Expected E-Energy Marketplace Shakeout Begins
The shakeout in the battle between online energy trading
exchanges has begun, with rumors circulating that at least two of
the well marketed, visible performers have run out of money and now
are scrambling for customers and liquidity. Though no companies
have publicly announced plans to close or merge, insiders say it's
just a matter of time.
There are, of course, impressive success stories in the short,
mostly happy life of Internet energy trading exchanges, which
numbered as many as 30 about six months ago. Independent
EnronOnline, the acknowledged leader of the pack for all Internet
commodity trades, launched its site in November 1999, and currently
boasts an average daily trading volume of $3.5 billion, the highest
among online energy exchanges.
IntercontinentalExchange (ICE), which secured the backing of
energy giants BP, Royal Dutch/Shell and TotalFinaElf, as well as
investment banks and power firms, by Nov. 17 had recorded more than
$13 billion in total trades in its first month of trading. ICE's
cash markets in natural gas were averaging 1-2 Bcf/d in trades by
mid-November. It had traded 60 Bcf of physically delivered gas and
financially settled gas volumes had reached almost 900 Bcf.
Of course, many others are laying odds on surviving and
thriving. TradeSpark, which launched in early October 2000, is
similar to the ICE business model, with high profile partners
Williams, Dominion, Coral Energy, Koch and TXU, and Dynegy Inc.
expected to come on board by the second quarter. Houston-based
Altra, which operates an independent trading platform, saw its
physical trading activity increase almost 40% in December, with a
solid customer base of 700 and climbing.
But for any online platforms thinking they were in the cat bird
seat just six months ago, today they are sitting on a precarious
"It's a very interesting game to be in right now," said Scott
Coleman, director of natural gas trading for Altra. "People
attempting to roll out a new platform or trying to operate without
liquidity are finding they can't play. And a lot of those that
started out so well with great marketing plans have lost some of
Coleman, who like a lot of his fellow e-trade executives was
hesitant to name names of companies not doing well, said some of
the higher profile companies have just "run out of money." He said
some had a "great marketing plan but no liquidity."
While he said that Altra is doing well, Coleman admitted the
company had a "bad" summer. With so many companies jumping into the
online trading arena at the time, Coleman said that business was
not as strong as expected. However, having made it through the
first shakeout, he said, Altra's long- and short-term goals now are
to "beat the competition."
To do that, he said Altra would have to continue to generate
liquidity, something it's been able to do through its clearing
function, a technique not used by other online traders.
"Credit is a huge issue right now because of the way natural gas
prices shot up," Coleman said. Even though some of the consortiums
were put together by huge corporations, parties have begun running
out of credit with each other, which in turn kills the trade. "Just
because you have corporate level backing doesn't mean the traders
will use you. You've got to have liquidity. If you know how to
anticipate when the customer is running out of credit, you
eliminate the problem. You've got to think like a trader."
When questioning companies about cutbacks or rumored job
layoffs, few commented on the stability or lack thereof of
competitors. However, in the past few weeks, rumors have centered
on RedMeteor and HoustonStreet as two exchanges experiencing
liquidity problems, but there was no confirmation. In fact, while
acknowledging that it's an uphill battle to compete,
HoustonStreet's chief strategy officer said last week that the
company is doing well.
"The first struggle is liquidity," said HoustonStreet's Kevin
Sluder, executive vice president and chief strategy officer for the
neutral platform energy trader. "That's the entry ticket into the
market. You've got to be nimble, be quick to succeed, but the
opportunities are still there."
With trading floors in wholesale electricity, crude oil and
refined products, Sluder estimates the Portsmouth, NH-based company
currently has between 200 and 225 customers, but admits that not
everyone who registers with the site comes back to trade. The only
proprietary information HoustonStreet disclosed was that four
months after its launch, Oct. 2, 2000, it had completed $1 billion
in crude oil trades. There were no figures about its natural gas or
other platforms, or any information on its current business
"The battle will be fought and won on which user services the
customer chooses," Sluder said. "As people who trade become more
sophisticated and know more, they will choose a level platform like
HoustonStreet in the long run."
But in the meantime? "It's a real dogfight, that's for sure,"
said Sluder. "The competition can make your life miserable. But
you've got to be creative, tenacious, efficient and mind your Ps
Sluder dodged questions about lay-offs at the company, but
sources reported about 17 people --- one-third of the company's
staff --- were abruptly terminated two weeks ago. The sources said
the lay-offs were prompted by a lack of new venture capital.
Last week another e-trader rumored to be short on liquidity,
RedMeteor, based in Houston, said it had expanded its business
operations to now license its technology to create open exchange
marketplaces and private branded marketplaces.
"Given the recent volatility in commodities, companies are
seeking better, technology-enabled business processes that provide
instantaneous market access and enhanced counter-party controls,"
said RedMeteor CEO Vincent Di Cosimo. "Even with the existing wide
range of Internet-based trading alternatives, online trading is
still very much in its infancy. We know that several years from now
there will be a myriad of exchange platforms all linked in one way
or another." There was no mention of how well its online energy
trading exchange was doing.
What's happening now was bound to happen, and even though the
shakeout in the online energy trading marketplace will take its
toll on large and small companies, in the long run, the Internet
will become the first choice for buying and selling energy
products, according to an expert who follows the industry on a
Peter Fusaro, principal of knowledge management for Skipping
Stone Inc., said the e-commerce marketplace is still so young, that
it may take as long as two years before the dust clears and the
true players are determined.
"It is so early in the game for electronic energy trading, and
what you have with electronic trading is a long process of actually
changing human behavior," Fusaro said, and what's happening now
always happens with a new way of doing things. "Brokerages really
don't want to change. They have the information and many customers
like to deal with their brokers on the phone, and it's still very
popular. But in the long run, the value of the electronic
marketplace will take over, and I think that in the next couple of
years, we'll slowly see the brokerages gravitate toward electronic
It won't be a straight line, though. Some electronic traders
will cease to exist or consolidate --- not a negative consequence,
just the normal migration of a burgeoning start-up industry, he
Fusaro, who has tracked the dotcom energy business on a daily
basis since 1999, has issued three in-depth reports on where the
industry is and where it's going. He confirmed rumors that
HoustonStreet and RedMeteor are floundering because of a lack of
However, he predicted that those companies and others losing
steam might be "patched" together or swallowed by more liquid
platforms. "Somebody will buy them," he said. "I don't know if it
will be some of their backers or another platform, but I expect to
hear about that soon." Fusaro said he also suspects that some
exchanges that appear to be solid may be "hyping up the numbers" on
their transactions, which also will eventually come back and hit
them in the bottom line.
"It depends on how a transaction is measured. When I hear
someone talk about having 100 trillion in over the counter sales,
are they talking about 100 trillion kilowatts, or 100 trillion
molecules? It makes a big difference, and the numbers can be
manipulated in a lot of different ways."
Even with expected consolidation, Fusaro said the marketplace
wouldn't be getting any smaller.
Next Wave of Exchanges Coming
"There will be more, not fewer in the very near future, both in
Europe and the United States. The next wave of exchanges most
likely will replicate those that are most successful at the present
time," he said. The reason, he said, is that consolidation of the
energy industry will "accelerate the movement further. There will
be more liquidity, which in turn will generate more growth in the
electronic trading field."
On his short list of those companies likely to make it through
the latest shakeout is ICE, TradeSpark and Altra. He doesn't
include EnronOnline on his list because "it's not like any of the
other exchanges. It creates its own liquidity" with its massive
And unlike Enron, other electronic traders should consider
paring down their offerings and concentrate on what they do best.
"The energy industry is very information intensive and some
exchanges are trying to do too much. It's difficult to capture
everything. To be successful, the electronic platform has to create
liquidity, and how to do that, no one seems to really know, except
certainly Enron. The trader has to find a niche to help him stand
out and cut out his slice of the market," he said.
One idea to generate more liquidity for online energy trading
was floated in late December by Houston-based Dynegy Inc., which
launched its propriety site Dynegydirect in November. Matt
Schatzman, president of Dynegy Trading, said then that if
EnronOnline would link its independent site to Dynegy's future
partner TradeSpark, the liquidity would be there. Schatzman said
Dynegydirect would aggregate multiple transactions from its small
customers and then execute the trades on TradeSpark. Though its
customers would pay a fee for the transaction, Schatzman said the
customers would still pay less because there would be more
While discussions continue between Dynegy and EnronOnline, so
far, no agreement has made, and Dynegy's John Jordan, the senior
director of the company's e-solutions, said he could not comment on
the discussions or on Dynegy's current trading activity because
fourth quarter earnings will soon be released.
Carolyn Davis, Houston