people want to sell at our prices, fine then sell it. I don't think we have the market manipulation capability people suspect..... We are not bigger than the marketplace."

Enron is the energy industry's largest marketer/trader/risk manager and one of the largest natural gas pipeline operators. About 60% of its marketing and trading business today is done over the EnronOnline system. Critics charge that EnronOnline provides Enron a tremendous advantage because all of the transaction data is thrown into a historical database that is not available to the public or to the traders who use the online system.

Enron has amassed a significant amount of data from the system to date. EnronOnline has handled more than 280,000 transactions worth $140 billion since going live. The proprietary system handles about 2,000 transactions every day with a value estimated at $1 billion, and most of the online business is natural gas and power sales and purchases.

Why has the system been so successful? It's free, easy to use, low risk and there is a tight bid-ask spread, both EnronOnline and its competitors note. There's no special hardware required; everything is on the web, and a transaction is as simple as a couple clicks of the mouse. It also provides a broad variety of information, including prices on 1,000 products, and is supported by the largest energy marketing firm. Although there are many other systems out there, few if any have the content, ease of use and price discovery of EnronOnline.

Critics claimed that power enables EnronOnline to "soak up liquidity" in the marketplace, and in doing so gain a tremendous advantage over its competitors. With each trade, Enron gains a little bit more information about its competitors' positions in the market.

When asked specifically about historical data collected on those who use the system, Shults denied the company studies the buying and selling patterns of its competitors with an eye toward manipulation --- sort of the "Big Brother" of the energy marketplace.

"The historical information is not available," Shults admitted. "We just started calculating the indices and price reports..... We are now providing that information to the market so everyone else has that information as well." He said Enron does not retain information about those who use its system.

Shults did, however, warn that the system will make the U.S. energy market much more closely connected to the global marketplace in the future. With increasing demand for LNG imports and rapid price discovery of worldwide commodities on EnronOnline, for example, market activity in Africa and the Far East could have a more immediate impact on domestic markets.

Quoting analysis conducted by Forester Research Inc., Shults also predicted electronic exchange revenues could grow from $500 billion this year to more than $3 trillion in 2005.

Rocco Canonica

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