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
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
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.