Six US utilities have teamed up with IntercontinentalExchange to create the world’s largest on-line exchange for energy. Will this team live up to its expectations of delivering liquidity and price transparency?
Six of North America’s leading power and natural gas trading companies have formed an alliance with Intercontinental-Exchange (ICE), an on-line commodities exchange, to create what will become the largest on-line over the counter (OTC) market for energy in the world. The venture aims to provide liquidity and transparency and ultimately a successful on-line trading business model that it can replicate around the world.
The six utilities – American Electric Power, Aquila Energy, Duke Energy, El Paso Energy, Reliant Energy and Southern Company Energy Marketing – initially came together in April 2000 to form an independent trading consortium known as the Energy Trading Platform Holding Company Inc (ETPHCo). Each utility has taken an equity position in ICE, an Internet-based trading platform for OTC precious metals and oil.
Atlanta-based ICE is ETPHCo’s ‘technology partner’. Its technological backbone is ‘The ICE’, a scalable trading system that provides participants with secure access and global trading support. Importantly, ICE gives participants a complete picture of market depth and the opportunity for a “paperless back office” with straight-through processing of information.
These are two factors that ETPHCo believes will promote liquidity and attract players to the exchange, and explains what the company is aiming to achieve – the creation of an independent, transparent marketplace for every player in the North American market.
“In the trading arena, there are several issues that we are trying to address,” says Janine McArdle, president of ETPHCo. “We need liquidity in the market, and the best way to get liquidity is to be on-line, and then also to achieve some efficiencies through straight-through processing. Those two issues are key to the industry, and an independent platform will help us deliver an industry solution as opposed to an individual customer solution.”
Jennifer Pierce, public affairs manager of Duke Energy North America agrees: “We wanted to create a market where you have an opportunity for multiple parties to participate,” she explains. “With this one exchange, there will be a tremendous amount of volume traded, and as such it will probably have greater price transparency, and there will be opportunity for cost savings … because of the standardization of functions.”
A standard, independent on-line platform will create cost savings for participants. According to ETPHCo, on-line trading is on average 15 per cent cheaper per trade than conventional methods. In addition, any entry errors can be quickly located, saving valuable time. “It’s very expensive,” says McArdle. She adds: “Manual processes that go on [involve] double entry into systems, but once you go on-line, that puts you on the track to straight-through processing.”
One of the biggest benefits of this platform will be the opportunity for players to implement straight-through processing, with the direct flow of information from the front to the back office. “It will be open on the back end for everybody to write their interface to the platform, so once they do a transaction, the information can flow electronically to their back offices and be processed there,” explains McArdle.
ETPHCo has been compared to EnronOnline, the on-line trading subsidiary of Enron. However, the two platforms are very different as Enron’s is a proprietary, non-independent system. Nevertheless, EnronOnline has clearly been a success, (see p.13), indicating that on-line trading is the way forward.
Given the success of EnronOnline, ETPHCo is not quite sure what to expect in terms of uptake of the exchange and initial trading volumes. According to Forrester Research, of the approximately 2.7bn MWh and 154bn cu ft of natural gas traded in North America in 1999, only 0.2 per cent of electricity trades and two per cent of natural gas trades were conducted on-line. Forrester predicts that these figures will increase up to 25 per cent and 11 per cent respectively.
But McArdle believes that these figures are now outdated. “Our estimates keep adjusting upwards. We originally pointed to the Forrester research which said that there would be $30bn in revenue traded on-line this year and $266bn by 2004, but Enron said a while ago that they were up to $60bn and that was just them.”
All the partners in ETPHCo have committed to a significant level of annual participation in the exchange, although none will say exactly how much. “We all have an incentive to trade all volumes through this exchange,” commented Pierce, adding: “If you look at the partners in our consortium, we are by far the leading power and natural gas traders in North America – we have 37 per cent of the power market and 27 per cent of the natural gas market traded.”
In terms of other potential market participants, McArdle says that many players seem keen on using the exchange. “I get a lot of calls from players right now about getting registered on the system. There’s been a lot of interest.”
ETPHCo plans to start trading in electricity and natural gas between mid-September and mid-October. It will offer standard over the counter physical products for the North American market. According to McArdle, it will hit the European markets soon afterwards, although it is likely to have to wait for further deregulation of Europe’s natural gas and power industry. “This [North American] market is fully deregulated right now so our primary focus will be to get everything launched on the American side and then move over to the European side.”