A MASSIVE, WORLD WAR I-era building in downtown Baltimore houses Constellation Power Source, an unregulated, wholly owned power-marketing subsidiary of Baltimore Gas and Electric Co. Upon introducing the new company in February, BG&E announced that Goldman Sachs would serve as "exclusive advisor" for the start-up.
Later, when asked to clarify the relationship between the two companies, Charles W. Shivery, chair, president and CEO of Constellation Power Source, acknowledged that, "We always get asked this question and it's covered by a whole set of confidentiality requirements."
Constellation Power Source he explained, has an "exclusive advisory and risk management relationship" with a Goldman Sachs subsidiary, Goldman Sachs Power. "The benefit we get is that Goldman Sachs Power has a lot of experience in trading commodities and they have a lot of experience in managing risk associated with trading those commodities. We have a lot of experience on the physical side of electricity1/4 What we've really done is melded the core competencies together1/4 into a company that brings together the best of those worlds."
Constellation Power began trading long-term electricity in May, when it received its wholesale power marketing license from the Federal Energy Regulatory Commission. CPS is just getting into the hourly and daily markets, Shivery explains, during a tour of the company's temporary electricity trading floor. (A move to permanent quarters in the Inner Harbor area is set for January.)
Constellation Power's efforts marks just one example of evolving commodity markets in electricity. As the power market grows from regional to national in scope, utilities turn increasingly to spot traders, brokers and futures trading, just as the natural gas industry did a decade ago. Some utilities are setting up separate, unregulated subsidiaries to do their power marketing. Others are simply adding electricity trading floors to their regulated business, which, it can be argued, is a natural outgrowth of the dispatch center.
Part of a New Culture
BG&E's gas marketing subsidiary, Constellation Energy Source, migrated into the marketing and trading arena three or four years ago, Shivery says, but its gas trading floor will remain in Houston for now. Although gas and electric deals exhibit certain obvious physical differences (em primarily the lack of storage capability for power (em the two do share similar "philosophical" issues, he notes. "The ability to price gas and manage the risk associated with gas is conceptually the same as managing the risk of any commodity1/4 except the database for electric is not anywhere near as lengthy or complete as the database for gas."
Cynthia Kase, a former oil trader who teaches technical trading, derivatives and risk management courses, confirms that assessment. Kase, who publishes GasFax, a weekly analysis and forecast report for the natural gas industry, notes that the gas futures market is liquid, actively traded and has a statistical base to watch. Electricity, on the other hand, represents a new contract with limited activity. Most electric markets don't even deal in futures contracts.
The "real dividing line," she says, lies between East and West. There is no transparent pricing in electricity (em no East Coast trading hub, such as exists in the West, with the Palo Verde [Arizona] and California-Oregon border hubs. Her guess is that another hub will emerge by next summer: if not on the East Coast, then perhaps in Kansas City.
Trading and managing a commodity requires a different mind-set than purchasing power for immediate transmission and use. "Many utilities are not only very ignorant but also don't know what they don't know," Kase explains. Nevertheless, Kase says she expects to see the electric industry begin to pay a lot more serious attention to risk management and energy trading. The number of utility executives and power traders attending her courses and speeches at conferences has increased noticeably in the past year or so, she says.
A new report from Price Waterhouse World Energy Group, Critical Issues in Energy Risk Management, also notes a "clear trend toward greater use of risk management techniques" in the energy industry. The report continues: "Increased competition between energy providers has narrowed profit margins. If energy companies hope to gain a competitive advantage, [then] they must improve not only their risk management services for customers, but their expertise in managing the increased market risk of their own portfolios."
Constellation Power Source "is designed as a company that meets customers' energy requirements," according to Shivery, which "typically means that eventually power has to be delivered to that customer." But, he adds, "It's also a company designed to make money1/4 and we do that by meeting the needs of our customers essentially on a national basis. We may buy electricity in Carolina and sell it in Ohio. We can make money doing that. [By contrast] the utility has no need to buy electricity in Carolina and sell it in Ohio. The utility has a responsibility to meet its load in its service territory. And it does that by generating itself or by buying from someone else1/4 the most efficient way that it can."
Electric restructuring, Shivery continues, marks "just the next step in that evolution of moving from regulated to competitive industries. With that change comes the realization that the marketplace in which energy companies will deal will be different. And it means that energy companies have to change themselves in order to be successful in a very changing environment. CPS is just one of those changes [BG&E] made in order to continue being a successful company in a changing environment. I like the way this company is moving."
Let's Make a Deal
One of the top power marketers, based on volume, is LG&E Energy Marketing. The company was created earlier this year by the consolidation of LG&E Natural (a natural gas trading and risk-management unit) and LG&E Power Marketing (which, as a subsidiary of investor-owned LG&E Energy Corp., was one of the first utility-affiliated power marketers to be licensed by the FERC in 1994). The group is now headquartered in Louisville, Ky. Thirty to 40 traders deal not only in wholesale electricity and natural gas, but also in coal and emission allowances, 24 hours a day.
LG&E uses the New York Mercantile Exchange as a basis for pricing and other exchanges but, given the company's size, "we're not as active on it as people might think," representative Stephen Cave says. The power marketer also sells a lot on spot and daily markets, and most transactions are over-the-counter (em that is, bilateral transactions that take place directly between the buyer and seller.
When asked how much trading is speculative, versus geared to ultimate delivery to end users, an LG&E trader said initially most of the company's business was to meet end users' needs. Now, the volume is more from the investment side. And the old-fashioned method of telephone or face-to-face meetings still takes precedence over electronic commerce, he added.
Just because a company has a trading floor (em a room filled with the latest technology, computers, people following the next-day or next-month price of electricity (em doesn't mean it's trading electronically, warns Stan Stasiak, executive director of marketing for the Continental Power Exchange in Atlanta. According to Stasiak, too many companies still rely on the traditional method of phone calls and fax machines. (An unofficial industry estimate is that only 1 to 2 percent of all transactions are electronic.)
The NASDAQ updated its electronic trading system last year, Stasiak says, and as a result, buyers and sellers can execute trades online. The electric industry is moving in that direction, Stasiak acknowledges, but not as fast as his company would like.
Continental Power Exchange is one of a new breed of players in the electricity industry. Neither a power marketer nor a broker, CPEX serves as a market gateway (em as an "information system" with two distinct functions. Since July 1995, CPEX has allowed utilities, federal power agencies and power marketers to arrange 24-hour spot market purchases via a real-time energy exchange. CPEX also enables participants to arrange transmission, or wheeling, via access to all OASIS nodes (see sidebar).
Automated Power Exchange, a start-up company in Los Altos Hills, Calif., aims to be another matchmaker. Like CPEX, it won't be using NYMEX futures, Vice President Jack Ellis says. Although futures contracts help give the market a certainty of price paid, Ellis said, APX staff will be putting together buyers and sellers of electricity with the intent to deliver power.
"None of our staff will be traders," Ellis says. "We will not initiate trades. If a customer wants power, they will send us an order to buy or sell, based on the prices we show for 168 hours [one week] in advance, and we will put buyers and sellers together."
That still may mean, however, that blocks of electricity could be traded 15 times before any of the power is actually delivered. "The quantities that go to delivery are a small percentage of actual trades," Ellis notes.
APX will open for business on Christmas morning, as it helps put together deals for delivery the week of Jan.1. The company already has a service agreement with the Bonneville Power Administration. At press time, APX reportedly was completing agreements with other interested parties, including the Northern California Power Agency, Salt River Project, Calpine Corp. and Edison Source.
Finding the Big Dogs
So, who are the companies trading the most energy? Well, it depends.
The companies in the chart below are registered as power marketers with the FERC. (As of Sept. 4, the FERC had approved rates for at least 324 registered power marketers; rates were pending for another 43 applicants.) Some, as noted, are utility affiliates. Yet nearly 60 other investor-owned utilities are also trading huge amounts of power using FERC-approved (or pending) market-based rates (plus a small profit margin) without setting up separate subsidiaries.
The PECO Power Team, located in a Philadelphia suburb, bought and sold 40,000 gigawatts in FY '96, a representative says. The Power Team (em a staff of 65 that includes accounting, administrative, legal and trading personnel (em was set up in 1994 as a division of PECO Energy Corp. Why didn't PECO set up an unregulated affiliate? "We weren't required to be a separate subsidiary," and strategically the Power Team fit into the company's business plan to be a division, company rep David Grier explains.
Consolidated Edison Co. of New York, Inc., opened a new trading floor in its Manhattan headquarters in September. ConEd, which has been trading bulk power since 1993 through its energy trading department, known as The Megawatt-Hour Store, received FERC approval for a market-based rate tariff March 14. In 1996, TMHS sold 3.9 million megawatt-hours of electricity. That volume would have put them in the number 13 spot for the year ahead of Southern Energy but behind Dupont, "if we had been classified as a marketer" then, says Ken Bekman, a former TMHS proprietor at ConEd.
The FERC also approved ConEd's unregulated power marketer subsidiary, ProMark Energy Inc., in March. ProMark, which was formed initially to make gas deals, changed its name Sept. 24 to Con Edison Solutions. As an energy services company, ConEd Solutions will expand beyond just energy trading, although that will continue, says Michael Forte, general manager of Con Edison's energy trading department. (A recent agreement between ConEd and the New York PSC allows the use of the parent name with unregulated subsidiaries.)
Forte asserts that although ConEd Solutions will be able to serve customers outside the company's traditional service territory, the primary focus of both TMHS and Con Edison Solutions will continue to be "to buy low-cost power for our own franchised area customers1/4 We will continue to invest in the wholesale trading function," he continued, "as it makes sense to lower costs for our customers." F
Lori M. Rodgers is an associate editor with Public Utilities Fortnightly.
OASIS: More Than a Mirage
THE FERC-mandated, electronic open-access, same-time information system is used for scheduling transmission. Industry players cannot purchase power on OASIS, although that day may come.
Before that can happen, however, most industry participants agree the speed and ease of scheduling and handling next-hour reservations needs improving. (See "Inside Washington," Sept. 15, p. 52). Because of the slowness and difficulty participants have encountered, many transactions reportedly are worked off-system, which tends to negate the "electronic" aspect of the system. Companies that do business off the system now must post those transactions on OASIS within an hour, according to Peter Hirsch, with EPRI's Power Delivery Group.
It's "surprising" to see how much next-hour market activity has occurred, Bill Booth says, chief of market oversight and information at the FERC. He says OASIS wasn't designed to handle the current volume. The demand didn't seem to exist for those types of transactions, he says.
OASIS is evolving to meet the needs of its users, however. Early next year, implementation of OASIS will move from the current Phase I to Phase IA. According to Hirsch, the updated system will:
• allow buyers and sellers of energy to negotiate prices other than the price that is offered online;
• allow users to link ancillary and transmission services in one request;
• provide dynamic (em or automatic (em notification when there is a change in a customer's request status; and
• better define capacity type, using standardized terms.
Phase II likely will be implemented in late 1998 or early 1999, Hirsch says. That phase will integrate energy reservations with scheduling and transmission reservations, a process known as "tagging."A report on the future direction of OASIS by the EPRI-led How Working Group was due to the FERC Oct. 31.
The North American Electric Reliability Council also is studying the issues of tagging and transaction management. Though the two groups are looking at the issues from "different directions," according to EPRI's Hirsch, it's possible their two visions of the electronic future of the electric utility industry may merge.
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