Trading comes to your desktop
Today in the USA, wholesale power trading is a $70 billion market, with virtually all deals completed over the telephone. The arrival of Internet `trading floors` could change the way power is traded, and could help traders survive in an environment of diminishing profit margins.
President and CEO,
Houston Street Exchange
Despite the fact that electricity is one of the largest traded commodities by volume in the world, it is one of the last to be bought and sold over the Internet. The most widely used method for trading wholesale electric power leaves traders with one hand on the telephone, one eye on the television for the latest weather forecast, and the other eye checking energy headlines. The inefficiencies from this setup can result in lost deals and lost profitability as traders juggle telephones with trying to get the latest information they need to make the best trades.
US-based Houston Street Exchange has responded to this problem in the wholesale power trading process by developing a Web site that acts as a portal, allowing traders to see updated weather forecasts, energy headlines and stock prices through a single medium, so they can make informed decisions. Using HoustonStreet.com, traders can post offers, make bids, counter and re-counter based on the product and term of their choice, much like they trade power today, only using a more efficient and easy-to-use medium – the Internet.
From its goal of creating an online community for power traders and changing the way an entire industry transacts business, to the “relationship Web” business model the company uses, Houston Street Exchange`s evolution marks the beginning of a change in how wholesale power will be traded in the future.
An industry beckons
The Internet`s arrival on the wholesale power trading scene is certainly timely. As trading, deregulation and competition continue to expand, the process of buying and selling wholesale power needs to be made more efficient.
Wholesale power trading has exploded in the past couple of years. Since 1996, it has grown by more than 900 per cent in the USA alone. According to figures released by the US Federal Energy Regulatory Commission (FERC) and industry estimates, power marketers and regulated utilities traded more than 3 billion MWh in 1998. Power marketers alone traded 2.3 billion MWh, a nearly 91 per cent increase above the 1.2 billion MWh traded in 1997. Today, wholesale power trading in the USA is a $70 billion market, with virtually all of that trading completed over the telephone.
As deregulation has grown, so has the industry and competition among different power marketing firms. The more fierce the competition becomes, the more likely prices will drop, and the more likely wholesale power traders will feel the slim profit margins. Navigant Consulting, Inc., a global management consulting company serving the energy industry, estimates that power marketing firms` profit margins were less than two per cent for 1998 as a result of increased competition.
While competition may be good for the consumer, the crimp it puts in profitability means that only the power trading companies that can adapt and ensure that their operations run at maximum efficiency will survive. Streamlining every aspect of the company, particularly all steps in the trading process, will better position companies to retain respectable profit margins.
Relying on telephones to buy and sell wholesale power is extremely inefficient, a drawback that is heightened at times when traders need performance and ease of use most. Traders working the `phones during a heat wave know exactly the kinds of frustration that can result from using a telephone. When markets are moving quickly, the delays associated with attempting to close deals over the phone can result in lost deal and lost money.
For example, a utility may decide to sell a 100 MW block of power for next week during a spell of expected mild weather. To begin the process, the utility calls phone brokers to find offers for power for next week. One broker reports back an offer of $50 per MWh, which the utility agrees to accept. Because phone broker transactions are only “live” if the other party is on the phone, the broker would have to call the seller and confirm the offer. In the ensuing delay, a new medium-term weather forecast is released showing much higher temperatures, which causes the prices for next week to jump to $100 per MWh. Due to the change in market conditions, the utility refuses to confirm the earlier offer based on the lower price, and the delay caused by telephones forces the buyer to pay a much higher price.
Moreover, information conveyed over a telephone provides only a single data point. Traders are not able to see the depth or breadth of the market, and important asset for determining market `sentiment`. A trader using a site like HoustonStreet.com can see a variety of offers and bids from other traders at any one time, and can respond to those bids and offers accordingly. Using a telephone, a trader can only “see” one bid or offer at a time. Additionally, `phones are not an efficient source for obtaining other critical information such as weather updates and energy news essential for making the best deals.
While recent headlines could lead one to believe that the Internet is the panacea to all of today`s problems, the best Internet applications fall into two broad categories: aggregating demand; and bringing individuals from disparate geographic locations together for a mutual purpose. Amazon.com and the many other online retailers are good examples of aggregating demand. Exchanges such as Houston- Street.com reflect the Internet`s capability to bring individuals together to transact business.
“HoustonStreet.com provides access to valuable market information through a single vehicle,” said Tim Charette, a trader with Energy Atlantic. “Online trading is the way of the future,” he added.
Initial forays into electronic wholesale power trading have offered some improvement over trades carried out over the telephone. But current Web sites and proprietary electronic trading floors often force traders to invest in expensive proprietary hardware and software to access the site so they can make deals. These proprietary systems are often closed, meaning that only traders who have purchased the same software and hardware can trade with each other. If the costs are high, a handful of traders may find themselves in a very small pool with limited options.
“The real-time environment of the Web naturally lends itself to trading wholesale power,” said Paul Messerschmidt, manager of power markets services at Energy Security Analysis, Inc. “But existing online products are inflexible and they typically require proprietary hardware or software. Houston Street is positioning itself as the industry`s wake-up call”.
HoustonStreet.com delivers a flexible, fully Web-based trading floor that provides quick links to the information necessary to make the best deals. Because it acts as a portal as well as a trading floor, the site allows traders to immediately access the most current weather, energy news and stock information without leaving the site.
A trader could buy a block of power a few days in advance, check the most updated weather forecast, and sell the block for a higher price (if he knows higher temperatures are coming) without having to log off from the site. The trader can personalize his desktop to track other links to information that interests him.
Power traders designed Houston- Street.com knowing exactly what type of information they need at their fingertips and how it should be presented so that users can make the most informed decisions. The designers have ensured that traders can buy and sell power based on the product and term of their choice, much like they do with a telephone, only more efficiently.
The site gives users total control over each transaction by allowing them to see every stage of the transaction. This way, a trader knows exactly where he stands with regard to the transaction. The site also allows traders to view their complete transaction history, sort offers and bids by price, term volume and delivery point, and trade 24 hours a day, 365 days a year.
Another key feature is its preservation of anonymity, a key power trading component. All trades on HoustonStreet.com are anonymous until after a deal has been finalized. Once both parties agree to the terms of the deal, Houston Street Exchange automatically sends a confirmation e-mail and fax to each party listing the details of the transaction, including quantity, price and other terms, contact names, phone numbers, e-mail addresses and fax numbers. It does not take title to power at any point during any transaction; the parties make payment arrangements independently.
HoustonStreet.com also allows users to enter their own information regarding trading agreements and credit status without betraying the anonymity of other parties. An icon on the site tells users whether they have an enabling agreement in place with a particular company without identifying the company until after the deal is finalized.
Knowing that an enabling agreement is in place and credit issues have been resolved beforehand gives a power trader an advantage in making split-second decisions.
HoustonStreet.com ensures secure and reliable transactions by using strictly controlled access protocols, independent firewalls and multiple system redundancies. Because of its ease of use and real-time environment, Houston Street.com allows power traders to complete more transactions, become more efficient and increase their profitability.
During the first four weeks of trading since HoustonStreet.com`s launch on July 8, 1999, the site`s users bought and sold more than 270 000 MWh, enough to serve more than 415 000 New England homes without interruption for four weeks. During the same time period, more than 60 per cent of the active wholesale power trading companies in the USA had either fully registered to trade power on the site or were in the registration process.
HoustonStreet.com now provides coverage for every power trading region in the USA, and the company intends to explore other markets, including international wholesale power trading regions, in 2000. For now, Houston Street Exchange`s primary focus is the USA.
Before launching the site in July 1999, the Houston Street Exchange founders recognized the need to move immediately to get the company and site up and running and take a lead in the market. Both the creative idea and the money to make it happen were in place. What was not in place was the staff and the infrastructure needed to get the company and the site off the ground.
The company founders recognized that the industry is poised to embrace online trading, and that market share and mind share would go to the first enterprise that could build and launch a viable, flexible site that gives traders what they need.
With that in mind, they decided to speed the process up by partnering with leading firms that specialize in different aspects of an Internet company`s operation. Houston Street Exchange partnered with Reactivity, Inc., MicroArts Corporation, Sapient Corporation and GTE Internetworking to design, build and maintain the site.
Houston Street Exchange tapped Reactivity to design the prototype based upon the Silicon Valley company`s expertise in identifying the latest technology to design Web applications. MicroArts developed the user interface, interactive marketing Web site and marketing plan for the product launch. Houston Street Exchange looked to Sapient`s extensive systems integration experience to build HoustonStreet.com.
Since the site went live, Sapient continues to provide technical support, MicroArts continues to drive the company`s marketing campaign and Reactivity acts as a virtual chief technology officer, monitoring the latest technology updates to improve the site.
Knowing the hardware and software demands it would take to run such an interactive Web site, Houston Street partnered with GTE Internetworking (GTEI) to host HoustonStreet.com. GTEI is a Tier I Internet service provider (ISP) whose core business is providing technology on the Internet. GTEI provides high-speed, high bandwidth connection to the Internet, sophisticated load balancing technologies, robust security and redundancy, as well as around-the-clock operations support.
Houston Street Exchange and Sapient Corporation used Microsoft technology to create the site. Sapient used a pure Component Object Model (COM) solution implemented in Visual Basic. Microsoft SQL Server version 7.0, Windows NT Server version 4.0, Internet Information Server and Microsoft Transaction Server power HoustonStreet.com.
More than 20 static HTML and Microsoft Active Server Pages (ASP) constitute the application`s presentation layer. Custom COM presentation manager objects, which support these ASP pages, generates dynamic content, responding to user actions and interacting with client-side business objects. Visual C++ and File Transfer Protocol (FTP) support the interfaces that allow users to access information such as weather and news headlines.
A new landscape
Nothing will ever fully replace personal communication in business. Everything from the handshake to interactive videoconferencing will continue to play an integral role in the way companies interact with each other. However, the wholesale power trading industry is beginning to change. As the inverse relationship between increasing competition and decreasing profit margins grows, so does the need to introduce more efficient systems.
While the telephone has long been a necessary tool for trading electricity, it has also become somewhat of a handicap to the industry by limiting a trader`s effectiveness. HoustonStreet.com answers this industry need and allows traders to buy and sell power more efficiently than ever before.
In doing so, it could help change the landscape of commodities trading, thus setting the stage for wholesale power to become the largest commodity traded around the world.