The Federal Trade Commission likely will regulate those business-to-business Web portals, but how much?

Electric utility executives may be a step behind the Internet revolution, but in one key respect they may have an advantage over anyone else building an e-commerce Web portal for business-to-business (B2B) procurement.

Utility executives don't fear government regulation. They're already caught in the net.

That affinity may in fact prove downright useful. Consider the comments and reactions heard in Washington, D.C. in late June, when business leaders from around the country gathered with government regulators at the U.S. Federal Trade Commission to share ideas on how to avoid collusion and ensure fair trade when industry competitors collaborate in e-commerce ventures.

The public workshop, "Competition Policy in the World of B2B Electronic Marketplaces," took place less than three months after the FTC had issued new antitrust guidelines for evaluating "collaborations among competitors," including joint ventures and strategic alliances. In that action, taken on April 7, the FTC had referred specifically to purchasing collaboratives to centralize procurement. It said such deals could "facilitate collusion" by standardizing costs or enhancing a competitor's ability to "monitor a participant's output level through knowledge of its input purchases."

And at the workshop itself, the discussions revealed a definite concern for antitrust issues and a leaning by the participants and hosts alike toward regulatory oversight.

Susan S. DeSanti, director of policy planning at the FTC, set the tone in her opening remarks. "B2B e-marketplaces offer opportunities for substantial productivity-increasing effects, but also raise concerns. Collusion, monopsony, and exclusionary conduct preceded the e-commerce revolution and will no doubt succeed it as well," she said.

Certainly, the possibility of the FTC taking a more active role in overseeing B2B platforms is of particular interest for the many e-procurement ventures by the electric utilities industry. In one of the earliest such ventures, for instance, PG&E Corp. and 20 other major energy companies created the Pantellos Corp. to operate and manage an open, independent Internet marketplace for the purchase of goods and services between the energy industry and its suppliers.

FTC rulings on e-commerce marketplaces also might affect the scores of energy trading platforms being built by utilities and power marketers. For example, Aquila Energy (a subsidiary of UtiliCorp United), Duke Energy, American Electric Power, El Paso Energy, Reliant Energy, and Southern Company Energy Marketing (a unit of Southern Co.) have entered into an agreement to purchase an equity position in Intercontinental Exchange, an independent online market for energy and metals.

In addition, Williams and Dynegy formed an energy-trading platform named E-Speed, while Enron and Coral Energy, an affiliate of Shell, built Internet-based transaction systems for customers to buy and sell energy-related products directly with them. Then there are the scores of independent e-commerce energy trading exchanges such as Altrade, Houston Street, Red Meteor, and the Intercontinental Exchange.

And new platforms are being created all the time. American Electric Power, Carolina Power & Light, Duke Energy, and Unicom will launch an independent Internet-based exchange that offers a single gateway, or portal, for arranging electric transmission capacity.

Overall, most of the FTC commissioners seemed content at the workshop simply to foreshadow the possibility of regulatory oversight rather than arguing for a plan of action. The FTC regulators preferred to be in "learning mode," as they called it, and that comment appeared to please many in the audience.

Yet at least one other regulator saw potential problems of biblical proportions.

"I wonder if there is a serpent in the garden of [B2B] efficiencies," remarked Bill Cohen, deputy director at the FTC, perhaps skeptical of the "invisible hand" argument made by many executives, who argued that market forces would provide the best oversight.

Such fire-and-brimstone references may have put industry on the defensive. Analysts interviewed during and after the meeting noted that workshop participants spent their energy debating which e-commerce model deserves the most antitrust scrutiny, when they could have presented a united front against federal regulation.

For example, executives representing suppliers argued heatedly that consortium exchanges led by buyers would erode their profits to the point of bankruptcy.

"Buyer exchanges lower costs by starving the supply chain downstream," said Harpal S. Sandhu, president and chief executive officer at Integral Development Corp., a provider of B2B e-commerce software and services for capital markets.

Suppliers, he said, are concerned with rules dealing with fairness and unfairness.

"In the next four years, there will be 10,000 verticals," added Stephen Attanasio, president and CEO at WIZNET.Com, a content provider for e-commerce platforms. "How do you keep intellectual property, specifically? I don't want new business rules [on how to present my product on exchanges] because it will commoditize my product."

Buyers, on the other hand, alleged that supplier-led exchanges would lead to cartels that arbitrarily set prices too high and slash the buyer's profits.

"Supplier-led exchanges could lead to price-fixing, restriction of access, dissemination of information to suppliers, or preferential treatment," said one workshop attendee, adding that some suppliers may exclude other suppliers.

One antitrust lawyer attending the workshop was more blunt: "Collusion is not only possible, but likely."

Privacy Concerns: Can Gaming Be Prevented?

Some at the meeting raised concerns about privacy and criticized both supplier- and buyer-owned exchanges for their claims in neutrality.

Setting up a procurement exchange owned by competitors that conduct "arms-length" transactions with the "independent" company they've formed may not be enough to ensure the security of competitors' sensitive corporate information, said Kaushik Shridharani, managing director in equity research at New York investment bank Bear Stearns & Co.

In addition, he said, without regulatory oversight, consortium-led exchanges may be induced to perform "front running." Front running is a practice whereby a securities or commodities trader or the owner of a procurement exchange takes a position to capitalize on advance knowledge of a large upcoming transaction expected to influence the market price.

"For example, if Exxon-Mobil needs chemicals within a week, the price of that chemical will go up," Shridharani said.

To prevent that information from being used to game the market, Exxon-Mobil will want assurances such as non-disclosure agreements in all supplier deals, he explained. But non-disclosure agreements may not be enough.

"How can front running of customers trades be stopped? How do you protect information flows?" Shridharani asked. "Some of these exchanges clearly have an incentive to control the price that they will sell at."

Web hubs still pose more questions than answers, but the answers are coming at Internet speed. New business-to-business (B2B) exchanges across diverse industries are being announced at a rate almost too fast to track. But many of these exchanges haven't yet moved from the announcement stage to actually conducting their first transaction, suggesting that more than a few companies simply are eager to be "on the e-commerce bandwagon." Although the electric utility industry historically has been slow to react to business trends, including e-business, a group of utilities is creating its own B2B exchange. And while this initiative comes a bit later than efforts in other industries, in the evolving B2B space, the utility industry may not really be that far behind. Pantellos in Process. The Pantellos Corp. was announced in June as an independent Internet market for the purchase and sale of goods and services between the utility industry and its suppliers. This electronic marketplace was formed by 21 member utilities that also are investors, including PG&E, Duke Energy, and Reliant Energy. While no public plan exists for future liquidity events, it is likely that the lure of IPO riches is what motivated these most cautious of investors, the utility companies themselves. The utility members of Pantellos haven't disclosed whether they will commit a set percentage of their annual procurement spending to the exchange. The likely rationale in enlisting 21 partners was to capture enough business to provide instant liquidity to the exchange, liquidity being the most critical success factor for any business exchange. In line with that goal, the exchange also will need to attract non-member utilities. That will hinge on the exchange providing cost savings and efficiency. The exchange also should incorporate content, community features, and a positive user experience. Pantellos is not alone in the B2B utility e-marketplace. In the coming months, other energy companies likely will band together to create utility industry exchanges. Independent electronic exchanges that serve cross-industry needs, such as FreeMarkets.Com, VerticalNets, and MRO.Com, are transacting business and possess the bandwidth to reach utilities. Independent exchanges will continue to outpace their industry rivals, as within-industry exchanges force competitors to collaborate. Profits for Suppliers? An important goal for a B2B exchange is to provide the real-time pricing and product availability that will introduce the efficiency needed to reduce prices. However, cost savings from exchanges that follow an aggregator model (i.e., many buyers and sellers) cannot come at the expense of the sellers. Ideally, small as well as large suppliers will have ample opportunity to gain market share. In reality, however, smaller vendors in the exchange may be forced to consolidate, because they may not be able to lower their prices enough to compete directly with larger vendors. Furthermore, sellers participate in an exchange at the expense of traditional distribution channels that may offer substantial benefits. In some of the press regarding Pantellos, the utilities mention that they will procure big-ticket transmission and distribution items like power lines, poles, and transformers through the site. However, it is more likely that traditional MRO (maintenance, repair, and operations) goods, like office supplies, will be the first items to be purchased through e-procurement. Utilities will be less likely to forgo long-held vendor relationships with industry giants for their big-ticket, customized items. First Movers Draw Scrutiny. The market power some online exchanges recently have exhibited has raised the interest of the Federal Trade Commission. B2B exchanges such as Covisint, the automotive exchange started by Ford, GM, and Daimler Chrysler, as well as an evolving airline consortium, have come under FTC scrutiny. Thus, as participants in e-hubs centralize and streamline functions, it will be a challenge for these online exchanges to stay within the bounds of what the FTC deems to be fair trade. In the end, the convenience and savings of exchanges likely will be enough to move the utility industry into the e-business arena. However, the perception of bias may preclude non-members from participating in exchanges. The following metrics have been vital to the initial success of online exchanges: few companies leading the effort, quick alignment with technology partners, rapid adoption by the CEO and supporting team, the attraction of big-name sellers that can bring big-name buyers, and alignment with industry-accepted purchasing practices. Above all, the ongoing activity in e-procurement is sure to spark some provocative explorations into the issues and opportunities of e-commerce as its potential is widely recognized. Stay tuned!

Shridharani recommended that risk management, fraud-detecting technologies, and insurance against loss of sensitive corporate information be developed to guard against market power on procurement exchanges.

Nevertheless, he worries that industry-affiliated exchanges are slowing the development of independent exchanges because of the "psychology of intimidation." In other words, said Shridharani, "Independents are worried about keeping their competition."

Enron expressed such worries about utility-owned exchanges in public statements to the FTC:

"Enron shares the FTC's concerns, however, that the transition to electronic commerce ('e-commerce') may result in anti-competitive activity as individual companies employ illegal tactics in an attempt to protect and extend their monopolies into new markets. As a result, Enron cautions the FTC to monitor e-commerce developments to ensure that individual Internet business proposals are truly pro-competitive."

The energy marketer added that it should be a requirement that B2B have firewalls or protective measures to guard against improper flows of information.

But even Enron itself may not escape antitrust scrutiny.

Vinod K. Dar, CEO and founder of Energy E-comm.Com, a vertical business search and knowledge-mining platform, said that independent trading exchanges may be at risk of gaming when linked with proprietary trading platforms such as EnronOnline. He explained that while having many independent markets linked online creates efficiencies, linking different types of platforms may create market distortions.

For example, Houston Street, an independent trading exchange, announced a memorandum of understanding with Enron in mid-July. Under this arrangement, North American electricity and natural gas prices posted on EnronOnline automatically will be posted on HoustonStreet.Com. Traders will be able to act on the EnronOnline prices via either platform. EnronOnline also executed a memorandum of understanding to connect its trading system to the independent True Quote energy exchange, to which PG&E Corp. has committed some of its energy trading volume.

Dar said that under such circumstances, energy traders, who have an incentive to front run, might try to force exchange prices to move in favor of their trading books. In other words, Enron more easily could game the prices offered on the independent exchanges.

A spokesman for Enron, however, argued that the link up to the exchanges is merely another distribution channel for displaying prices. "Enron could offer the same price whether it was linked up to Houston Street or trading on Houston Street."

The spokesman denied that Enron could manipulate prices on the neutral exchanges. "In the end, it is going to be about offering the best price," he said.

Meanwhile, Dar suggested that Enron's decision to link with the independent exchanges might be a survival play. "It's a matter of business model evolution; Enron knows that proprietary online trading forums will be supplanted by huge neutral or independent digital, many-to-many markets."

Dar speculated that Enron was transitioning from a closed proprietary to an open independent e-exchange.

"The sharing of price postings is the first baby step; having used a proprietary online trading floor to reach transactional critical mass, Enron may be ready to evolve its business model so in a year or less it could do an IPO of the business as a leading independent T2T [trader-to-trader] e-exchange."

Protecting National Security: Technology Isn't Enough

To the surprise of many, the very Web technology developed to protect the integrity of corporate buying and selling habits on e-exchanges was called into question at the FTC conference.

"Much of the hardware and architecture was never designed to have the level of security to prevent outsider intrusion," said Jeffrey Hunker, senior director at the Critical Infrastructure Assurance Office (CIAO), part of the White House's National Security Council.

The President's Commission on Critical Infrastructure Protection was the first national effort to address the vulnerabilities created in the new information age. The commission, established in July 1996 by Presidential Executive Order 13010, was tasked with formulating a comprehensive national strategy for protecting the Web infrastructures from physical and cyber-threats. Critical infrastructures are defined as systems whose incapacity or destruction would have a debilitating impact on the defense or economic security of the nation. These include telecommunications, electrical power systems, gas and oil, banking and finance, transportation, water supply systems, government services, and emergency services.

In a late-June hearing before the House Government Reform Committee, Subcommittee on Government Management, Information and Technology, John S. Tritak, director at the CIAO, outlined some of the risks.

"Restructuring, including deregulation, is driving companies to apply these new [Web-based] technologies more widely to perform core business functions and operations," he said.

Tritak acknowledged that there will be benefits, but with those benefits come risks. "The interplay between complexity and technology increases geometrically the different ways technical failures can occur. More importantly, cyber tools are readily available to individuals or groups to attack and disrupt our infrastructures, whether for fun, profit, revenge, or political or strategic gain."

Charles Maglione, industry director at Proxicom, an e-commerce industry consultant and developer, while acknowledging that security is a real concern, said that software and middleware in place provide more than sufficient security.

Other executives simply called for the FTC to oversee industry-affiliated exchanges. But even the FTC's involvement presents a technological challenge, said analysts.

"How will a slow-moving government bureaucracy like the FTC be able to enforce its laws in the warp speed, point-and-click world of e-commerce procurement?" critics asked.

Energy E-comm.Com's Dar highlights some of the e-commerce challenges for regulators.

"[For example, suppose that], using the Net, a U.S.-domiciled merchant of gas, electricity, and bandwidth sells a bundled offering that has convergent pricing with a participating swap feature and cash flow financing to a multi-facility industrial with plants in the U.S. and Canada," he said.

"The transaction occurs on a server in the Grand Caymans; the payment is made via an encrypted disbursement account in the Bahamas to a receiving account in London, which uses a website sitting on a host facility in Ireland." The transaction originated via an e-mail proposal delivered by the U.S. merchant's U.K. arm to the U.K. parent of this industrial. The email server sits in Houston.

"What regulatory authority governs this transaction: the FERC, the FCC, the CFTC, the IRS, the FTC, or no one? Or is this transaction illegal?" he asked.

Dar questioned whether U.S. regulatory agencies will be able to track business transactions in cyberspace, and said international regulatory obstacles may deny the government access to corporate transaction data. Enforcement of reporting also may be difficult.

"I don't think the U.S. government is going to send in the Marines to attack Caribbean-based corporate data havens," he joked.

Market Power: Is Smart Software the Equalizer?

Many e-commerce executives, quizzed by the FTC about market power issues, saw a possible solution in software that scans various markets for the best price. They claimed that these programs would eliminate the need for regulatory oversight because they make it impossible for B2B marketplaces to collude by making the price available at all times to all participants.

In their present form, these software programs, known as "shop bots," compare prices among multiple electronic vendors, and in some cases, traditional retail vendors, as well. In response to a query such the title or brand/product description, a shopping bot will return a sorted list of prices and product descriptions, sometimes including comparative shipping costs, according to Jared Hansen, of the marketing department at Brigham Young University.

According to Hansen, there are four basic types of shopping bots, although only the first is truly a searching "bot"; the others are compiled guides and directories: (1) pure search engine price/product locators; (2) vendor-partnered shopping guides; (3) category-specific comparison services; and (4) human-based interaction.

But other e-commerce executives argued that "shop bots" pose regulatory obstacles of their own because of copyright issues.

For example, when auction giant eBay Inc.'s prices were being searched by auction aggregator Bidder's Edge, eBay cried copyright infringement. eBay's lawsuit contended that Bidder's Edge was trespassing when it culled listings from deep in eBay's site. In late May, a federal judge sided with eBay Inc., and issued an injunction barring Bidder's Edge from using an automated system like a Web crawler to search eBay's site for information about its auctions, according to a report in Computerworld Online. A California law that prevents unauthorized computer intrusion into databases also protected eBay.

"People forget that prices quoted on the New York Stock Exchange or the New York Mercantile Exchange are copyright-protected," said one executive.

Consequently, the use of shop bots would either have to be through agreement among industry exchange owners or by pronouncement of the FTC, said a workshop participant.

Others argued that even without shop bots, e-commerce markets that exhibit market power will be disciplined by new entrant independent exchanges at the first opportunity.

"If buyers and sellers share too much information and prices are [affected], the market self-corrects," said Mark L. Walsh, president and CEO at VerticalNet, an owner and operator of industrial trade communities.

But Walsh said that worse than collusion is the denial of information by some exchanges to other exchanges. "The problem is not the information itself, but denial of information," he said.

In addition, workshop participants representing suppliers claimed that supplier-led exchanges may introduce procurement catalogs that are seen by some rival suppliers and not others.

Moreover, Walsh believes that there are industries where geography and integration can be a barrier to entry. He explained that after big companies have spent millions integrating their back-office systems with two or three exchanges, they will be less likely to jump to yet another exchange.

FTC regulators questioned whether interoperability standards could pose another significant barrier to entry.

"What happens if [one market] is selling a product that cannot be found on the other?" asked Gary Fromer, vice president of new business and partner solutions at SAP America.

"As market places achieve critical mass, there will need to be industry standards," Fromer said. He added that interoperability has not been enough of a problem to require a standard.

Commerce Extensible Markup Language (cXML) was used to get the inter-exchange started, he explained. cXML began as a collaboration among more than 40 companies looking to reduce the costs of online business. It is used to standardize the exchange of catalog content and define request/ response processes for secure electronic transactions over the Internet. The processes include purchase orders, change orders, acknowledgments, status updates, ship notifications, and payment transactions.

But Rod Gray, chief financial officer at Petrocosm, a procurement website that enables companies to buy and sell products and services in the oil and gas industry, said that it was the financial barriers that led oil majors such as Texaco and Chevron to seek an alliance or ownership stake in Petrocosm.

"You need liquidity equating to $10 billion to make your market. It cost between $100 and $200 million to create Petrocosm.Com. The efficiencies of sharing costs of creating the exchange and lowering transaction costs were better than having 25 different sites," he said. Gray predicted that Petrocosm will be one of at least five exchanges.

"Ownership does not have anything to do with the exchange being successful and it being seen as neutral, because it will be the volume that drives it."

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