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 perch.
"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 their momentum."
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 activity.
"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 and Qs."
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 daily basis.
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 trading."
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 said.
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 liquidity.
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 wholesale marketplace.
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 liquidity.
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
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