NGI The Weekly Gas Market Report
The simmering pot of market concerns regarding the market powerof EnronOnline finally boiled over in public yesterday at Chicago’sLDC Forum. A representative from EnronOnline had to fend off verbalattacks from competitors and from the audience, who criticized thesystem as giving Enron the ability to manipulate prices and provideit with an unfair advantage over competitors.
Scott Coleman, an official at Altra Energy Technologies, saidproprietary systems like EnronOnline, and systems being developedby a consortium of large market players, represent a danger to thehealth of the energy industry because of their current or potentialmarket power. Altrade operates its own independent online exchangethat is one of Enron’s biggest electronic competitors. It differsfrom EnonOnline in that various buyers and sellers trade with eachother with Altrade serving to clear the transactions. OnEnronOnline, Enron posts bid and asked prices and is a party inevery transaction.
The proprietary EnronOnline trading system has been accused ofmarket manipulation mainly because of its tremendous growth sincegoing live last November and because of the market strength of itsoperator, Enron Corp.
Enron is the energy industry’s largest marketer/trader/riskmanager and one of the largest natural gas pipeline operators.About 60% of its marketing and trading business today is done overthe EnronOnline system. Critics charged that EnronOnline provides atremendous advantage to its parent because all of the transactiondata is thrown into a historical database that is available only toEnron.
EnronOnline has handled more than 280,000 transactions worth$140 billion since going live. The proprietary system handles about2,000 transactions every day with a value estimated at $1 billion,and most of its online business is natural gas and power sales andpurchases.
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 andits competitors note. There’s no special hardware required;everything is on the web and a transaction is as simple as a coupleclicks of the mouse. It also provides a broad variety ofinformation, including prices on 1,000 products, and is supportedby the largest energy marketing firm. Although there are many othersystems out there, few if any have the content, ease of use andprice discovery of EnronOnline.
Critics claimed that power enables EnronOnline to “soak upliquidity” in the marketplace, and in doing so give itself atremendous advantage over its competitors. With each trade, Enrongains a little bit more information about its competitors’positions in the market.
“Over the long term I think the market will always correctitself,” said Altra’s Coleman. “But in the short term, I think ifany one player has enough of a presence in any one market they cancause prices to move in one direction or another.”
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 arejust putting a bid and ask out there, and if people want to buy atour prices, then fine. If people want to sell at our prices, finethen sell it. I don’t think we have the market manipulationcapability people suspect… We are not bigger than themarketplace.”
When asked specifically about historical data collected on thosewho use the system, Shults denied the company studies the buyingand selling patterns of its competitors with an eye towardmanipulation — sort of the “Big Brother” of the energymarketplace.
“The historical information is not available,” EnronOnline’sShults admitted. “We just started calculating the indices and pricereports… We are now providing that information to the market soeveryone else has that information as well.” He said Enron does notretain 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 marketplacein the future. With increasing demand for LNG imports and rapidprice discovery of worldwide commodities on EnronOnline, forexample, market activity in Africa and the Far East could have amore immediate impact on domestic markets.
Quoting analysis conducted by Forester Research Inc., Shultsalso predicted electronic exchange revenues could grow from $500billion this year to more than $3 trillion in 2004-2005.
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