Managing the Risk of ETRM Implementations by Patrick Reames

Last month UtiliPoint completed a “snapshot” survey of companies which had recently completed ETRM implementation projects. One of the more startling results from that survey was the fact that more than a quarter of the 35 respondents said that their projects were not successful. Given that the average cost of an ETRM implementation project (according to the survey and UtiliPoint's prior research) is more than TWO times the cost of the license, the cost of an implementation failure can easily exceed several million dollars.

So, what can be done to ameliorate the risks and help ensure that your project does not become one of the failures? As anyone with experience in implementing large scale projects of this nature can tell you, there are many established “rules of the road”—put your best, most knowledgeable people on the project; create and execute against a comprehensive plan; ensure that senior management is onboard and involved; ensure that the vendor is dedicating quality resources to your project; and utilize professional project management techniques and methodologies. These are but a few of the elements that are necessary to make a large scale project successful.

However, the realities of running a business can and generally will conflict with many of these rules. Can you afford to dedicate your very best people to the project, removing them from their day to day responsibilities? Can you convince your executive staff to provide the dollars and resources necessary and ensure that whatever process changes are required are made and enforced? Can you exert enough influence on your vendor to ensure their best resources are dedicated to the project? Do you have the necessary project management skills in-house to guide the project to success? Ultimately, all projects involve some compromise in terms of balancing the ideal vs. the practical reality of limited resources.

We wanted to find what single element, more than any other, should never be compromised—the element that may ultimately determine whether your ETRM implementation project is successful or not. So, we asked many of the industry's leading authorities, those people who are responsible for delivering successful ETRM implementation projects—the system and services providers - a group of individuals that brings with them the experience of hundreds of ETRM projects.

So, the question was asked…

“Acknowledging the fact that every customer is unique in terms of resources, assets and business process—what, more than any other, is the most important element in ensuring success for an ETRM implementation project?”
Austin Morris, Managing Partner—Energy, SunGard Consulting Services: “I would have to say it would be having senior management support and ongoing, active involvement throughout the entire project. This includes post-implementation. One of the quickest ways to have an ETRM system fail after implementation is to have the users go back to previous processes and not successfully continue to use the ETRM system. These projects can be hard on the user community and without the senior management support the projects will have a low probability of long-term success. In addition, confirm that upper management has clear expectations about the length, resource commitments, and costs of the project, and they confirm they understand and agree with the benefits to be expected from the system. This will help ensure their support throughout the entire effort.”

Ian Clarke, Senior Manager, The Structure Group: “The selection and implementation of an ETRM system requires an organizations' solid commitment, from senior management, to traders and analysts. Engendering a sense of ownership at all levels provides a strong foundation that contributes to the project's success. Above all, the right resources need to be available at the right times to minimize delays and to ensure that the right functionality is put in place. For example, business users should not only be actively involved in the requirements-definition phase, but also during demonstrations and system testing; after all, they will be the primary users of the system. They should be apprised of implementation progress to minimize surprises and avoid scope creep. External resources also play a vital role because their experience in previous ETRM projects helps identify and mitigate areas of risk and enables them to manage expectations, which often run high with both the client, who wants to get as much as possible, and the vendor, who strives to please the client, yet runs the risk of over-promising.”

Claudine Trottman, Manager—Risk Solutions, RiskAdvisory (A Division of SAS) : “The success of an ETRM implementation is heavily correlated to the amount of time that knowledgeable resources - from both the customer and vendor organizations—dedicate to training, establishing best practices, defining roles, compiling data and identifying custom requirements. Without dedicated resources, organizations may shorten the necessary implementation phases in order to accommodate the “go-live” date, leading to a scramble by the time the production roll-out date approaches. The consequences can be painful. Months of process overhauls and data-cleanup efforts may ensue. Having dedicated and experienced resources on hand during the entire length of the project—and especially from the beginning—will ensure that the ETRM system's integration into the company's overall strategy is successful, efficient and complete.”

Alan Somerville, VP Operations, EMEA, Global Energy Decisions:
“…The most important success factor is a solid project approach; if a project is not executed professionally by dedicated staff, against a well defined and practical plan then the possibility of success is significantly reduced. Project scope is a significant factor to get right from day one; the more complex or demanding the requirements, the more complex and risky the implementation. Many implementations fail due to extended requirements which do little to provide improved business benefits and do not justify the time, money or risks of including them in scope. Selection of a vendor who can work effectively with a company is important to get right up front. Evidence proves that executing a successful ETRM implementation project is as much about effective project management, rigor of approach and processes as it is about functionality and scope.”

Mike Burger, Managing Director, Business Consulting, MRE Consulting: “ETRM projects are complex and unique, and they do not have only one key to success. I believe they require four critical ingredients, with the most important being experienced, commercial representatives participating on the project (not new employees or "part-time" resources). Additionally, software selection should be unbiased and scored against fully documented requirements; the system's vendor must provide adequate support and be committed to the project's success, particularly if significant customization is required; and a comprehensive project management methodology should be employed, with particular attention to change management. It is possible for a project to succeed without all four components, e.g. by relying on particularly strong business or technical resources. However, projects which do not address these areas have greater risk of delay or failure.”

Don Jefferis, Managing Director—Northeast Markets, Energy Consulting Practice, Sirius Solutions LLLP: “A passionate, visionary and empowered executive champion. ETRM systems implementations are challenging in the best of times—and only become more so as energy trading companies continue to expand product coverage, commodities coverage and geographic reach. As much as each company strives to select or design its 'perfect' ETRM system, commercially-driven requirements change, internal business processes evolve, and the challenges of the ETRM course selected all work in concert to challenge every system implementation. No substitute exists to protect a project's success like an empowered executive champion with a balanced, seasoned blend of both business and IT perspectives who possesses the authority and organizational following to hold cross-functional groups accountable for 'on plan' delivery. The ability to stay on the plan—calling the shots when able, mediating when appropriate, and casting the tie-breaker when necessary—all contribute greatly to success.”

Mack Miller, Vice President of Energy Services, North America, OpenLink: “Apart from the obvious answer of selecting the right ETRM software solution, the clients of our most successful projects share one commonality—intelligent, resourceful, and highly-engaged Executive Leadership from the conception to the adoption of the new solution. Successful and competent Executive Leadership Teams clearly establish and communicate the mission and objectives of the ETRM implementation, select the most qualified employees for the team, offer them results-based financial incentives, and actively monitor the project milestones. Accomplished Executive Leadership Teams control their own destiny by being careful to avoid outsourcing chain of command and decision-making roles to external entities. Instead, they cast them into supporting roles for the project, as these temporary entities do not own or live with the final solution.”

Brad Hamlin, Vice President, Client Operations for Americas, Triple Point Technology: “A crucial factor in a successful ETRM implementation is the active participation and support of the client's management. Building on a positive foundation set by supportive client leadership, proactive and regular communication is absolutely critical throughout the implementation process. Clear agreement on what defines project success within the targeted project timeline, when combined with the proper allocation of client and vendor resources from all the relevant business areas, makes for a winning ETRM implementation. Using this strategy, Triple Point has executed several successful implementations of large institutions that have taken less than four months from contract signing to full production.”

Dave Stangler and Manuel Santos, Directors of ETRM Solutions, Open Access Technology International, Inc. (OATI): “OATI has found that the most important factor for a successful project is ownership of the project jointly by OATI and the Customer from the top to the bottom of their respective organizations. This includes full participation and commitment to the project by the Customer in all impacted areas of the business. This ownership lends itself to cooperation, mutual understanding, customer pride, and ultimately a Customer whose needs have been met.”

Scott Roltsch, Vice President—Services, Allegro: “Most common factors that limit success are the state of the data being entered into the system and the readiness of the people to embrace the new system. If you have the best software in the world but load existing data from several disparate systems without cleansing, you will likely have many duplicated master records such as counterparties, trades, locations and the like. When the users try to use it all, they will be very frustrated at the system's inability to present the correct information. Similarly, if the users of a new system are not prepared to use it, if they don't have the desire, or understand the benefits to them and the company, it will not be utilized correctly. In either situation although the software performs exactly as it should, without data or behavior correction, the system will ultimately be viewed as a failure. Even with after the fact fixes it will never be seen as a huge success.”

John England, Managing Partner—Global Energy Markets, Deloitte & Touche LLP: “Successful implementations are not the product of any one factor, but require a combination of several key elements. If I had to pick the most important one, it would be involvement from the client, from executives to users, in all phases of the project. A strong mandate from executives is essential for broad adoption and to effect changes in the organization, such as reducing reliance on manual and spreadsheet driven processes. Lack of user involvement will increase the risk of key functionality being omitted, and will result in key decisions being pushed to the parallel test phase, potentially causing implementation delays. I would also note the importance of a comprehensive plan that includes focus on parallel testing and business process, areas that are frequently under-scoped.”

Masud Haq, Vice President, Sapient Corporation: “Most ETRM implementations pave the cow path by automating existing processes. Doing so on budget with incremental ROI is often declared a success. Our teams' mindset is to achieve breakthrough business results by innovating with our clients. To do this we define the desired business value with our clients, and create a detailed blueprint of the desired future state—the innovation needs to happen here. Beyond that, you need a strong team with relevant business and technology knowledge who can identify and prioritize the gaps in detail between the blueprint and the ETRM package(s), create the right plan, and execute with world class precision. ETRM implementations can fail even before the technical design—clients often find out in the testing phase or later.”

Alex Penner, VP of Services Europe, SunGard Energy Solutions: “Many factors contribute to the successful implementation of ETRM solutions, but success hinges on the delivery of business value to the economic buyers and business users. This requires upfront work on business test cases, commitment to in-depth training, and internal champions within the user group. We bring to implementations strong project management methodologies and certified project leaders with both domain and product expertise. These factors are necessary to success, but not sufficient. Senior business leader endorsement and involvement throughout the project is the most critical success factor helping to ensure the availability of the appropriate resources, the close collaboration of the IT team and the user community, and a focus on adding business value. The business will be the ultimate judge of success and this makes senior business leadership commitment the most critical success factor.”

Clearly, based upon these responses, no organization should undertake the implementation of an ETRM system without ensuring the organization, top to bottom, is properly aligned to, and supportive of, project scope and goals. Active executive involvement is clearly a key. The organization's leadership must unambiguously support the project and actively encourage the participation of all stakeholders in the process. It falls upon them to ensure key personnel are properly incentivized to not only participate, but to own both the project and its result. Executive management must lead this process, not merely react to issues that may arise. They should be in front of the project, proactively eliminating internal barriers and quickly resolving conflicts.

Regardless of your organization's size, if you have made the commitment to deploy a new ETRM system, you have, by extension, made the decision to risk large amounts of your company's resources—personnel, dollars, time, and opportunity. If successful, you will realize the benefit of having a system that will add real value to your business in terms of better decision making, improved efficiency, regulatory compliance, improved record keeping, etc. If unsuccessful, not only will you not realize these benefits, but you will have lost time, money, opportunity and quite possibly, the willingness of your organization to try again.

ETRM Software Providers are Facing Increasing Market Uncertainty - By Patrick Reames

Energy Trading and Risk Management (ETRM) software providers have been enjoying considerable success over the last several years. With a market buoyed by higher commodity prices, high levels of volatility, new regulation and reporting requirements, and new market entrants, software vendors have been making some serious hay. These companies have been seeing new records for unit sales and revenues and have struggled to keep up with demand. However, at UtiliPoint, we've been projecting that the rapid market expansion, while not necessarily ending, would be slackening as there is only so much growth that's sustainable over the long term in a market of this type. In our recently released 2008 North American ETRM Market Analysis and Sizing Report (http://www.utilipoint.com/rci/details.asp?ProductID=1173) , we've forecast that slowing, projecting market growth this year to be substantially down from the double digit growth rates of 2006 and 2007. Our forecast has been based upon a number of dampening forces which started emerging in energy commodity markets in the first quarter and have reached a crescendo within the last week. These forces are now hammering many in the energy commodity markets and have started, and will continue, to impact sales of software products servicing those markets.

The Financial Services Crisis is Being Felt in the Physical Energy Markets

The dollar magnitude of the transactions in the energy commodity markets demand that players have ready access to credit, and by extension, a solid balance sheet. Credit is the oxygen that keeps this market alive. Consider a common sized transaction for natural gas: 10,000mmbtu/day for a month. At current market prices, that transaction is worth around $2.25 million. Small trading shops may be buying and selling up to a half of a BCF of gas per day, meaning their exposures will be north of $100million prior to the end of the month settlements. Mid-sized traders, those up to 1 BCF/day, will have exposures measured in the hundreds of millions of dollars, with the largest companies, those trading several BCF/day, having multiples of that. This is not a "cash on the barrelhead" business. These trading companies rely on ready access to quality credit reserves to provide assurance to their trading partners that they can meet their obligations despite any negative market developments. If market players start to doubt the credit worthiness of one of their trading partners, they will stop selling to that company in order to reduce their exposures, leaving that suspect company dead in the water and unable to meet their obligations to the companies they've sold product to.

Last week saw the crash of Constellation Energy for this very reason. Despite the fact that Constellation's energy trading group was successful, generating up to 80% of the parent's revenues, the markets were increasing uncomfortable with the quality of the firm's credit due to the failure of Lehman Bros. (who held a less than 6% stake in the company) and the suspect nature of a few banks who were proving relatively modest credit lines to the company. As a result of credit downgrades associated with Lehman's demise and the questionable credit lines, many of Constellation's trading partners started to pull back and the company's stock plunged 45% in a single day. Ultimately Constellation was salvaged via a fire sale to MidAmerican Energy at $26.50/share, less than half its price just 10 days ago.

When Enron collapsed over the period of a few days in Oct. 2000, most companies couldn't react in time to shield themselves from losses—they had already sold significant volumes to Enron based on credit ratings that were ill-informed and ultimately far too optimistic. These companies, unable to recoup their losses, took significant bad debt write-offs, ultimately contributing to the demise of many. It was only after banking and financial services firms stepped up and into the market did any semblance of confidence return. Not only did these financials enter the markets directly through acquisition of existing trading companies or expansion of their own subsidiary commodity trading groups, they also extended and backed credit lines for other players. The recovery of the energy markets, catalyzed by the entrance of the financial companies, brought the ETRM solutions market out of the doldrums and fueled significant market growth for a number of the larger vendors.

With the market taking several years to emerge from the damage caused by Enron, credit managers have, for good reason, increased their diligence, and in some cases have become hypersensitive when it comes to counter party credit exposures. However, until recently, if a counterparty had one or more solid lines of credit from one of the major banks or financial services companies, credit managers were pretty comfortable with the source and were more willing to extend credit. The source of the credit helped assure them that the transactions were adequately backstopped in case something bad happened.

However, the sub-prime lending crisis has changed all that. With three of the five largest financial services companies imploding and with major banks, like IndyMac, going under, there are few if any golden backstops these days. Credit managers are seeing the quality of their counterparties' credit being impacted as firms such as Bear Sterns, Lehman Brothers and Merrill Lynch have either gone under or have had to be rescued by larger entities.

Even for those energy trading companies that have been able to maintain sold credit, those credit lines are being exhausted more quickly as commodity prices have taken off. Simply put—a doubling of the price of a commodity will double the credit exposure for a same sized transaction. Credit has become a limiting factor for growth for many companies as commodity prices have continued their steady rise over the last 24 months.

With credit being impacted by the ongoing financial market crisis and higher commodity prices, the oxygen is clearly being sucked out of this market and ETRM system providers are starting to feel the impact.

Budgets Have Absorbed Higher Prices

Producers have always been a steady market for ETRM vendors, making up 10 to 20 percent or more of the system sales in any given year. With the run-up in commodity prices, many energy producers generated profits beyond their budgetary projections. This unexpected influx of cash enabled many to upgrade their systems earlier than they may have otherwise; improving their transaction management capabilities at a time they needed it the most.

Unfortunately, this accelerated replacement cycle in the producer space will create some hangovers for vendors. As UtiliPoint's research shows that the normal replacement cycle for these systems averages five to six years, pulling many of these future deals forward will take some license sales opportunities out of the market for the next couple of years.

For many of the energy companies that had stayed with their legacy systems through the period of rapidly escalating prices, the recent slump in commodity prices has them rethinking near-term system purchase plans. With budgets developed last year during the upswing in the market, the recent sell-offs in commodities are forcing a number of companies to re-examine and potentially delay planned expenditures for IT infrastructure.

Some Positives

Despite many troubling developments in the market, there are some positive trends that should provide opportunity for ETRM system providers.

With crude having traded close to $150/bbl recently and still hovering around $100/bbl, industrial scale consumers of crude-based products continue to adopt aggressive price hedging strategies. UtiliPoint is anticipating that these industrial-scale consumers, including transportation companies, railroads, and airlines, will continue to seek out ETRM system capabilities to better manage their energy purchases and hedging strategies.

We also expect to see continued growth in the market for systems servicing non-energy buyers, such as agricultural product producers and traders. This market has been emerging for the last 18 months and should continue to drive new sales for the vendors that have capabilities in the space.

An additional bright spot in the market is the widening acceptance of ASP or "Software as a Service" (SaaS) solutions. These solutions, delivered over the web, have been selling well in the last couple of year as they enable smaller market participants, such as municipals, to acquire ETRM capabilities at a lower price and with less implementation effort. Given their appeal to the lower tiers of the market (a segment likely to be lest affected by the credit crisis), we believe the ASP/SaaS software vendors will continue to see success and enjoy good market growth.

Some Vendors More Impacted Than Others

2006 and 2007 saw solid growth for most of the solutions providers—the rising tide lifting all boats. 2008 and 2009 don't appear to offer the same widespread opportunities—there will be winners, but there will be more losers than in past years. Vendors that have been successful in the industrial, fuels, and non-energy markets (such as Solarc, Triple Point and Allegro) should continue to see success. Additionally, companies like OATI, OilSpace and others that can service the ASP/SaaS markets will also continue to sell products. Still, there is little doubt that all vendors will feel the impact of the turmoil in the markets, although some much more than others.

ETRM's 2007 Market Leaders by Patrick Reames

Having tracked activity in the Energy Trading and Risk Management (ETRM) solutions market over the last several years, UtiliPoint has seen trends emerge and disappear and market leaders rise and fall, only to rise again. It's an impossible proposition to declare any particular solution vendor THE winner of the race, for not only is the race never complete; it's difficult at times to even define WHICH race is being contested.

As we've written about many times in the past, the ETRM market is a wide ranging space. It covers virtually anyone and everyone that buys or sells wholesale energy commodities, physical or financial. It includes exploration and production companies, producing and selling oil and gas; hedge funds that may not hold a particular energy commodity for more than a day or two; power utilities that produce, and sometimes buy or sell, wholesale quantities of power to service their native retail loads; refineries buying wholesale crude and selling finished products; airlines purchasing huge volumes of jet fuel … the list goes on and on.

Given the breadth of the space, it is practically impossible for any one vendor of ETRM software to address the entirety of the greater market's needs. The business processes are simply too wide ranging for any single product to be the best fit for everyone involved in whatever form of energy trading and risk management they have chosen to pursue. The reality is that for every strip of business model, there will be one or two vendors that will be a best fit for that model, and over time, the “best fit” vendors will change as members of that group pursue new functionality or shift focus to address other needs that exist in the wider market. Nonetheless, we can look back over the last couple of years and see some consistent trends when it comes to identifying either particular market segment leaders or identifying companies that have had significant success in the broader market.

Following on from our IssueAlert article of Jan. 28th, Energy Trading and Risk Management Systems Market 2007 Results, 2008 Outlook, and Customer Implications, and based on the granular information we've gleaned from the market and reported to us by many of the vendors, we wanted to break down the 2007 results and identify market leaders in a number of categories, some broad, and some more specific, but ones in which there was one or two clear leaders:
Total New Client Signings in 2007 For this category we took into account only net new business, not expansion license sales or new modules that were added to an existing customer. We also did not take into account reselling an existing customer - that is moving them off one product and onto a different product.
For 2007, Allegro and Triple Point came out on top in terms of global unit sales, or put another way, they signed the most new customers for their products around the world. Close on their heels last year were Solarc, OATI, and OpenLink.

ASP Delivered ETRM Solutions
In order to fully explore this category, we've broken it down into two segments: financial trading and physical trading. On the financial side, Kiodex, the pioneer in delivering solutions via the internet to energy centric trading shops, continues to sell significant numbers of new systems in the space, although their client base now encompasses many non-energy commodity and financial trading firms as well.

On the physical side, OATI continues to see great success for their ASP delivered webTrader product family. Their primary market, small to midsize utilities, continues to be one of the most progressive in terms of adopting the “software as a service” model in physical energy trading, allowing OATI to capture the most sales in the “ASP for physical trading” space.

Industrial and End User Market
Solarc has been the leader in this category for the last several years and was one of the first to recognize the value of, and pursue, large energy consuming end users. Airlines in particular have been selecting Solarc's RightAngle more than any other product on the market, and as a result, the company has virtually locked up the airline segment. They've also been successful selling to package shipping companies and agricultural firms, amongst others.
One of the emerging challengers to Solarc in the end-user category is Allegro. 2007 saw several new end user clients for the company and they are well positioned to see additional success in 2008.

Financial Oriented Trading Market
In 2007, financially oriented trading companies, like hedge funds and bank founded and/or backed trading companies, continued buying ETRM systems to help them better manage their growing portfolios of physical energy commodities. Triple Point and Openlink have been the primary beneficiaries of this growing physical focus over the last several years and that trend continued in 2007.
Solarc also found success in the financial oriented markets in 2007 and may emerge to challenge the market leaders in 2008.

Utility Market OATI has been able to leverage their huge customer base for their tagging and market communication products for power trading, yielding them solid success selling webTrader to small and mid-size utilities. On the upper end of this market (those utilities with large scale associated trading operations), the picture is less clear with several different vendors having each sold multiple systems to the market.

E&P Market
The oil and gas exploration and production (E&P) market has been a consistent, if not exceptionally large, market for ETRM vendors over the last 10 years. Every year, this segment comprises about 10 - 15 percent of all deals done. Over the last decade, Allegro has been a consistent market leader, a position they continued to enjoy in 2007.

OpenLink has focused on development of additional producer functionality over the last couple of years, and as a result, has closed several significant new E&P deals in 2006 and 2007, positioning them near the top of this market with Allegro.

Solarc is positioned to mount a challenge to these current leaders, having acquired Trinity Apex in late 2006, a product with solid producer functionality and one which has already brought new E&P clients to the company.

Most Diverse New Client Base in 2007
Looking at the results of 2007, Triple Point added the most diverse group of new clients, ranging from traditional energy trading firms to financials, refiner/distributors, biodiesel producers, agricultural companies, generators and metal traders.

Several other vendors, including Allegro, Solarc, and OpenLink, also distinguished themselves from the pack in term of market segments serviced in 2007.

International Sales for a North America-based Vendor
Triple Point showed significant strength internationally last year, with their relationship with SAP and access to that company's global client base proving to be a differentiator versus the competition. Triple Point closed the largest number of deals in Europe of any North American based vendor and added a new client in Africa. With their SAP relationship, Triple Point should be considered one of the favorites in capturing not only additional European business, but should also see growing success in other international markets.
Among the other vendors, Allegro, Sungard, Solarc, and OpenLink also showed solid international sales, with the group signing new deals across Europe, Asia, and Australia.

Other Markets
As mentioned above, there are numerous ways to slice and dice the ETRM market. However, for each of these slices, there is no one or two vendors that clearly stand out. Consider the refiner/ distributor market—while several vendors, including TradeCapture, Allegro, Triple Point and Sisu Group sold products into that market, there simply were not enough transactions to definitively establish a market leader. Biofuels emerged as new market for ETRM vendors, and while several companies sold products to biofuel producers, again, the numbers don't yet indicate a market leader.

We didn't consider, for this analysis, markets or products that don't encompass all or most of the core business processes of energy trading and/or risk management (defined as contract management, deal capture, position management, analytics, pre-scheduling, scheduling, actualization, accounting and invoicing), including those solutions that provide functionality peripheral to, but in support of, the buying and selling of energy commodities. These solutions include such things as power market communications, NERC tagging, asset management, logistical support tools, and analytics packages amongst others. We did find that many of the vendors providing these products (and who may also produce full scale ETRM solutions) experienced very good results and in some cases, record years. The roster of companies enjoying a good 2007 would include The Structure Group, OATI, Power Costs (PCI), RiskAdvisory, and Ventyx.
Conclusions

For a company considering the purchase of a new ETRM system, these results should be viewed as informative, but not a definitive indicator of what you should buy. If your business fits one or more of the categories described above, certainly you should take a close look at the leader(s) for your segment, but, you should not limit your search to those companies. Every energy commodity related business, including yours, is a unique mix of assets, geography, commodities, and business priorities. Given that UtiliPoint's Directory of Energy Trading, Risk and Transaction Management Software Solutions and Providers now lists more than 70 firms producing solutions within the ETRM universe, the odds are good that you will find one, or possibly a mix of multiple solutions, that can meet your unique needs—and it may not be the current market leader.

Theoretically Speaking… ETRM Solutions and “The Discipline of Market Leaders” by Patrick Reames

A senior executive at an ETRM software vendor mentioned to me the other day that his management team was discussing strategy and had focused the discussion on the theories expounded in the book “The Discipline of Market Leaders” authored by Michael Treacy & Fred Wiersema, first published in 1995. For those unfamiliar with the book (and I'll have to partially include myself in that category, having heard the theory but not really being familiar with the source), the authors advanced the notion that truly successful organizations embrace a singular value proposition and align their organizations around that value proposition. In Treacy and Wiersema's book, they identified three distinct value propositions that companies can follow to achieve a market leadership position:

• Operationally Efficient—In an operationally efficient company, it's all about the delivery of products and services in the most (as the name implies) efficient and effective manner. These companies are highly process oriented and highly productive. They generally get their products out the door quickly and cheaply. Their customers get reliable products and services; and the company is pretty easy to do business with. You're not getting a leading edge product, but you can be sure that what you're getting will generally meet your expectations and at a price that is lower than the competition. Examples of companies that follow this model are Wal-Mart, McDonalds and Dell.

• Product Leader—In a company embracing product leadership, the focus is on identifying, understanding and responding to market needs, both current and future, and in the process providing the best, most advanced and innovative products. These companies are creative, innovative risk takers. In doing business with these companies, you're getting the best product in the category. However, you're going to be paying a premium for that leading edge product. Example companies for this category include Apple, Sony and 3M.

• Customer Intimate—Customer intimate organizations strive to understand the customer intimately and provide the best total solution. In the process, they strive to gain customer loyalty and develop long-term relationships. These companies are friendly, responsive and adaptable to customer demands. As a customer you're not only getting a customized, personalized product, you're also getting a trusted advisor and partner. However, when you're doing business with these companies, you're paying top dollar. Companies that fit this model include Nordstrom and Ritz Carlton.

In the authors' view, in order for any company to achieve the status of “market leader,” no matter the industry or market they serve, they must embrace one of these value propositions, both internally and externally, and always focus their efforts to achieve the goals that they have elaborated in the adoption of the proposition. Additionally, no company can embrace all three, they must focus on one and do the best they can with the other two, but never to the determent of their chosen value proposition. The theory implies that trying to be all things to everybody will lead to the inevitable state of being nothing for anyone.

The theory is still very popular and widely used today, and it's easy to see why. Focus and discipline are universally accepted as qualities that are necessary for anyone or any company to succeed, and applying those traits around a central value proposition would seem to almost guarantee success (if you truly have a product and a market that wants it).

Applying the “Discipline” Theory to ETRM Products and Markets
However, applying the “Discipline” theory to ETRM solutions vendors can be problematic. The market for these products is extremely small when compared to almost all consumer products, and further, you can divide this small market up into even smaller discrete segments, grouped by commodity, geography, or business model.

Consider this group of fictional companies:
• A small west Texas gas producer sells equity production and schedules gas on a handful of pipelines.
• A Washington State merchant power producer sells power from multiple units into two ISOs, requiring real-time scheduling.
• A Wall Street energy trading company takes positions in virtually every energy commodity across the country. They trade both physically and financially.
• A large Chicago based airline tracks JetA fuel purchases at three regional hubs in the United States and two international hubs. They hedge these purchases whenever its makes sense.
• A global energy company is involved in the production of almost all hydrocarbon products world-wide and markets their products on five continents.

The small gas producer and the merchant generator would probably want to do business with vendors that have embraced the operationally efficient model, a vendor that can provide a low cost product that while not leading edge, still meets their somewhat “generic” needs. These companies probably wouldn't be interested in a “total ownership” experience given that what they do, while not easy, is pretty straightforward. They aren't really looking for a solution partnership, just a product.

The Wall Street firm however, is going to be depending on their ETRM solution to help make them money. They will want a product that can keep up with their needs. They view themselves as a trading shop, not an IT shop, and therefore rely on their vendor to be more than just a software supplier; they want the vendor to be their partner, ensuring that they have the vendor's ear and access to their talent to ensure their systems never hold them back. Clearly, this is a company that would place high value on a Customer Intimate experience.
The airline will be looking to their vendor to provide them with a product that can capture the single commodity (JetA fuel) both physically and financially, but in multiple currencies and possibly in multiple units of measure. Their IT staff is probably not going to have significant experience in these types of systems, so they will most likely be looking to the vendor to supply ongoing support and services, similar to that of the Wall Street firm, but in a less intensive mode.

The global energy producer may have a very large global IT organization. In their business they need a large support staff, not only to service the marketing organization, but also the exploration, production, and refining groups. They have a sophisticated marketing operation and because of their geographic reach, they trade products in all the major market regions around the globe. This is a company looking for a leading edge product, one that they can deploy to address their marketing needs now and that will keep up with their growth. Given the size and experience of their IT staff, they're self-sufficient and aren't looking to the vendor to be a partner. They want to do business with a product leader.

Most of the major ETRM software vendors will view each of those companies as a potential customer for their products. Clearly, the needs of the west Texas gas producer have very small overlap with the needs of the Wall Street firm or the global producer; and the needs of an airline or a merchant generator have even less. Yet in these days of multi-commodity, physical/financial ETRM products, a single vendor will visit all five and demonstrate how the capabilities of their product(s) might meet the needs of these companies.

The Vendor Perspective
So, how does a single vendor address the needs of this heterogeneous market and what are the implications for that vendor when trying to establish their value proposition?

In some cases, the vendors in the ETRM market still develop their products around a monolithic code base. They may disable some features and/or functions depending on the client needs; but, it's still the same code serving the small west Texas producer and the Wall Street trader. It costs the same to produce for both customers, but it is sold at different prices. Given that the vendor's investment in the product was made to address the needs of the top end of the market (the global multi-commodity, physical/financial trader), that vendor will have a very difficult time elaborating a value proposition that makes sense for the small producer market. The market segments are clearly different and have different business drivers. It is impossible for a single product to be stretched over a fractionated market and meet the expectations of the majority of the players therein. So, this vendor would need to focus on that high end market, define their value proposition in terms of that piece of the market, and just do the best they can for the rest, risking a significant amount of market share in the process.

Given the difficulties in developing a market wide value proposition for their product and their company, and if one assumes that the “Discipline” theory is valid, the vendor of the monolithic product is probably not going to become the market leader in the broader ETRM space. They could lead a niche market, but for the majority of the market, they will find themselves in the position of trying to be everything to everybody, with the attendant result.

However, if the vendor can supply a product set built around a modular, service oriented architecture, and deployed with a common integration infrastructure, that vendor can start to view the market as the heterogeneous environment that it is, and develop specific strategies and products to address the different segments. Each combination of market segment and product module can potentially be oriented as a separate entity, all rolling up to the vendor parent. The selection of the value proposition for these separate entities could then be undertaken using the processes outlined in Treacy and Wiersema's book; based upon standardized metrics, including the cost to service, and the value expectations of, the various market segments.

The Buyer Side
So, what does this mean for the buyers of ETRM systems? It means that you must understand and clearly express your expectations to the vendor, and ensure that vendor's value proposition (either explicit or implied) is aligned to meet those expectations. If your's is one of the smaller operations, trading only gas or only power, and you don't have aspirations of triple digit year-over-year growth, the answer may be that you want to do business with an operationally efficient vendor that can give you a decent product at a lower price. If you don't require leading edge functionality, you'll probably find that it's good enough.

However, if you're working for a growing international trading company that takes both physical and financial positions in gas, power, coal, crude, and NGLs; the low cost provider solution is going to be wholly inadequate. The scale and scope of your business dictate that you need the latest functionality. It may even mean that your company's business is unique enough that you need a somewhat customized solution. You're going to be seeking out a product and a vendor that can maintain your pace. Given your circumstances, your vendor will either need to be the superior technology company or the full service, customer intimate organization. But, you should be prepared to pay the cost associated with the product and service level you expect to receive. Trying to buy and implement a sophisticated ETRM solution on the cheap is a receipt for disaster.

You can't expect to shop at Nordstrom and pay Wal-Mart prices.

Why We May Soon Replace the ‘E’ with ‘C’ in ETRM Software By Gary M. Vasey

Energy trading, transaction and risk management (ETRM) software is that category of software applications, architectures and tools that supports the business processes associated with the trading of energy commodities. Energy trading is here taken to mean both the buying and selling of energy commodities such as crude oil, coal, natural gas, electric power, emissions and refined products – both physical and financial, the management of the movement and delivery of the energy commodities, and associated risk management activities. Not surprisingly, ETRM software suites tend to comprise a very complex set of functionalities that varies considerably depending on which commodities are traded, what assets are employed in the business, where those assets are located, and what the company’s business strategy and associated business processes are.

Recently, the market for ETRM software has been quiet buoyant. It rebounded significantly as hedge funds, proprietary traders and investment banks entered the market while European deregulation has also helped foster the explosive growth in energy and other commodities trading over the last 4-5 years. UtiliPoint research has indicated growth rates for ETRM software in North America and Europe at 15% in recent years . Additionally, the maturing of electronic marketplaces such as ICE and NYMEX has also, in effect, reduced many of the barriers to entry for those wishing to trade commodities and the expansion of the number and type of instruments to trade has fueled this growth. Another aspect of the growth in ETRM software markets has also been simply that overall the requirements have changed and, particularly in North America, replacements of older ETRM solutions has taken place. In fact, the changes that we have observed in commodity markets in general and energy commodities in particular in the last several years are helping to drive fundamental changes in both trading and risk management practice and in the requirements for ETRM software.

Changes in Commodity Markets
The increasing financialisation of energy and commodity markets has brought many significant changes which in turn have impacted ETRM software requirements. The backdrop and catalyst for these changes has clearly been the underlying fundamentals as documented by Fusaro & Vasey, 2006 .

Almost all commodities are still in supply/demand tightness as a result of increased demand led by the twin Asian economic powerhouses of China and India. Essentially, natural resource industries which had underinvested in infrastructure over a 12- 15 year period of relatively stable and low commodity prices were caught out by a demand side surprise. Because of the long cycle time in natural resource industries, even the higher levels of investment of the last 4-5 years has so far had little impact on supply. Indeed, the added factor of the environment has added cost, complexity and time to what was anyway a long cycle time. The supply/demand tightness in many commodity markets has resulted in vastly increased volatilities and generally rising commodity prices and, market sentiment has emerged as a new risk factor in price formation for commodity traders. Any event deemed to have an impact on supply – whether real or fictitious – can and does now impact price formation on a routine basis. Of course, this has taken place also at a time of a weakening US economy and US Dollar which in turn, has accentuated those price rises for raw materials priced in the US Dollar.

Almost at the same time, a raft of new entrants into energy and commodity markets including hedge funds, investment banks, proprietary trading firms and more has helped bring about fundamental structural changes in commodity markets. In fact, one must not underestimate the ordinary investor’s impact either. The advent of Exchange traded instruments such as ETF’s, ETC’s an ETN’s has provided a basis for the ordinary investor to gain exposure to commodities in a way previously not envisaged. Anyone with a trading account and money to invest can now gain exposure to crude oil, natural gas, uranium and other commodities using these highly liquid instruments . New trading participants and increased trading volumes have also encouraged the rapid emergence of a raft of new instruments to trade, new exchanges, electronic trading and exchange cleared trading which in turn have opened up the possibility of new trading strategies while significantly reducing the barriers to and cost of entry to these markets. The impact of this is simply that almost every day new traded volume records are set. Another impact is that this has opened up markets by increasing transparency and liquidity and introducing new counterparties for traditional traders. European markets, which were essentially limited to incumbent utilities as recently as 3 years ago, have particularly benefited by this rapid increase in potential counterparties.

As commodities continue to be in supply/demand tightness and as new entrants increasingly viewing commodities as a must have asset class engage in trading activities, new relationships have emerged between commodities and older, trusted relationships have broken down. The emphasis on Corn for Ethanol in the US, for example, has had a ripple effect throughout he commodity complex as Ethanol prices bear a relationship to Gasoline prices, Corn prices bear a relationship to Ethanol prices and as farmers increased Corn acreage at the expense of other grains, Wheat, Soybeans and other grain futures have soared. But the impact doesn’t even end there. The rapid increase in feedstock prices has had the effect of depressing meat and livestock prices as farmers slaughtered their animals sooner rather than pay higher feed costs. Older relationships such as that between Heating Oil and Gasoline have broken down at times in the recent past.

Overall, there has been an increase in traded volumes through an increase in the number of instruments, exchanges and traders, a growing financial aspect to commodity trading, larger and more erratic price swings and volatilities and prices have often become dislocated from the underlying fundamentals as ‘sentiment’ took over. Increasingly, commodity price movements have veteran traders fooled and looking for rhyme or reason to explain market events. One characteristic of today’s commodity markets that must not be overlooked is the idea that commodities are now an asset class. For example, it could be argued that the commodity correction that took place in the third week of March, 2008 had little to do with fundamentals and everything to do with large financial institutions selling profitable commodity positions to raise cash to support losses and margin calls in areas of their portfolios related to other asset classes like debt, credit and equities.

Impacts on Commodity Trading and Traders
At the highest level, there are three major impacts of all this in terms of trading and risk management. The first major change that UtiliPoint has observed is that unlike a few years ago, it’s difficult to trade just a single commodity. Multi-commodity trading – not just in energy - but across all commodities – is increasingly the norm. As an example of this, in a survey of energy companies in Europe conducted in early 2007, UtiliPoint found that only 1 in 50 traded a single energy commodity .

A second significant change is that simple directional trading strategies that profited earlier in the commodities bull market are increasingly being replaced by more sophisticated trading strategies including spreads, options and even black box trading. Some trading strategies conducted by financial players in these markets would not make much sense to traditional physical energy traders. What often gets forgotten is that hedge funds and investment banks make money in both up an down markets and, as discussed above, are not limited to a fundamental view of the commodity world but might see opportunities that play across different asset classes. Furthermore, there are a wider variety of instruments to trade

The final change worthy of note is that with these new instruments, trading strategies, factors influencing price formation and changing commodity inter-relationships, there is an impact on risk management. Firstly, as volatilities and other parameters have changed, traders should ask themselves the question ‘are the risk measures being used still reliable?”. Many quantitative statistical measures assume that certain factors are within certain bounds, for example volatility. If this is no longer the case then the risk measures might now be being used inappropriately. However, as historical trends break down, it can also be argued that risk measures relying on historical data and market behavior are now also increasingly inappropriate. Now is the time to review your risk measures and statistics and to move to models that rely more on stochastic models. Now is also the time to conduct more rigorous stress testing of your portfolio.

While this is just a summary of some changes that have taken place in energy and commodity trading as a result of the changes observed in commodity markets this last few years, it isn’t and cannot be comprehensive in the context of this article. What should be apparent however is that as markets have changed, so to has trading and traders and risk. These all impact the requirements for your ETRM software.

ETRM Software Impacts
In faster moving and more volatile energy and commodity markets your ETRM software has to be responsive, scalable and adaptable. It needs to support new trading instruments, new exchanges, new trading strategies and do so in a faster and more responsive manner than in the past. But faster moving markets and more complex trading also requires that your ETRM software provides true Straight through Processing capabilities and workflow support to help cut down room for error, oversight and abuse. Workflow involves smoothing and automating business processes so that authorizations, approvals and limits, for example, are all handled seamlessly by the system. In today’s faster moving commodity markets, this is increasingly essential because trading firms require improved controls such as security of access to data, documentation as well as more checks and balances throughout the business process. This should be provided by the ETRM software.

Reporting has traditionally been a weakness of ETRM software which often arrived with a third-party report writer, a few hundred template reports and the potential for a large consulting bill for building more and more reports. Reporting should be built into you ETRM software. The user interface should be graphical and complete with intuitive reporting and drill-down capabilities. Again, in fast moving and complex markets, users need to access information quickly and efficiently and not have to develop a new report from scratch.

In some ETRM solutions, risk management is simplistic and provided via third-party tools and add-ins. Risk management in today’s markets as stated above is a key area of concern and solid stochastic risk measures should be central to the ETRM solution that you utilize. The risk tools should be easy to use, include stress testing and what-if scenario tools and they should be responsive.

In fact, the basis for many of the features and functions required by ETRM solutions for today’s markets ought to be enabled through architecture. Service Oriented Architectures and parallel processing are increasingly being adopted by ETRM software vendors because they provide scalability, responsiveness, adaptability and connectivity to their software. The adoption of these architectures has so far been the key to vendor innovation in providing the tools that are needed, indeed, demanded by their clients.

Another important key requirement is the need to support multiple commodities. Many trading firms now trade not just energy commodities but related commodities such as emissions, freight rates, various softs and metals and so on. They require a single software platform that can support all the diverse commodities that they trade. This trend has become emphatic in the last 18-months or so and many of the leading vendors of ETRM software have recognized it and adapted to it. In fact, it will soon be time to replace the ‘E’ with a ‘C’ in ETRM. But not all vendors have picked up on this trend early enough and remain focused on adding software to support the energy value chain. In doing so, they are limiting their ability to respond to the growing recognition that commodities are an asset class.

The ETRM/CTRM Conundrum
In fact, it is difficult not to have sympathy with the ETRM vendor community. Markets and users change and at speed. Consider that their clients could be hedge funds, investment banks, utilities, oil and gas producers, refiner/marketers, generators, end users such as airlines, coal producers and more besides. One single solution for all these types of end users? And therein lays the reason why there are still so many suppliers of ETRM software simply because no single vendor has yet been able to meet the needs of all of these potential energy and commodity traders in a single solution.

While the uptick in commodity markets is where the focus of attention might be as vendors scramble to move from energy trading and risk management to commodity trading management and risk management, there are also other specialist niches for ETRM software. Asset ETRM software is a prime example where asset heavy firms such as Utilities and Generators require the ability to forecast market prices, optimize their assets and manage the bid to bill process. Asset ETRM software includes a good deal of additional functionality and points of integration and is far more complex and costly. On the other hand, there are users whose focus is more towards fuel procurement and hedging. They simply do not require the vast range of functionality that an out and out trader does and they may decide to opt for a solution provided through an Application Service Provider or simply use spreadsheets.

The issue remains that Energy trading, transaction and risk management is a complex area with widely varying requirements that this article has only scratched the surface with. While the big trend right now is to move toward commodity trading and risk management software – i.e. replacing the ‘E’ in ETRM with a “C”, there will always be room for more specialist software providers in the more typical ETRM space. For the vendor, that’s a conundrum and for the prospective user, it can be downright confusing.

About Dr. Gary M. Vasey
Dr. Gary M. Vasey is an energy industry expert noted for his industry analysis, consulting, and marketing skills. Gary currently manages UtiliPoint's European practice from its office in the Czech Republic. Gary is the co-author of the books ‘Trends in Energy Trading, Transaction and Risk Management Software - A Primer' and ‘Selecting and Implementing Energy Trading, Transaction and Risk Management Software - A Primer'. He also contributed two chapters to ‘The Professional Risk Managers‘ Guide to Energy and Environmental Markets' published by PRMIA and two chapters, co-written with Peter C. Fusaro, to ‘Weather, Energy and Environmental Hedging - An Introduction' (ICFAI University Press, 2007) edited by Amando F C Da Silva.

A Growing Acceptance of SaaS in Energy Markets By Patrick Reames

When energy trading and risk management (ETRM) software first appeared in the post FERC 636 era, the applications were built around the best available technologies of the day—client server architectures, relational databases and Visual Basic or PowerBuilder front ends. These applications were suitable for the times, sitting on an internal server and running over the client company's internal network. The data and the program itself stayed within the physical confines of that company's business.

Following the client server phase, new technologies came into vogue, like n-tier and Service Orient Architectures (SOAs), and Java and .Net, offering the promise of improved performance, improved ability to integrate with other applications, and, perhaps more importantly, the ability to deploy the applications directly over the internet, enabling what has become known as "Software as a Service" or SaaS.

Using the Web for Energy Transactions
For energy companies, the advent of the Open Access Same-time Information System (OASIS) and the development of the RTO markets in the mid 1990s essentially forced a broad acceptance of web-based transaction exchange. The standardization of OASIS functionality (and later, the mandated use of e-Tags) meant that companies operating in the markets had to accept that doing business in those markets meant using the internet to communicate with their business partners.

Still, there remains some resistance in trading shops to the idea of transmitting critical and proprietary data to an offsite server not owned or controlled by that company. Some organizations continue to hold the perception that someone could hack-into that third-party box, access the database and read or corrupt their critical data, crippling that data owner's business. What's not readily recognized is that the servers within most of the trading shops today are probably less secure than those sitting in a hardened data center operated by a SaaS provider that has developed the operating protocols and security measures necessary to legitimately operate in the space. Today, particularly for critical industries such as power generation and transmission, data center cyber security and protection is a top priority. The proper certifications, such as SAS 70, and compliance with industry standards such as the NERC CIP Standards, provide assurances for SaaS customers that their data is secure and that their system will be readily available.

Today, the Intercontinental Exchange, ICE, is the largest energy commodity exchange in the world and all its transactions are conducted via the web or via virtual private networks to its own data centers. Given ICE's ubiquitous use by virtually all trading companies, it's increasingly difficult for holdouts to make the argument that Web-based transmission and third party storage of sensitive data is too risky to employ.

With energy markets' participants increased exposure to web-based technologies, such as ICE, more and more are accepting of SaaS solutions for their critical business software. In our market research, UtiliPoint has seen annual double digit growth in the SaaS ETRM markets over the last several years, and we are forecasting that growth to continue, even in an otherwise potentially slowing market.

With the acceptance and adoption of SaaS solutions, companies are finding numerous advantages in relieving themselves of the burden of housing and maintaining these critical applications. Amongst those advantages:
• Limited or no hardware investments
• Reduced maintenance costs
• Standardized XML based integration points yielding potentially faster implementations
• Nearly transparent product upgrades-reduced cost, time, and pain

While SaaS does provide a number of benefits, it's not without its perceived drawbacks. In particular, if a company wants a highly customized solution to fit a particularly unique business process, maintaining those customizations in a hosted, web-delivered system has the potential to erode the value of the model.

OATI—THE SaaS Success Story in Energy
While almost all ETRM vendors will advertise their ability to deliver their applications via the web, only a few have architected their products specifically for SaaS delivery. In fact, most will utilize a technology such as Citrix to "Web enable" their products.

One of the earliest solutions companies to adopt the SaaS business model for product development and delivery was Open Access Technology International (OATI). With the opening of the RTO markets, the deployment of OASIS in the transmission markets and the evolution of e-Tagging, OATI, founded in 1995, began providing the technologies and products required by market participants. The company's web based solutions quickly became the standard for the vast majority of regional power market participants.

Since that time, the company has grown to be one of the largest players in the energy technology space (and the largest vendor of dedicated SaaS energy solutions), providing products in energy trading and risk management, NERC compliance, congestion management, transmission management, and smart grid development and management. However, despite their breath of solutions, there's a chance you may not have heard of them as the company has accomplished all that it has without much investment in marketing. As they will readily admit, they've historically relied more on word of mouth to sell their products, believing that success breeds success, and apparently it has.

Despite their low profile in the market, the list of accomplishments for this company is impressive. Consider these facts:
• The company has over 650 active customers for their various products
• They handle over 96 percent of the e-Tagging in the North American market
• They've deployed their RTO market solution 116 times
• They've deployed their ETRM solution at more than 65 companies
• The company has over 80 percent of the Transmission Providers utilizing their transmission management, scheduling and OASIS solutions.

As Jerry Dempsey, OATI's vice president of sales and marketing says, "We've focused our efforts on building an organization that is 100 percent dedicated to providing the highest value to our customers by utilizing the best available technologies to solve extremely complex business problems. We know that by delivering on that strategy, the market will be there for us."

"The SaaS model has proven very successful in delivering on that strategy. Our customers have been able to achieve superior value on their investment and are assured that the products they are using will always be up to date with the ever changing energy markets."

According to Mr. Dempsey, while OATI's products can be delivered on servers located within their customers' facilities, in almost all cases customers have elected to use OATI's dedicated hosting facility. "For clients that want a more customized solution, even for some very large customers, we've been able to demonstrate that our SaaS model can provide that uniquely customized solution in a fully hosted environment. It's the same effort whether the system is hosted or delivered. Customers recognize the benefits of a SaaS model. Yet some customers do elect for a delivered solution over a hosted solution mostly due to lack of experience of SaaS or the strong desire to simply retain the solution within their own facilities."

OATI's hosting facility is one of a kind for an energy solutions vendor, providing not only application hosting, but also managing almost all of the thousands of e-Tags that are transmitted every day in the North American power markets. In all, their data center manages over 80 terabytes of data on a daily basis.

I recently had the opportunity to visit the company's headquarters in Minneapolis and tour their data center, which, from the outside is a rather unassuming building on the west side of the city. However, as you pass through a very robust security process, the unassuming label quickly drops away. OATI is very serious about their facility and have built a state of the art data center by essentially constructing a hardened bunker within the building, one equipped with its own utility feeds and back-up systems, operating independently from the outside facility.

"Our data center is the heart of our business. Our customers, including most of the power industry, rely on us to ensure that their data is safe and their business critical applications are available. We are constantly working to ensure that our facility remains state-of-the-art and is the most secure and reliable in the market. We've worked hard to maintain SAS 70 and NERC CIP compliance, and we take pride in that we are the only energy technology vendor to have achieved that compliance with their own 100 percent dedicated data center," said Dempsey.

Good News for Other Vendors
For vendors of SaaS products, OATI's story should be heartening, for it clearly indicates the growing acceptance of internet delivered solutions in the energy markets. Their continual success in selling, deploying, and maintaining SaaS solutions is one of the most persuasive arguments in tearing down perceived barriers to web-based ETRM products.

If you would like to learn more about OATI, you can visit their newly redesigned website at www.oati.com.

As ETRM Becomes CTRM Vendors Such As EKA Emerge

One of the purposes in creating CommodityPoint as a Division of UtiliPoint earlier this year was to signal our intention that we would cover the broader commodities space rather than just energy commodities. Essentially, CommodityPoint provides research and analysis services around global commodity markets and the underlying technologies that are used to support trading, transaction and risk management activities. Over the last several years, and reinforced by the results of our study into commodity markets published earlier this year¹, we have discussed how commodity markets have changed in a variety of ways. Generally, those that trade commodities now trade a wider range of commodities and new relationships between commodities have emerged as older relationships to some extent have broken down.

One example of these changed relationships is around the impact of ethanol, which has effectively linked supply and demand of a variety of different commodities such as crude oil, gasoline, natural gas, grains, sugar, ethanol and so on creating arbitrage and other trading opportunities. Indeed, the impact of the emergence of ethanol as a gasoline substitute may even have had a broader impact than that as through much of 2007 and early 2008 the rising costs of animal feed as farmers switched crops in favor of corn and grains for ethanol production forced them to slaughter early depressing meat and livestock prices.

ETRM Becomes CTRM

As a result of these and other changes in commodity markets, traders—particularly financial traders—are more likely to trade a wide variety of commodities and, as they have done so, they have sought TRM solutions that could support a wider variety of commodities too. As we have stated before, ETRM is becoming CTRM software as a result. Some traditionally ETRM vendors have followed this trend, too, offering support for non-energy commodities such as metals and softs, albeit often for exchange traded instruments only. The problem for many ETRM vendors however is just as the physical transaction management of the different energy commodities is extremely complex, so too is the management of the physical side of metals and agricultural commodities. It is neither simple nor straightforward to offer physical transaction management coverage for these commodity groups. Of course, there is also a similar movement amongst vendors that have historically served metals and/or agricultural commodity traders as they try to tackle the complexities of adding energy commodity coverage. As a result, the emerging CTRM software arena will include some non-familiar names for many in the energy side of the industry including Brady and EKA.

EKA—From Agricultural Commodity Beginnings to Complete Commodity Coverage

EKA was founded by Manav Garg with venture funding after working as a trader at a large trading house. He noticed that there were deficiencies in the technologies used to support trading and risk management activities and set out to build a software solution that addressed those issues. The result was The EKA Trade and Risk Management solution, a CTRM solution initially focused on agricultural commodities that later expanded into the metals domain. The key differentiator for the EKA platform is its deep focus and support for the physical transaction management (logistics) around agricultural commodities and metals.

The EKA software is utilized today by a number of clients around the world including the Noble Group, Louis Dreyfus, CHS and AWB. As EKA has succeeded in deploying and continually developing its software it has seen its staff grow to more than 200 professionals and it has opened a North American office in addition to its Bangalore, India HQ. Recently, it announced the appointment of Rick Nelson as Head of Sales, Achuth Rao as Vice President - Product Management, and Mr. Gautam Bhattacharya as Vice President - Professional Services as it seeks to consolidate and grow. It is working towards developing a complete end-to-end solution for commodities but its traditional and ongoing strength is in agricultural commodities and metals.

EKA's Commodity Trading and Risk Management (CTRM) solution for agriculture and soft commodities provides a single platform for managing operations across softs, grains, feeds, edible oils, oilseeds, livestock, and other agri-based businesses. It was specifically designed to meet the needs of the different participants in the supply chain, including trading houses, elevators, distributors, processors, exporters, farmers and importers and covers the entire lifecycle of both physical and financial contracts, combining front, middle and back office functionality. The software also caters for food processors and ingredient suppliers, the meat, poultry and dairy industry and refineries and ethanol plants amongst other segments.

EKA's Commodity Trading and Risk Management (CTRM) solution for metals provides a single platform for managing operations across base metals & ferro-alloys steel and scraps. Again, it was designed to meet the needs of different participants of the metals supply chain, including mines, producers, fabricators, trading houses, distributors, as well as recyclers and covers the entire lifecycle of both physical and financial contracts, combining front, middle and back office functionality.

The New CTRM Product Landscape

CommodityPoint's recent TRM Vendor Perceptions Study² showed that buyers of TRM Software now have familiarity with a broader range of vendors than two years ago. Some, particularly the financial trading firms that trade a wider variety of commodities, are already somewhat familiar with traditionally non-energy TRM vendors such as EKA. Indeed, EKA were amongst the vendors considered as market leaders in industry segments such as agriculture and metals. This is a trend that CommodityPoint believes will continue.

As companies trade a wider variety of commodities they will require broader-based TRM solutions and this will often require the use of different products for different commodity groups or at least for the physical transaction management for those commodity groups. As a result they will be exposed to a wider variety of vendors and products as it is not just ETRM vendors like Triple Point and OpenLink that will offer the needed functionality but also vendors who grew up serving different commodity groups such as EKA who now are adding energy commodity coverage. The CTRM software market will be more competitive as a result offering a broader choice for buyers and users of CTRM software.

Note: CommodityPoint's Online Software Directory at www.trmdirectory.com provides complete lists of CTRM software vendors with direct links to their websites.

---

¹ Changes in Commodity Markets: Impacts on Traders and Software. CommodityPoint Report, 2009


² 2009 TRM Vendor Perception Study Report, CommodityPoint Report, 2009

Contigo Eyes UK and European ETRM Software Markets By Dr. Gary M. Vasey

The ETRM software arena is one that often attracts new entrants. The fact that it is a complex business with many regional and/or asset-type specific requirements, especially on the physical side, means that there is often room for new entrants. UK-based Contigo is one such new entrant hoping to capitalize on its founder’s energy and market knowledge and IT skills. The Directors of Contigo spent many years working at PowerGen, which later became E.On UK. and were heavily involved in putting together that company’s trading systems. As a result, they have a good deal of expertise in UK market requirements and saw an opportunity to be a ‘niche’ supplier in the UK and European ETRM software market.

They founded Contigo in 2006 developing custom applications primarily for UK-based energy companies and found that their industry and market knowledge was in demand. The company has grown based on this model and is profitable according to Simon Piercy; its Director of Commercial and Project Management. But, the company has also been hard at work developing off the shelf software that it now sees as ready for mainstream consumption and its enVoy product is already used by four UK-based gas companies including Centrica.

Contigo’s market focus is “to target smaller players in the market at a lower price point than many mainstream ETRM solutions on the market,” states Piercy. “A lot of smaller players in the market still use Excel spreadsheets due to the high entry cost of an off the shelf ETRM software package.” All of Contigo’s software products are browser-based and employ Service Oriented Architectures making them flexible, scalable and easy to use.

The company’s three initial products include;
• enVoy - for notifications including Exelon notifications, submissions of data to the National Grid, gas notifications to Xoserve. It can support notifications to various agencies and is flexible enough that it is easy to add other data flows as required. EnVoy Interruption specifically provides UK Gas Shippers the capability to manage the process around bids and process flows for interruption.
• enVision – a business intelligence platform focused on energy and utilities. It consolidates trading and operational data for reporting, online analytical processing and data mining activities.
• enTrader – an energy trading platform that supports multi-commodity deals for power, gas, biomass amongst others and provides modules for billing and payments, service contracts and connectivity to trading exchanges.

Contigo reckon that their approach, based on their understanding of energy trading gained by many years in the industry, offers them and their clients an advantage. Piercy states “Our approach is to support a multi-commodity environment and for each commodity we provide a defined delivery calendar that determines the settlement and billing dates. The calendar is built to support complex delivery schedules, such as 23:00-23:00x48 (UK Power), 06:00-0600 daily (UK gas), weekly (UK coal), or annually (Carbon). Corresponding delivery, payment and settlement calendars enable much quicker position, risk and credit management. Products are defined as groups of periods against the delivery calendars. Traders therefore record deals as they would trade in the market – i.e. Power Baseload Summer, or Gas Balance of Month.” They also believe that they are differentiated as a “UK company serving the UK and European market.”

In fact, part of Contigo’s value proposition is to deliver cost effective software quickly and insure an ROI for the client – something that many clients already perceive as a reality. The Head of Trading and Operations of Wingas UK said of Contigo recently “Contigo was able to implement the software over a two day period and provided excellent training, enabling the roll out of the new software to be easily integrated and hassle free.” While the Contracts Manager at British Gas said “Contigo’s contribution was vital to British Gas Business’s successful participation in the first UK Gas Interruption Auction. Contigo helped significantly reduce the impact of the change on our team, freeing our account managers to concentrate on provision of quality customer service to our large account customers.”

But Contigo face a highly competitive market in ETRM software and will compete with a long list of other vendors in the UK market including OpenLink, Triple Point, Allegro, SunGard, Navita, Hyperrig and many more bedsides. End users are often attracted to a fresh face and a new vendor but the honeymoon often does not last. That’s why it is critical that vendors such as Contigo focus on being best in class in a certain aspect of the industry’s requirements utilizing their expertise to establish a beach head in that particular target market. Many new ETRM vendors have come unstuck and got into trouble attempting to be opportunistic and in trying to meet every requirement in an attempt to gain business and market share losing their focus and traction in the process.

The fact that Contigo are UK-based and have deep understanding of UK energy markets is certainly a differentiator but UtiliPoint buyer surveys have always discovered that whether the vendor is local or not ranks very low in any question regarding buying criteria. What is more important is functionality, ease of use and the ability to integrate. By building their software on Service Oriented Architecture, it is likely to be scalable and have good connectivity and their expertise in UK energy markets should ensure that they deliver the functionality. Nonetheless Contigo have made a good start and already have clients, installations and a profitable business.

ELVIZ Is Alive and Well and Living in Europe - By Gary M. Vasey, Ph.D.

Blogging does work. Recently a comment was posted on the UtiliPoint Europe Blog (www.utilipointeuropeblog.com) regarding our lack of coverage of VIZ Risk Management. I replied to that comment suggesting that UtiliPoint would be more than interested in learning more about the company and several days later Mr. Frank Carlsen, CEO of VIZ Risk Management, contacted me via e-mail to arrange a briefing. For me, this is good evidence that blogs are a great way to communicate and discuss topics around the industry!

VIZ Risk Management

VIZ Risk Management was established in 1992, writing front office models for interest rate traders. But it wasn't until 1998 that the company entered the energy software arena. It did so as a result of an interest rate trading client who desired forward curves for the NordPool power market and it has subsequently gone from strength-to-strength. The company now boasts a large number of clients for its ELVIZ ETRM software across Scandinavia and Europe in the Netherlands, Germany, Switzerland, France and Spain. UtiliPoint first encountered VIZ Risk Management in its 2007 European ETRM Benchmarking study1. In that study, VIZ Risk Management was in the top ten ETRM vendors first to mind for European buyers and also mentioned by several respondents as their vote for market leader in the software category.

VIZ Risk Management's early strategy was to target unhappy clients of a competing product which had a large installed base around Scandinavia in the late 1990s. This strategy was successful according to Mr. Carlsen who told us, “VIZ Risk Management now has around 90 percent of that competitors clients (the competitor is no longer operating) and VIZ Risk Management was able to win some European clients, too, as Scandinavian traders familiar with the product moved to other trading firms on the continent.” But the demise of Enron signaled a pause to trader movement and a slow down in ETRM software sales generally as the industry stalled on the back of the merchant collapse.

In 2004, VIZ Risk Management got a capital infusion from some venture capital companies which it used to acquire two smaller companies in Oslo, inheriting several more clients in the process. It also used its cash injection to open an office in the Netherlands from which to target European markets. Today it boasts seven German clients and others in France and Spain with plans to continue to win new European business.

ELVIZ ETRM—An ETRM Product

Mr. Carlsen believes that his product's strength remains in valuation and risk management—with basis in Nordic power, but points to their presence in other parts of Europe to justify the products strong functional coverage elsewhere, too. As might be expected, VIZ Risk Management has added natural gas, emissions, coal, freight and FX functional coverage to ELVIZ ETRM, as well as some scheduling functionality for German markets. Their true strength, though, remains in risk management and modeling where the product offers VaR, PaR, and stress testing utilizing full Monte Carlo simulation.

Typically, VIZ Risk Management has been actively targeting middle tier energy trading firms with a message based around speed and ease of deployment and a product that is trader friendly. But it also has a somewhat unique licensing model in that it licenses its software on a monthly basis i.e., leasing. This proposition is certainly attractive for some trading firms.

Unfortunately, UtiliPoint has yet to see the product in action and is therefore not in a position to offer first-hand comments, except that surveys in Europe around ETRM continue to show that VIZ Risk Management is a strong European vendor in some identifiable market niches with a reputation for delivering effective trading and risk management solutions with the emphasis on financial energy trading. Typically the product will compete with the offerings from other vendors such as OpenLink, Navita, Murex and Allegro in the middle tier of the European energy trading arena.

1 Benchmarking of European ETRM Software Markets, UtiliPoint report, 2007 - http://www.utilipoint.com/rci/details.asp?ProductID=1142

Seeking Total Risk Management Solutions in Today's Commodity Markets

This new white paper can be downloaded below...

What is Really Driving the Price of Crude Oil? By Dr. Gary M. Vasey and Patrick Reames

An article by Ralph Nader caught my eye this week. In that articlei he makes the case, with very little evidence, that speculators are to blame fair and square for the high and increasing price of crude oil. It's the sort of piece you would expect from a politician, especially one not overly fond of the oil and energy industry. It's also an example of the true level of ignorance of anything and everything energy amongst politicians and the media. It's why we don't actually have a coherent energy policy—because the industry simply isn't well understood by the people with high profile names or magazines that like to sound off about the issue.

The point that he makes—that speculators are to blame—is worthy of hard analysis. It's almost certain that the current price of crude oil reflects some level of premium due to speculation but the source of that speculation and the mechanism by which speculation moves prices might be a small surprise to many. Most folks like to blames hedge funds and big banks. Hedge funds are an easy culprit because they are not in a position to defend themselves due to how they are governed on the one hand and so as to preserve their strategy on the other.

However, what really lies behind the rise of crude oil, and commodity prices in general, comes down to a combination of factors and is not just about market speculation. This is why Ralph Nader deserves to be called out for his story on crude prices. He has an axe to grind and, unfortunately, many, if not most folks may believe him.

Let's take another look at some of the factors driving the price of crude oil.

The Fundamentals
It's best to start with the fundamentals because it is, despite Mr. Nader's and others opinions, the reason why speculators got interested in oil in the first place. This apparently gets forgotten by the media and our politicians. One of the first myths to explode is that there is adequate supply. There is not. Supply and demand have been tight for several years now. One only has to inspect data from various organizations like the EIA and IEA to understand that. Two million barrels per day of oversupply may sound like an awful lot of crude oil but, the US alone consumes around 20 million barrels of crude oil on a DAILY basis.

What just isn't understood but is very, very important is that not every barrel of crude oil is the same. No, an increasing amount of the stuff is what is called heavy, sour crude oil. What buyers seek is light sweet crude oil. Why? Because it is more costly to process heavy, sour crude and, more importantly, there is much more limited refinery capacity that CAN process heavy, sour crude oil. So what we have is both supply/demand tightness and a lack of refining to handle heavy, sour crude oil.
According to reports by Lehman Brothers, this situation may last through the end of this decade. A study by that bank suggests that more refining capacity is on the way, particularly in the Middle East and Asia. Much of it will be built adjacent to fields producing heavy, sour crude meaning that it can be processed into usable product ready for export. But for now, even if Saudi Arabia can add 500,000bbls per day of supply, it isn't much use because it's heavy, sour crude that can't really be readily processed due to lack of refining capacity. OPEC points to the fact that its members can't sell all the oil they have to offer because it's the wrong kind!

What put us in this mess in the first place was the rapid growth in demand from Asia and the U.S. Don't rely on my word for it - just read the report by the World Energy Outlook that the IEA issued late 2007 on the future of supply and demand. It isn't pretty reading. But, as the price of crude rises demand should fall. But, in fact, the strength of demand from developing and developed countries alike has actually meant that only now, in recent months, have we seen any sort of demand response at all and that is reflected in a small drop in gasoline consumption in the US and crude oil use in Europe. Frankly, the strength of demand has been pretty robust and the expected demand response simply hasn't occurred as quickly as might be expected. Why is that?

The Impact of the U.S. Dollar
Yes, oil along with many other commodities is priced in U.S. dollars. The U.S. dollar has nosedived over the last two years, with the Federal Reserve trapped between a rock and a hard place. The U.S. economy, as a result of the credit crisis, is in tatters and every indicator suggests that it is headed towards a long shallow recession. In an attempt to spur the economy, the Fed has reduced interest rates several times. The problem is that many other nations are not following the Fed's lead on interest rates. One thing that is now different is the existence of a Euro Zone in which European nations have adopted a common currency and their Governments given up some fiscal control to the independent European Central Bank. It (The ECB) remains adamantly focused on fighting inflationary pressure and recently raised interest rates squeezing the dollar further. In short, the "Mighty Dollar" is simply no longer so mighty. In fact, with a worsening banking crisis in the United States, the dollar has just this week reached a new historical low versus the Euro.

The impact of the weak dollar is to constantly help drive up commodity prices including crude oil in the United States. However, for many other nations, the rise in crude oil prices has been less dramatic than that in the United States. This point can readily be observed in Figure 1 below which clearly shows dollar based consumers paying as much as a $50/bbl premium versus the Euro based consumer. Perhaps, this, in part, explains why a significant demand response has been late arriving. Although gasoline consumption in the United States has experienced a year over year decline recently as many Americans are reducing leisure and non-essential driving, crude price increases have not had the global impact on consumers that has been experienced by those in the United States. In all likelihood, any significant demand response will not occur unless, or rather until, the United States and global economies slow in response to recent economic events.

In recent months, crude oil and other commodities have become a hedge against inflation. Just as gold has always been the place to be in times of a weaker dollar, oil is now the place to be when inflationary trends set in. Many investors are imagining an economic perfect storm—a weakening dollar increasing prices on imported goods and services, combined with accelerating crude price increases (driven in part by that weakening dollar) leading to sharply higher prices for domestically produced goods. In these conditions, tying oneself to crude helps offset the impact.

As we stated above, the Fed is between a rock and a hard place right now. It needs to address inflation but it also has to keep an eye on the overall economy. Unfortunately, its growing more apparent that the balancing act that has been Fed policy is unsustainable.

The weakness of the U.S. dollar then has had a very definite and quite large impact on the price of crude oil and this little to do with speculators!

And Speculators?
It's so easy to blame hedge funds and other "speculators." It's so easy to blame lack of oversight and regulation. But the evidence really seems to suggest that these funds are not directly to blame. In fact, through the first several months of this year, as crude oil prices rose over 40 percent, hedge fund returns were lackluster. The Gardner Energy MacroIndex® (www.macroindex.com) is an index based on the performance of energy hedge funds. True, it reflects hedge funds in energy across the space from equity long/short through debt and including commodity trading, but it was actually in negative territory until the last two months and as of the end of May, was up just 1.42 percent for the year. Yes, it is true that a small number of funds have performed extremely well but the vast majority just are not focused on the very risky strategy of directional crude oil trading. In fact, the evidence for speculation in oil markets is weak at best. In recent months, the CFTC data has shown that speculators are making up much less of the market.

So what is happening? Energy and commodity markets have changed dramatically and one of those changes is just how easy it is for any investor to place money in those markets using a variety of instruments that are relatively liquid and tradable. The evidence now suggests that investment in the growing number of Indexes across the space is the real speculative factor in energy and commodity markets. Investment in these commodity Index funds creates a positive feedback loop and the better the performance the more money comes in. It becomes a self-fulfilling prophecy. These Indexes are essentially a long-only strategy and their investors are actually—yes—You and I through pension funds, endowment funds and so on. We are to blame for speculation because WE are the speculators. Mr. Nader—I hope you don't have money in a pension or endowment fund!? The pressure and the flow of money have been accentuated by the concept that commodities provide a hedge against inflation.

Summary
Exactly what is driving crude oil prices is a very complex study. Yes, speculation is involved but it wouldn't be if the fundamentals didn't point to higher prices in the first place and it wouldn't be if equities were a more attractive investment than commodities for example. In other words, blaming speculation gets us nowhere because, in doing so, we are focusing only on a symptom while ignoring the much larger issue confronting our, and subsequent, generations—natural resource availability. It is the fundamentals of supply and demand, and the various markets reactions to those fundamentals, that must be understood in order for us to take the actions necessary to fend off a crisis that is otherwise inevitable. As we have stated before, what is ultimately required is a comprehensive energy policy that founded in and recognizes the finite nature of the commodities on which the United States and world has grown dependant.

With all of this in mind, UtiliPoint is proposing to undertake an exhaustive study, seeking to further clarify and define the driving forces behind crude oil prices. We hope this study will help to illuminate the realities of the market and, potentially, reduce the amount and level of volume of the uninformed voices seeking to shape the issue in support of political agendas.

We are currently seeking sponsorship for the study. If you or your firm might be interested in becoming a sponsor, please contact us for a study prospectus.

i What's Really Driving the High Price of Oil? Ralph Nader, May 28, 2008, Counter Punch Magazine

Carbon Cap and Trade—The Balancing Act By Patrick Reames

The first attempt to bring forth cap and trade legislation to limit greenhouse gas (GHG) emissions died earlier this month when the Lieberman-Warner-Boxer Climate Change Bill failed in the Senate on procedural grounds. While the bill received more support than previous attempts at climate legislation, much of that support was more symbolic that concrete. In fact, ten of the Democrats who voted to move the bill to a full Senate vote (which ultimately never took place) followed-up, post failure, with a letter to the leadership of the party stating that they would have not have ultimately voted to pass the bill in its proposed form and their future support of any GHG legislation would be predicated upon it meeting several key points, which they detailed as:

• Contain costs and prevent harm to the US economy,
• Invest aggressively in new technologies and deployment of existing technologies,
• Treat states equitably,
• Protect America's working families,
• Protect U.S. manufacturing jobs and strengthen international competitiveness,
• Fully recognize agriculture and forestry's role,
• Clarify federal/state authority, and
• Provide accountability for consumer dollars

And There's the Rub
The issues outlined by the Democratic Senators (the party that is generally deemed to be more supportive of environmental legislation) highlight the critical issues facing any future cap and trade legislation. Despite acknowledging a strong desire to do what they feel is necessary to limit CO2 emissions, these legislators, and many more, recognize that if cap and trade legislation is implemented without measured consideration and extreme care, the U.S. economy could be seriously damaged, with every American affected in ways that most consider unacceptable.

Part of the political problem of enacting a cap and trade scheme (which will be one of, if not the largest, federal program ever enacted) is no real environmental benefit will accrue for many years, as even the most optimistic projections of any plan note that these programs are being enacted in order to stave off the most serious climate effects decades from now. However, the costs will be felt by consumers almost immediately as energy costs will reflect the immediate and anticipated costs of compliance. Utilities are the largest emitters of greenhouse gases in the United States and will be the first targets of legislation. Customers of the largest coal fueled generators, like AEP, Southern and Duke, will feel the pain more than others. There is no way to isolate the consumer from the cost of CO2 emissions reductions.

Some cap and trade schemes being contemplated, like the Lieberman-Warner-Boxer Bill, are based around the auction of the initial emissions permits, or certificates, by the Federal government to the newly-regulated industries. The proceeds from this auction could then be used in various ways to help offset the effects of the program. However, the proceeds of an auction would be a very real cost to industry and would be fully reflected in higher costs for the customers of those effected industries.

Even if the certificates were awarded freely to industry instead of being auctioned, consumers would still be impacted. As the Congressional Budget Office noted in their report, "Trade-Offs in Allocating Allowances for CO2 Emissions" released last year, a CO2 allowance or certificate, even if provided at no cost to a producer, would be treated akin to an asset, an asset that allows that producer to continue to operate while producing CO2. As that allowance is "used up" in the production process, the value of that allowance will be passed to the consumer—at a cost equivalent to replacing that allowance or acquiring an equal amount of carbon reduction technology.

The Senators in their letter note that the Lieberman-Warner-Boxer Bill would have generated up to $7 trillion dollars for the Federal government, the cost of which would be passed on to consumers in the form of higher retail prices for everything from gasoline to food. And this figure, which represents more than $23,000 for every man, woman, and child in the United States, may only be the starting point. The estimates of the effect of a cap and trade system assume technologies will advance sufficiently to allow economically feasible incremental reductions in CO2 emissions to targeted levels; should those technologies—like carbon capture and sequestration (CCS) and clean coal—not pan out, the ultimate costs could be so high as to force abandonment of the program—leaving a big smoking hole in the economy without any of the desired effects.
One of the cornerstones for supporters of greenhouse gas emission reduction legislation is that job losses that result from the impacts to manufacturing and production will be offset, at least partially, by new "green jobs"-those that would potentially materialize from deploying new carbon reduction technologies. These employment offsets have been included in most projections of costs of GHG reduction, and again, should they not materialize, the costs could be even greater still.

Un-leveling the Playing Field
As the Senators' point that any legislation passed must protect U.S. manufacturing implies, a cap and trade program can have very serious ramifications for U.S.-based industry, including producers of oil, gas, refined products, chemicals, metals, coal, and every conceivable consumer good. Each of these industries is going to see the costs of their U.S.-based facilities increase. There is no way around it. If every competing manufacturer around the globe faced the same increases, there would be no concern about competitiveness. However, China, the country that has become the primary base for outsourced manufacturing, and others like India, have clearly indicated that they have no intention to implement any CO2 emissions rules, and certainly none that come anywhere close to being as stringent as those being contemplated in the United States. Given that reality, U.S. industry, particularly manufacturing, will be at a disadvantage against global competitors not faced with similar carbon reduction schemes and will undoubtedly demand some form of trade legislation/tariffs that reflect that disadvantage. If they don't receive some type of assistance, many of these manufacturers may seek to relocate to less costly jurisdictions in order to maintain their competiveness, with the result being increased job loss in the United States.

Additionally and again noted in the Senators' letter, there will be considerable thought necessary to balance the rights of the states against the rights of the Federal government. Any Federal cap and trade legislation will need to ensure that all states are treated equitably. However, as industry is not distributed evenly across the states, those which contain a greater concentration of heavy industry may be more significantly impacted by GHG legislation and will demand some form of relief from its effects, while other states which have already begun regulating carbon emissions, such as California and Massachusetts, will demand an acknowledgement of those efforts. Clearly, the issue of states' rights will come to the forefront in legislators argue the construction of any program.

The European Experience
Europe, which began regulation of greenhouse gas emissions with a cap and trade program in 2005, can offer some insights into the potential issues if the programs are not properly implemented. Under the first phase of the EU Emissions Trading Scheme (ETS), emissions certificates were awarded by the individual national governments to the effected industries, generally at no cost to those industries. It was up to the governments to determine the number of permits to award to any individual facility or company within their jurisdiction. When trading of the certificates opened, the certificate prices trended steadily upward peaking at more than 30 Euros in early 2006. However, within months it become clear to the market that the certificates were over allocated, meaning that little or no emissions reductions were necessary beyond "business as usual" in order to meet lax reduction standards. Subsequently, the value of the certificates fell to fractions of a Euro (less than 10 U.S. cents) as the market dried up. Ultimately, the EU ETS Phase 1 ended with emissions trading virtually dead and, according to the latest available figures, an increase in European GHG emissions in 2006 and 2007 of more than 1 percent over 2005 levels.

Despite the failure of the plan to reduce emissions, many are touting the EU ETS as a success. According to a report issued by the Massachusetts Institute of Technology (and released in support of the Senate's efforts to pass the Lieberman-Warner-Boxer Bill), the EU plan created the infrastructure for achieving reductions and had limited macroeconomic impacts. The economic impacts that have been noted were significantly higher regional electricity costs in the first year and half (corresponding to the period prior to the crash in the ETS market) and some loss of business to non-EU companies, particularly in the steel industry (and again, this is against a backdrop of no real reduction in CO2 emissions).

Phase 2 of the EU plan takes effect this year and runs through 2012. This latest iteration makes some significant adjustments, including a greater percentage of certificates auctioned, more centralized authority (less national control) and a more aggressive cap on emissions. It is this latest phase that will provide the best test of the program's effectiveness in reducing carbon emissions and its effects on the economies of the EU, in particular heavy industry and consumer costs for fuels and electricity.

What Do the Presidential Candidates Say?
Both of the major party presidential candidates, Barak Obama and John McCain, have made very unambiguous statements that they would not only support such legislation, but would in fact push for its adoption.

However, saying they both support cap and trade is one thing. As with most everything in life, the devil is in the details—and unfortunately, a lot of the details are missing from both platforms. In anticipating the impacts of a cap and trade systems, several key parameters need to be understood, including: how will the caps be established and how will they be phased in; how will be credits be allocated—via auction, award, or a mix; if auctioned, how will be proceeds of the auction be used—will they be used to offset economic losses; will offsets be allowed; will there be a bail-out provision should the reductions not occur without serious or catastrophic economic damage? A review of their respective positions (as posted on their campaign websites) while light on details, does reveal some important differences
:
The Obama Plan
• Reduce Carbon Emissions 80 Percent below 1990 levels by 2050 - no detail on intermediate targeted reductions
• 100 percent auction of certificates with "some of the revenue generated by auctioning allowances will be used to support the development of clean energy, to invest in energy efficiency improvements, and to address transition costs, including helping American workers affected by this economic transition.
• Unclear as to whether to allow offsets, but does say he wants to confront deforestation and promote natural carbon sequestration, such as that provided by agriculture.

The McCain Plan
• Reduce Carbon Emissions 60 percent below 1990 levels by 2050, with intermediate targets at 2012, 2020 and 2030
• A combination of allowance awards and auctions. A portion of the proceeds of these auctions will be used to support a diversified portfolio of research and commercialization challenges, ranging from carbon capture and sequestration, to nuclear power, to battery development. Funds will also be used to provide financial backing for a Green Innovation Financing and Transfer (GIFT) to facilitate commercialization.
• Allowance of offsets in lieu of emissions reductions

Senator Obama's plan, being the more ambitious of the two, will certainly be the more costly. Setting aside potential differences in the areas of offsets and other details, experience and a review of available technologies tells us that the cost of the incremental 20 percent reduction proposed by Obama's plan will result in total program costs far beyond those envisioned under the McCain plan. Carbon reduction is an exercise in diminishing returns-each incremental reduction in emissions will be substantially more difficult and costly to achieve than that which preceded it.

Managing Risks of Cap and Trade
Clearly, after the November elections, there is going to be a renewed push toward cap and trade legislation. Should some form of cap and trade be implemented, the ability of industry to manage their risks associated with that market may mean the difference between corporate life and death.
I spoke to Dr. Mark Earthey, Managing Director of Lacima Group - Europe1, and an authority on the European scheme, about the implications for risk managers as they anticipate potential legislation. According to Dr. Earthey, "Political and regulatory risk should be high up U.S. risk managers' agendas as they ponder the ramifications of a scheme similar to that of Europe." He listed some of these regulatory issues that risk managers will need to contend with as they anticipate what may occur:

• Changes to the global “Big Picture”, such as a “son of Kyoto” post-2012, and the implications should the U.S. program have linkages with those of the EU and others
• At the national strategic level, what will happen if anticipated emissions reductions don't occur or the costs associated with the targeted reductions become economically unacceptable? Will the market be subject to a “helping hand”, i.e., direct intervention via rules changes?
• At the tactical level, random minor adjustments by the technical authorities to emissions calculations methodologies may change underlying physical liabilities of some sectors.
• Changing/imposing project credit import quotas (e.g., from the EU ETS or CDM) impacts the domestic allowance supply-demand balance.
• Clumsy or negligent release of market-sensitive data from a relevant authority such as happened in Europe, leading to the precipitous drop in value for emissions certificates.
• Introduction of new sectors, and uncertainty over timing & amount of liability due to delaying tactics (lobbying) by that sector.
• Arguments over the basis & consistency of allowance allocations.
o by sector
o by state
• New legislation or regulatory rule making in related areas, such as renewable energy sources, energy efficiency, CCS.

According to Dr. Earthey, "All these regulatory risks will impact carbon price volatility to a greater or lesser extent, over and above levels associated with a 'normal' energy/commodity market. A big driver of carbon price volatility is market perceptions of scarcity, so regulatory 'tinkerings' with the supply-demand balance will have major follow-on impacts. As a case in point, there was high volatility in Phase 1 of the EU ETS, with allowance prices falling some 60 percent in one day as the result of premature release of verified emissions data, leading to a shift in perception from a net-short to net-long market. From a purely quantitative point of view, there is some debate over how representative the last three years of EU ETS Allowance prices behavior will be of future volatility levels. Cynics will expect more of the same, as both governments and liable companies bed down to operate in a Carbon-constrained world. Thus one can expect risk managers to supplement their tradition risk modeling and quantification techniques with a healthy dose of stress-testing, based on real-world scenarios."

Balance is Necessary for Success
As noted by Dr. Earthey, for any cap and trade scheme to be successful, both commercially and in terms of reducing emissions, the market must have a perception of "scarcity"; that is, caps must reflect real reductions in emissions, and by implication, a real cost in meeting the cap requirements, otherwise, the certificates, as it emerged in Europe, will decline in value and risk market collapse. However, if the cap is too aggressive and reflects required reductions beyond what is commercially and/or technically achievable, prices for certificates will skyrocket, which will be quickly reflected in ever increasing prices for goods and services across the board for consumers.
That's the delicate balance that must be struck—CO2 reductions must be real, but achievable without serious economic damage. While a cap and trade system is the most effective system for allocating costs from the most efficient entities to the least efficient, on a macro level, such a system cannot reduce the real costs of reducing greenhouse gas emissions, it will merely provide an efficient method to redistribute them.

Ultimately, the success of any carbon reduction program will be dependent upon the regulators ability to recognize what is achievable within a framework similar to that elaborated by the ten Senators. If a program of carbon reduction is based on projections of continual advancements in enabling technologies that fail to materialize, the ultimate costs of such a program could be much greater than anyone, other the most cynical, anticipates.
________________________________________
1 In 2003 Dr. Mark Earthey became MD of LoigicaCMG's "Emissions Solutions Business". In this capacity, he joined the British Government Department of Trade and Industry "Emissions Roadshow" team that exports UK knowledge on emissions trading and environmental compliance. Mark continues in this role at the Lacima Group and often speaks at conferences and workshops across the world dedicated to Carbon trading and the cap and trade mechanism. Mark frequently mixes with the whole community of participants in emissions trading schemes, including politicians, company executives, risk managers, traders, and IT managers, seeking their views and discussing their concerns. He is a well-known commentator on environmental matters.

Evolving Power Markets— Opportunities and Challenges by Patrick Reames

The market restructuring programs currently underway at the California ISO and Texas ERCOT represent potential new opportunities for energy traders operating in these markets. The development of new centralized day-ahead markets, combined with a change from the current zonal pricing models to resource specific nodal models, open up what are potentially more liquid markets that provide significant opportunities for both generators and power traders that don't hold assets. However, with opportunities come challenges, not only in terms of business strategy, but with the processes, people, and systems which need to be in place prior to pursuing business in the newly restructured markets.

California ISO—“MRTU”
The California ISO's Market Redesign and Technology Upgrade (MRTU) program is currently forecasting a “go live” date of February 1st, 2008. As the CAISO describes it, the MRTU is “a comprehensive program that enhances grid reliability and fixes flaws in the ISO markets. It keeps California compatible with market designs that are working throughout North America and replaces aging technology with modern computer systems that keep pace with the dynamic needs of California's energy industry.”1 For market participants, it entails a multitude of changes to the market structure, the most interesting of which are the move from zonal pricing to nodal pricing and the development of new day-ahead markets for energy, ancillary services and transmission management, with co-optimization, that is offerings including both energy and ancillary services in that day-ahead market.

Additional changes of note include the development of a new congestion revenue rights (CRR) product, increased credit monitoring of market participants, and new penalties and enforcement procedures for deviations from the ISO dispatch instructions.

Texas ERCOT—“Texas Nodal Market”
ERCOT is projecting a “go live” in December 2008 for the extensive changes they are making to the Texas power market structure, most significantly (like California), the transition to a nodal structure, moving from the zonal model that has been in place, and the development of day ahead power and ancillary services markets. And again, like California, ERCOT will implement co-optimization for energy and ancillary services.
Other important changes in the ERCOT market include issuance of CRRs and the development of a secondary market for those CRRs, new collateral credit requirements for market participants, and separate settlement for the real-time and day-ahead markets.

Alike but Different
The market changes in California and Texas appear to be similar and to a large extent they are. In fact with the changes in these two states, they are becoming more aligned with the mainstream of the other ISO/RTOs in the United States (with the exception of the SPP, which has not yet implemented centralized day-ahead markets).

However, there are significant differences in the design and execution of many of these changes in the two states. These differences are in some ways reflective of philosophical differences brought about by California's energy crises of 2001 and in other ways they are an acknowledgment of the physical differences between the two markets. California's grid is somewhat dependant on imported energy, while ERCOT, a practical “energy island,” operates more or less in isolation from its surrounding states.

These differences show up in the initial allocation of CRRs (California awarding CRRs to load, ERCOT auctioning to market participants) and the execution of the energy markets as it concerns capacity (ERCOT will make payment to generators for energy only, where as CAISO will provide payment to generators not only for energy but also for maintaining capacity).

Challenges
With the move from zonal pricing to nodal, pricing granularity is greatly increased, with the number of prices in the two markets moving from less than 10 in each to more than 4,000 in Texas and more than 3,000 in California. Obviously this increase in data will significantly impact the processes and systems used for managing deal entry, price structuring and position management.

Data management will become more critical to the information discovery, capture, and decision making process. Systems that managed this data in the pre-Nodal or pre-MRTU markets will be insufficient to support activities. Forecasting and analysis will be heavily impacted, most likely requiring the development of new models and tools, in addition to the development of strategies to address the lack of historical pricing associated with the new nodes.

Scheduling systems and ISO interfaces will be impacted as well. Participants in these markets will be dependant upon their selected vendors to deliver the new functionality required for managing schedules and paths involving the new nodal points and for interfacing those schedules with the ISO's.
With the dissolution of zones down to resource specific nodes, the book structures used by most participants will change, with the resulting impact on ETRM system configurations, effecting not only deal capture, position management, forecasting and scheduling, but also reporting. Significant rewrites of existing reports and development of new reports will be required.

Addressing the Challenges
As energy traders contemplate participating in the new markets, they need to consider not only business strategy, that is “how can we make money in these markets?”, but also consider the costs associated with aligning their systems, processes and people to the new market rules.

Knowledgeable and skilled personnel are a perquisite for success. However, it is this element that may be the most difficult to address. With an aging workforce, a robust energy economy and increased competition for new graduates entering in job market, qualified resources are at a premium. Filling new roles necessitated by the market changes will require realignment of responsibilities across the organization, with particular movement toward the forecasting and analysis areas. New hires will require significant training and orientation, involving several months of less than optimal production as they become familiarized with their roles and responsibilities prior to the opening of the markets. The costs associated with these personnel additions, movements, and training will be significant.

Process changes will be far reaching, effecting trade strategies, limits, deal capture, position management, scheduling, and risk management. Each new aspect of these markets will need to be examined for compatibility with current processes and the necessary adjustments made and tested as the company moves toward actively trading. And as these new processes cannot exist in isolation from the systems used to analyze, support, and record market decisions, the implementation of new processes cannot occur in isolation, but must be “part and parcel” to the implementation of the new systems that will be required.
The systems implications may ultimately be the most “easily” solvable of all the challenges. Vendors of ETRM, scheduling, and settlement systems have been at the forefront of assessing the impacts of the market changes. The leading vendors, such as OATI and The Structure Group, have been directly involved in working with the ISOs to ensure that the required changes are fully and accurately reflected in their systems. They are currently working in the testing environments provided by the ISOs, testing not only their functionality, but also helping to harden the processes implied by the new market rules.

Given these vendors' past experience with the other ISO/RTOs that have in place similar market structures, and their intimate knowledge of the changes occurring in California and Texas, companies that wish to do business in the new markets should seek to leverage that experience and knowledge.
For more information on the upcoming market changes and their implications, UtiliPoint recommends taking advantage of one of the web-based or public seminars offered by the leading application vendors such as OATI or The Structure Group, or by consulting organizations such as SunGard Consulting.

ETRM Providers Are Going Wide by Patrick Reames

Recent acquisitions in the ETRM space clearly indicate that many solution providers are moving to broaden their presence outside of the “traditional” ETRM model, seeking to service an ever increasing portion of the energy value chain. While the market for wholesale energy trading and risk management systems remains strong, areas adjacent to this market are showing similar strength and have drawn the attention and dollars of the ETRM vendors.

In previous years, acquisitions were primarily executed to gain market share. Companies such as Caminus and SunGard purchased smaller competitors, increasing their customer bases, but, in the process, they also expended significant energy and resources reconciling overlapping products and strategies.
The latest deals, however, do not come with the burden of competitive products. They offer the acquiring companies the opportunity to grow revenues without the attendant costs of supporting multiple products serving the same market or ending support for one or more of the products and trying to maintain and service customers through that process.

Asset Heavy Focus
Competition among the leading vendors, particularly in the “asset light” market (deals involving hedge funds, banks, and brokers) has been fierce. As that segment of the industry and the products servicing it mature, it is becoming increasingly difficult for solutions providers to differentiate themselves from their competition for these primarily financial players. Sales in this segment are becoming more about the vendors' reputations and less about the products functionality. However, for prospects holding significant assets, such as generators, utilities, and oil and gas producers, logistical and physical risk management challenges offer solutions vendors an opportunity to sell a combination of creative products focused on solving these unique and complex problems.

SunGard's Acquisition of Energy Softworx
SunGard Energy's recently announced acquisition of Energy Softworx enables the company to broaden their market reach without having to expend significant resources on product reconciliation. Energy Softworx has achieved success by focusing on unique logistical problems and in the process has become the market leader in the servicing of fuel management needs for power generators. Their FuelWorx product, with additional modules covering fuels budgeting, rail management, and gas fuel supplies, are targeted solutions that provide deep functionality in areas that are underserved by “typical” ETRM solutions.
We had an opportunity to meet with Debbie Wohlers, now COO of the Softworx group of SunGard's Energy Solutions unit, and Karen Dowd, SVP for Softworx customer services, product management and product development. Together, they formed the management team responsible for Energy Softworx's success as an independent company. They noted that the acquisition has been very well received by their customer base, indicating that SunGard has a very good opportunity to leverage Softworx's success to introduce the entirety of the SunGard Entegrate product family to those customers.

With this acquisition and the transition of the ACES power scheduling and deals management system onto the Entegrate platform, SunGard is now able to offer a broader asset oriented solution to merchant generators and utilities.
Matt Mandalinci, president of SunGard's Energy Solutions unit, has indicated that the company will continue to seek acquisition opportunities that allow them to increase their coverage up and down the energy value chain.

Other Recent Deals
In January of this year, Open Link Financial announced they had acquired IRM, a European based provider of asset management, forecasting, optimization and planning solutions for utilities, generators, and oil and gas producers. While primarily serving the European markets, OLF has indicated that they are bringing the solutions to the North American market and are focused on growing their presence in the asset heavy space. Their asset centric strategy is further evidenced by their recent announcements of the release of a new oil and gas producer services module and cMotion, a logistics and scheduling solution for virtually any commodity.

Solarc, a company that has seen significant success in the natural gas liquids, petroleum, and industrial fuels markets with their RightAngle product, announced late last year that they picked up Trinity Apex, a provider of physical gas management solutions. Trinity Apex's Ties II product provides significant gas producer, transportation, and storage functionality, giving Solarc a wider footprint in the physical natural gas markets.
The latest deal in the ETRM space, announced just two weeks ago, is the acquisition of Global Energy Decisions by Ventyx. Ventyx came into being earlier this year with the merger of Indus International and MDCI Mobile Data Solutions, creating one of the largest global suppliers of billing, revenue management, call center, materials management and service delivery solutions to the utility markets. With the acquisition of Global Energy's energy trading, risk management and asset management solutions, Ventyx is now positioned to cover the majority of the power utilities value chain from generation to retail billing and customer care.

Moving Toward Energy ERP
ETRM vendors are taking a more holistic view of the energy markets—not only acquiring products covering adjacent functionality, but also creating new ones, such as OLF's producer module. Certainly, ETRM will continue to be a lucrative market for these vendors, but areas such as asset management, forecasting, and planning and control are commanding more attention and becoming components of more comprehensive energy solutions. As one executive stated, “It's no longer just about ETRM—it's becoming more about energy ERP (enterprise resource planning).”

Customers Impacts
For systems providers, the advantages of serving the wider energy markets are clear: increased market opportunities and the ability to grow through acquisition without creating product conflict. For the customers of these systems, significant advantages also exist. Integration of the multitude of applications necessary to run an asset heavy business has always been problematic and expensive. Purchasing these systems from a single source helps to shift that burden from the customer to the vendor. Additionally, upgrading components of a single sourced solution should be less burdensome as the newly released products will be compliant with the vendors overall technology and integration framework.

However, downsides do exist. There can be significant risk associated with a single vendor supplying and supporting a majority of systems that businesses rely upon. In selecting a solution covering multiple operational areas, buyers need to be doubly certain that their chosen vendor is stable and has the financial wherewithal to weather potential market downturns. Additionally, the odds are that no single vendor will provide the best “fit” for every need of a complex asset oriented enterprise, leading to some level of compromise in order to get the best overall solution.

What's Next?
The upstream push will undoubtedly continue. Utility centric functionality is now a component of many of the leading ETRM solutions and the coverage is fairly extensive. Oil and gas producers are also seeing increased attention from providers; however, there are areas in this market that have not yet been impacted in the latest merger and acquisition activity, including production revenue accounting and land management. It would certainly not be surprising to see transactions in these areas within the year.

Trayport After the GFI Acquisition - By Gary M. Vasey, Ph.D.

GFI Group Inc., the inter-dealer broker specialising in over-the-counter derivatives products and related securities, purchased Trayport for £75 million in February. Trayport provides real-time electronic trading software for brokers, exchanges and traders and the acquisition represents a five time multiple of Trayport's £14 million revenue per annum. The deal was anticipated to raise a few eyebrows across the European energy trading space as Trayport is a significant trading platform for European energy, while GFI is one of the main inter-dealer brokers. However, both companies have worked hard to allay any concerns.

What drove this acquisition, how does it impact current and Trayport users and what is the future for Trayport? I recently spoke with Alan Bright, PR Manager for GFI Group and Elliot Piggott, Deputy Managing Director for Trayport to get these questions answered.

The GFI View

According to Alan Bright, the Trayport acquisition provides GFI with an ability to enhance its electronic trading capabilities. GFI believes that the supply of electronic trading platforms is critical to its continued growth. In European energy trading, Trayport is a leading player and all major broker/dealers use it. So while GFI's strategy is to own the technology delivery platform, it is important to continue to do so in an open fashion. The Trayport platform has little value unless it is utilised by existing and future clients. Indeed, GFI see the platform expanding into many other areas and recent announcements regarding the Trayport distribution of NYMEX products and its relationship with Tradition, a large interdealer broker, certainly reinforce this strategy.

“Trayport is run at 'arm's length' by GFI Group and interactions are only at the Board of Directors' level,” Mr. Bright explained. “GFI Group remains a key client of Trayport as well as its owner.”

The Trayport View

From Trayport's perspective the motivations behind the deal seem to be slightly different. It sees the acquisition as affording it the opportunity to grow beyond the traditional European energy markets into North America and Asia-Pacific while offering the electronic trading of other asset classes via closer cooperation with GFI Group. It believes that the acquisition cost paid by GFI reflects Trayport's growth potential, and argue in response to worries over the acquisition that any change to their current growth model (being an open platform with respect to other broker/dealers) would certainly change Trayport's growth profile.

Trayport argues that the acquisition has not impacted its ability to write and support quality software and that, in fact, they have already expanded the market access side of the product since the acquisition through the addition of access to NYMEX, NordPool, DEX and ICE products. The announcement around Tradition also appears to suggest that their continued independence as a self-managed entity with the same business focus and management team has helped continue to establish the platform's value to other broker/dealers even post the GFI acquisition.

Mr. Piggott said, “GFI Group simply desired to grow their investment in technology and electronic trading. Meanwhile, Trayport continues to aggressively sell to GFI Group around the world as a strategic client."

UtiliPoint's Assessment

UtiliPoint believes that the acquisition of Trayport by GFI Group, while perhaps threatening to initially raise some quite genuine concerns regarding future platform openness, provides no real fear to Trayport's current clients. Our assessment is based on the idea that any change in Trayport's ability to be "open" with respect to other broker/dealers, would significantly erode its ability to deliver and impact its market share. At a valuation with a multiple in excess of five, this makes little or no sense for either party—it is a significant investment on the part of GFI. This view seems reinforced by the rapid progress that Trayport have made in providing new markets and products for their users via the platform and by the recent announcement of a five-year partnership with Tradition—another broker/dealer.

Present and Future

Trayport has a dominant position as an electronic trading and deal discovery platform in European energy trading where 100 of its 115 or so employees are based. Mr. Piggott points to the high predominance of OTC trading in Europe versus other regions like the United States, where OTC trading is generally not electronic and trading is more exchange-based. Trayport hope that the GFI acquisition will help them expand in other geographies including North America however.

Piggott also is a little surprised by the slow evolution of markets pointing to cross asset trading as an example and in the slowness of the traditional markets to get into commodities. He also points to freight rate trading as an area of growth where “three to four years ago, freight was considered too complex to trade electronically,” but is now a growth market. One thing is for sure, since the GFI acquisition Trayport has continued to add connections to its platform and exchanges such as SIBEX and ECOMEX have moved or are moving to its platform.

Will Triple Point Benefit From its Acquisition of ROME? by Dr. Gary M. Vasey

Given the turmoil that has subsequently occurred in commodity and other markets, the acquisition of ROME Corporation by Triple Point Technology in July, 2008 might prove to have been a very smart move indeed by the management team at Triple Point. At one time, credit risk management was the poorer brother of market risk management despite the emergence of both ROME Corporation and RAFT International a few years ago. RAFT was acquired by Financial Objects in 2006 which was subsequently acquired in 2008 by Temenos, the banking software company. ROME is now the credit risk side to Triple Point's business. But in today's volatile commodity markets, the assessment of credit risk is increasingly viewed as mission critical and accordingly, it is moving closer to the front office.

Credit Risk Emerging as a Key Requirement
Volatile commodity markets make for significantly increased risks and in an era of tighter credit conditions, credit risk management is a significant aspect of a trader's exposure. Lack of access to low cost capital, counterparty credit rating migrations and increased margin and cash calls as commodity prices have risen, have all contributed to the need to tighten credit and credit risk management at trading firms. The collapse of Lehman Brothers and the demise of Constellation Energy have already sent out ripples into the market which will have an, as yet, unknown impact, but the collapse of Enron and the energy merchants is surely still fresh in most people's minds.

Of course, markets have moved on today. There is significantly more trading by a greater diversity of players ranging from energy users through to banks and funds. There is greater absolute volatility and higher prices. There are more instruments and commodities to trade and more money at stake than ever before. There are more arbitrage opportunities and commodities as an asset class means that not all price movements are tied to commodity fundamentals or even market sentiment. These days, price movements can also be related to trading activities and market movements in other asset classes. So certainly, now is the right time for Triple Point and its ROME acquisition.

Understanding the Acquisition
One key aspect of the acquisition was the immediate benefit to ROME from being a part of a larger organization. Although ROME did an excellent job of earning some of the top energy and commodity companies in Europe as clients including E.ON, SmartestEnergy, Atel and BG, its European infrastructure was minimal at best prior to the acquisition with a small office in London and a reliance upon contractors to assist in implementations. Today, ROME has essentially doubled its entire staff due to internal training and significant European hires and has gained access to Triple Point's sales and support staff who can sell and support the ROME software. According to Dan Reid, VP, Credit Risk Solutions for Triple Point, “We have doubled our support staff and cross-trained our sales force, sales engineers and services people vastly improving our market reach and implementation and support capabilities. We can now also work with Triple Point's system integration and consulting partners as opposed to independent contractors.”

But Triple Point Credit Risk Solutions, as ROME is now known, is still a solution that can and has been deployed in conjunction with other ETRM and CTRM software platforms, not just Triple Point's. “We always had to integrate with a variety of platforms and so we use our credit integration tool which was built from the ground up to integrate us with many ETRM platforms,” Reid told me. This affords another advantage for Triple Point since the ROME software already integrates with Triple Point's solution out of the box but Triple Point aims to tighten the integration further believing that fully integrated risk and credit is increasingly a top requirement in the market. Essentially, Triple Point can have their cake and eat it too by virtue of being able to provide a credit risk solution to work alongside competitors ETRM products or offer a more tightly integrated solution of their own.

Feedback regarding the acquisition has been very positive says Reid as he can now offer significantly improved support and services as well as continue to serve their clients regardless of ETRM platform.

Europe Benefit?
The acquisition has probably most benefited ROME's capabilities in Europe however by providing them access to Triple Point's significant presence on the continent. In fact, Europe likely has a good deal of potential for Triple Point's Credit Risk Solutions. “Europe has so many different regional and national rules and regulations, different netting and pricing terms and so on that accentuates the requirements for a comprehensive credit solution” says Reid. Indeed, Europe is not yet a single homogenous market for trading and still has some way to go to meet that objective despite the EU's push towards that goal. There are also a larger number of counterparties and a lot more laws and regulations around things like equal access, for example that makes the trading picture a good deal more complex and impacts management of credit greatly.

When that increased complexity is set against today's trading environment it must equate to high demand for solutions and integrated solutions at that. It is today's market volatility however that has really brought credit into the mainstream focus for commodity traders. A trader can do a trade and hedge it eliminating market risk but ignores the margining and collateral requirements at their peril. “Often the cost of credit to support the trade is not properly considered,” states Reid.

Today, a trader must consider the credit aspects of the trade they are contemplating more than ever before. This involves understanding the credit quality of the counterparty, the cost of credit and collateral and a good deal more. “Traders have in the past depended on credit rating agencies to tell them that they can do a deal but now the world has been turned upside down,” says Reid. “Credit has been the watchdog and the stop sign but now traders need to be comfortable with the details. Credit is moving closer to the front office as a result.”

UtiliPoint Assessment
Indeed, UtiliPoint has already observed and commented on market liquidity issues related to the cost of credit that has impacted smaller physical players' ability to participate and we expect the situation to get worse not better over the coming months. In retrospect, Triple Point's timing in the acquisition of ROME couldn't have been better and in our assessment it adds a significant revenue contributor to the company. While there remains a risk that users of competitors' ETRM software will be less likely to procure Triple Point's credit risk solution, the bare facts are that there are few, if any, true alternatives squarely focused on energy today and credit risk remains something of a 'best of breed' solution category anyway.

Credit risk management and its integration into ETRM and CTRM solutions will increasingly become a key factor in the battle for market dominance in the space. Through its timely acquisition of ROME, Triple Point has placed itself in a potentially market leading position to provide a broader-based solution or even a best of breed component. At this time, Triple Point's acquisition appears to have been extremely well timed. We will see.

New White Paper

The Return of the Windfall Profits Tax is a Bad Idea for Consumers By Patrick Reames

There has been a lot of press coverage recently about how many, including some politicians, are calling for the re-implementation of the windfall profits tax. In one story recently printed in the Houston Chronicle, a representative of the Sierra Club was quoted as saying that they were certain that this being an election year, “action in Congress is going to be sudden and faster than many think,” meaning that there would be some sort of legislation to penalize “big oil” for making so much money. This effort to bring back a tax on domestically produced crude is short sighted and would be counterproductive in the efforts to bring down the cost of energy. The crude market is a global market. Gone are the days when the United States produced all or even most of the crude we use; in fact, the United States produces only 33 percent of the oil we consume. There is nothing that any individual domestic producer can do to bring down the price of oil other than to discover, and bring to market, new supplies; and short of a huge new find, that price impact would be minimal.

If the windfall profits tax were brought back, who ultimately would be penalized by it? If you increase the taxes on the suppliers of any good or service, what happens? The cost to the consumer invariably increases to off-set the cost of the tax. It's doubtful that any American consumer would be willing to pay more at the gasoline pump just for the satisfaction of knowing that the oil companies are being subjected to the additional overhead burden of managing the costs of such a tax.

Ultimately the only producers that will feel the impact of the tax are those that don't own refining assets, meaning they can't immediately pass along their increased costs to the consumers of refined products. These would primarily be the smaller producers, those that operate many of the marginal fields and wells that don't provide significant profit. Many of these properties have been sold off by the majors as their high internal cost structures made the fields uneconomic to continue to own and produce. The smaller companies with their lower overhead burdens have been able to keep these wells flowing and still realize a small profit. However, any additional costs, such as increased production taxes, will make many of these properties uneconomic and lead to their being abandoned. Additionally, in taking money from producers, they will have less dollars and incentive to seek out additional domestic reserves, meaning there will be less supply in the future to replace what is being produced now. An increase in production taxes will create a loss of domestic production, forcing increased imports, increasing prices and making us even more dependent on potentially hostile suppliers.

The bottom line on crude and fuel prices in the United States is that we are now price takers, not price setters. As long as we import two thirds of our oil needs, we are going to be subject to the winds of global prices. Although, the argument could be made that even if we produced 100 percent of our needs, we would still be subject to those same winds as commodity sellers will always seek out the highest price. It wouldn't matter if the crude was produced in Oklahoma—if China was willing to pay more for oil than folks in the United States, the oil would go to China. Crude oil markets are the ultimate expression of the global economy.

This election year mentality of politicians pandering to angry consumers is counterproductive. “Punishing” the big oil companies will have a negative effect at the pump for U.S. consumers and will do little in the way of advancing our efforts to become less dependent on others to meet our critical energy needs. There is no viable near-term political solution for the issue of higher fuel costs.

So, Why is This Even Being Considered?
Given that the impact of instituting a windfall profits tax would be to increase the cost of gasoline and other crude supplied energy sources, why is there a growing perception that it's time to bring it back? If you listen to the arguments for its return, it's always broached as a way of taking back the money that we, the consumer, have overpaid to the oil companies. The problem is that we will see none of it, so obviously it's not a tax that is meant to aid the consumer, and in fact, the unspoken justification of increasing taxes is just the opposite. The ultimate goal for many, if not all, of the supporters of the windfall profits tax is to increase the cost of gasoline. The reasoning is that if the price of gasoline can be increased to such a degree as to force significant numbers of Americans to park their cars and find other means of transportation, then the ends justify the means. The environmentalists, like the Sierra Club, see it as a win because if we consume less oil based energy, we will reduce carbon emissions, and in their view, help reduce global warming. Others, like the growing numbers of “Peak Oil” believers (those who think that world oil production has peaked and it's all downhill from here) believe that the sooner we can force ourselves off energy derived from oil, the better. They believe that doing it now on our terms would be better than it being forced on us later by foreign suppliers.

Are There Alternatives?
There is one economic policy decision that can be made that will bring down the cost of crude, and that is to pursue a strong dollar policy. The devaluing dollar has, by many accounts, contributed more than 30% to the rise in crude prices over the last couple of years. However, there is little or no interest on the part of the Fed or the Treasury to manipulate the dollar exchange rate, and given our current economic conditions, many of the tools of such a policy, including increasing interest rates and decreasing deficits, would be counterproductive to the government's current efforts to stave off or ameliorate the impacts of the pending recession.

Ultimately, the only action that politicians can pursue that won't significantly harm consumers is to pass legislation that provides tax cuts and grants to businesses and research institutes that are pursuing innovative new sources of alternative energies or are perfecting existing ones. Additionally, while those alternate solutions are brought forward, allow and even encourage U.S. producers to seek additional domestic sources of oil and gas, such as the East and West Coasts and in Alaska. Doing this, while not significantly reducing prices, will help to somewhat reduce our exposure to potential interruption of foreign sources of energy.