How to Use A Mouse to Trade Power

So, its time for traders to put down the phone and pick up the mouse to trade some power. What's the first step? First, a company must register to trade by going to HoustonStreet.com Then, traders in that company can access the trading floor using a secure user name and password to buy or sell wholesale power. Each trading company has its own Web site, which lists historical information about trading on the site as well as historical trading information about the trades that trader has made. There is also access to weather information, energy headlines and full texts of stories.

During the bargaining process, traders can counter and recounter anonymously. An icon on the site indicates whether the necessary enabling agreement is in place with a particular company without betraying that company's anonymity until after the deal is finalized. Once a deal is finalized, both parties receive automatic confirmation messages via fax and E-mail. The messages list the details of the transaction, including quantity, price and other terms, contact names, phone numbers, E-mail addresses and fax numbers. At no time during the transaction does HoustonStreet.com take title to any power; the parties make payment arrangements independently. HoustonStreet Exchange charges the buyer and seller a commission for each transaction and sends a monthly invoice to its member companies detailing each transaction. Houston Street charges on a tiered rate structure in which the more power a person trades the less they are charged per megawatt hour. The charges start at 2 cents a megawatt hour and decrease to 1 cent a megawatt hour for larger trades. Phone traders normally are charged from 1 cent to 3 cents a megawatt-hour.

With HoustonStreet.com, traders can sort offers and bids by price, term, volume and delivery point; and trade 24 hours a day, 365 days a year to make deals anywhere from an hour to a year in advance.

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Say good-bye to the telephone. You won't need it anymore to trade electricity on the wholesale market if Houston Street Exchange has anything to say about it. In this Internet age, they think they have a better way, a way that allows power traders to execute their their trades at home, on the road or in their office using real-time pricing via a Web-centric service.

On July 8, Houston Street Exchange introduced the first completely Internet-based trading site for electricity -- HoustonStreet.com. The system launched in the Northeast and worked off the New England independent system operator and the Pennsylvania, New Jersey, Maryland interconnection. National rollout occurred Sept. 13, four months earlier than planned because of what the company called "positive user response." To trade on the site, users only need a browser. Registration is free. No proprietary software or hardware is required. And no telephone either.

"We don't pretend that people are going to put down their phone today," says Frank Getman, chairman of the Portsmouth, NH, company. In fact, initially, it may be difficult to get some traders to pick up the mouse and not the telephone, Getman says. But he believes Internet trading will take hold, especially since the company and its site development partner, Sapient Corp., tried to make the Internet trading process as similar as possible to the phone process. "People are now used to using the Internet in business transactions. Guys are using the Internet to buy and sell stocks. It's not foreign to them. By asking them to change their business process as well would represent a big hurdle,"Getman says. "What we're doing is just bringing a better platform for them to execute those trades."

Getman says HoustonStreet.com provides greater liquidity and greater price transparency for traders. He won't predict that using an Internet trading site will prevent price spikes, but he says it will improve efficiency in the market so trades can be executed in a more orderly fashion.

Paul Messerschmidt, manager of power market services for the research and analysis firm Energy Security Analysis Inc., says the HoustonStreet site brings to everyone's desk an easily accessible platform that provides speed and efficiency that phone trading can't provide. The down side of the site, according to Messerschmidt, is possible system failure.

Houston Street has contingencies for a failure, Getman says. The company built into the system triple redundancy. "If one server goes down, we have two other servers to back it up," he says. "We built it based upon where we envisioned the trading volume to be when this is a wonderful success."

And that could be fairly soon. The company hasn't calculated profit yet, but only because service from July 8, Aug. 31 was free and profits from September had not been calculated as of press time.

But Getman could verify that 270,000 megawatt-hours of electricity had been traded on the site during the first month. That's enough electricity to power 400,000 homes in the Northeast for the same four-week period.

More than 70 percent of trading companies in the United States (77 out of approximately 110) are registered or are registering to trade power using HoustonStreet.com. Of the 1,500 to 2,000 traders in the United States, more that 300 traders are registered on the site. The potential for the site is great considering that the wholesale power market is a $70 billion market. In the United States, wholesale power trading has grown by 900 percent since 1996. In 1998, more than 3 billion megawatt-hours were traded.

No Sweat
Tim Charette of Energy Atlantic is one of the energy traders registered on HoustonStreet.com. He performed three trades using HoustonStreet.com during the first month of operation and plans to use it more once additional companies sign up with the service. While Charette likes that the Internet system eliminates pressure from brokers to buy or sell, he says that phone brokers sometimes can offer better deals because they can negotiate lower rates from a seller and pass them to the buyer.

Ethan Cohen, an analyst in retail energy at The Yankee Group, says HoustonStreet.com eliminates the friction traders feel using three or four telephones to make on trade. Cohen thinks the ability of the site to display weather information, historical trading information, about the market and each user's own trades will make HoustonStreet.com successful.

"Any kind of Internet or Web-centered product like HoustonStreet.com has the potential to break the market wide open because the traditional paradigm of even electronic products has been in proprietary software offered to traders or trading companies at much greater prices and in a much more limited way than HoustonStreet.com. Is," Cohen says.

Companies such as Altra, Automated Power Exchange, and Bloomberg already offer electronic trading but require proprietary software. With HoustonStreet.com, there is no software to download or purchase, and updates to the system can be performed without requiring new downloads for users.

Success and Copycats
If things work out for Houston Street Exchange, more competitors will follow, Getman says. "Success breeds success," he says. "It also breeds competition and copycats." But Getman's not afraid of a little competition. "It [competition] validates that this is where power trading is headed and this is where the market is going."

Cohen cautions that it may be difficult to dislodge traditional competitors but says, "I think Houston Street and its solution has the potential to do that. If it's not Houston Street, it will certainly be some sort of Web-centric solution."

Getman says his company will succeed partly because it solicited input from traders throughout the development process and after the initial rollout in the North East. The comments received led to some changes with the Sept. 13 national rollout. For example, now the system has one button that allows traders to cancel or suspend all bids and offers if the market suddenly becomes volatile. In addition, the site now has a chat line because traders said they like to be able to banter with each other.

"That being said, the number one thing to them [traders] is being able to negotiate anonymously," Getman says. "The Internet is actually a great platform for this. Anonymity is assured with negotiating on-line yet the chat functionality enables users to stay connected to other traders."

Where to Next?
Getman hesitates to make projections about expected profits from the site. BayCorp Holdings., the parent company of HoustonStreet Exchange and the deep pockets that funded the whole site, is a publicly traded company and discourages protections. Getman does project that the company will move into other trading areas within electricity and outside it. Those moves won't include retail trading. With the Internet, anything is possible. The HoustonStreet.com site makes for an interesting convergence between cyberspace and electricity, Messerschmidt says, "because just as the Internet is a virtual space, electricity is a product you can't see, you can't smell , you can't taste."

But both forces have come together and, according to Cohen, could become the main avenue for wholesale power trading within the next three years. It all hinges upon the success of products like HoustonStreet.com and the willingness of traders to change the way they do business.

by Pam Kufahl, senior editor       

Reprinted with permission from the October 1999 issue of Utility Business. Copyright 1999, Intertec Publishing. A PRIMEDIA Company, Overland Park, KS. All rights reserved.