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News Analysis

Fortnightly Magazine - September 15 1999

of trading terms for accepted deals is provided through the site's automatic confirmation via fax and email. Two backup servers provide triple redundancy to ensure against site crashes due to overcapacity, such as those experienced by the eBay auction site. And system security is ensured through a threefold chain: (1) a user name and password required for logon; (2) the latest encryption technology; and (3) a firewall.

But how do traders know that their trading patterns and other information won't be tracked and sold? According to Getman, "We would be shooting ourselves in the foot to do that."

He added, "We really are building a community of traders. We want their feedback and we're going to build the system they want to use."

So is, in fact, the system traders want to use?

"The promo's been good, but I question whether the industry will embrace it," said Mark Williams, vice president of risk management at Citizens Power.

"It doesn't matter which [online] company you look at," according to Williams. "There are three fundamental problems [with e-trading electricity] from a risk management standpoint. If they can get past these three hurdles, they stand to be effective."

The first problem he cited concerns market risk caused by the high volatility of electricity, and the trader's need to be immediately responsive to price change. While the Internet may be responsive enough to accommodate trading less-volatile commodities such as stocks and bonds, Williams said, power can have volatility as high as 200 percent - many times that of natural gas, for example. This high volatility substantially raises the stakes in terms of price, so it is imperative that traders be able to act quickly to buy or sell.

Another area of concern, said Williams, is credit quality, and traders' need to manage credit exposure. He noted that most Internet-based trading systems have only a red light or green light to indicate whether trading parties may deal, limiting the traders' flexibility.

"That doesn't allow you to turn counterparties on or off on either a buy or a sell transaction," he said.

Williams said the last problem area concerns operational risk related to system reliability. An Internet system can fail due to anything from server and software problems to acts of God. "But whether the problem is internal or external doesn't matter," he said. "For me, reliability has to be 99.99 percent."

While any competition against brokers is beneficial, said Williams, they play an integral role in trading that a Web portal can't displace. "Brokers add market color. You get a sense of how the market is moving."

Despite its inherent risk, the lower cost of using Internet technology vs. proprietary electronic systems means it's only a matter of time before electricity is commonly traded on the Web, he said. "I think it's inevitable just due to economics. Cost as a barrier to entry is so low that people are just going to jump on this bandwagon."

But resistance to Internet trading will persist until systems reach near 100 percent reliability. High reliability is imperative, according to