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ADDITIONAL RESOURCES
More News & Trends
Utility Fire Sale
Independent power producers (IPPs) and some shareholder-owned electric utilities have been selling off assets in an attempt to improve their credit ratings and boost liquidity. IPPs accounted for most of the activity, which reached $11 billion-worth of plants and pipelines by mid-2002. Liquidity and debt concerns, improving credit ratings, and a desire to increase financial flexibility are among the reasons many companies are selling assets in response to the credit crunch associated with the diminishing income from the energy trading sector. The stream of sales has created a buyer's market, but also raises concerns that companies are sacrificing long-term income streams for cash to meet their short-term needs. For example, sales of pipelines removes from a company's portfolio low-risk assets with stable cash flows. MidAmerican Holdings has benefited, however. The company just purchased two interstate pipeline systems, ranking them as the leading owner of U.S. pipelines. And the fire sale is taking place both at home and abroad. NRG, for example, placed all of its overseas portfolio up for sale, including the ones held for only a short period of time. Unstable economic conditions have contributed to a lot of the activity, though companies are also gaining liquidity from these sales to deal with the conditions in the United States. Companies are also cutting dividends, revising their capital expenditure programs, and refocusing on core holdings. Calpine is one of the few companies that did not sell out: It managed to preserve liquidity by canceling projects from its construction program, the largest in the industry.
Virtual Transmission Room
A new software tool developed by the Electric Power Research Institute (EPRI), called the Community Activity Room (CAR), depicts the nation's transmission network as a multi-dimensional "room" that transmission operators, owners, and market participants can use to visualize the constraints imposed on the system at any given time. "The walls, ceiling, and floor of the CAR represent the limits of the space within which local and interstate power transactions can freely take place," says Stephen Lee, the originator of the concept. "It's like the floorplan of the transmission grid." The conceptual walls are actually based on mathematical definitions of wholesale power transactions: Each line represents an actual transmission line. A lightbulb that moves around the "room" represents the status of the wholesale power market. Operators can control the bulb and direct it further inside the walls if forced outages occur. For example, if lightning knocks out a major transmission line, its load transfers to another line. CAR depicts this by moving the line adjacent to the outage closer in. Multiple outages cause the walls to start to move inward, thus reducing the amount of space for the bulb to move in. As congestion on the grid increases, the bulb can migrate outside the walls. Once this happens, the software provides instructions for getting the grid back under control. "There are three audiences for this tool," says Lee. The independent system operator can use CAR to monitor operations of the grid for safety purposes. Transmission line owners want to know how the market is using the lines, and whether they should expand their infrastructure to meet market demands. CAR can generate usage statistics for this purpose. "Finally, the market wants to know where and why its transactions are being curtailed. The CAR lets them know if there's a way to get around the congestion," says Lee. The tool was developed for the North American Reliability Council in preparation for summer 2002. "We were looking for a way to visually represent the complex relationships of the transmission grid," says Lee. "The metaphor of CAR's many-sided room creates a sense of interdependency and community that exists around the use of transmission." The CAR is currently being applied in a pilot project with NERC to study the eastern interconnection.
THE HUMAN ELEMENT IN ELECTRONIC TRADING
Finishing the Trade
By Gary M. Vasey
Gary Vasey is the founder of VasMark, a strategic marketing, consulting, and communications firm in that works with buyers and sellers of energy software.
Since the deregulation of the natural gas and wholesale power industry, several fundamental shifts have occurred in the energy commodities business-each a dislocation event for the software vendors, where changing market requirements interrupted the typical technology adoption curve. It's in this unstable world that many energy trading, risk, and transaction management (ETRM) vendors and products (which handle contract management and other "back-office" functions, as opposed to open market exchanges) were born and, in many instances, died due to the shock of an abruptly changed environment. Since most of the vendors were poorly capitalized, they were unable to build the new functionality that the shifted market required. Better capitalized vendors were often able to make the transition, introducing new or enhanced products and sometimes taking the opportunity to buy out their competitors. At least from a software point of view, the new market looked larger, more urgent, and more attractive than before, especially to new entries with the right product. Before wholesale power deregulation, a thriving group of mostly small software vendors was busy establishing gas marketing software packages. One or two were actually offshoots of marketers and pipelines that had built internal systems and thought there might be a market for their software. But with the advent of wholesale power, the industry required systems to capture, schedule, and invoice power deals-and none of the existing gas-based vendors had the solution. While some were able to build new software, many simply dropped back and continued to focus on the physical gas aspects of the business. Almost overnight, new vendors built physical power marketing software from scratch and were able to attract sufficient customers to become players in their own right.
With the advent of power marketing came the need for risk management. Natural gas marketers and producers had experienced little of the price volatility that came with unstorable, instantaneously delivered electric power. This sudden realization of the need for risk management happened almost simultaneously with the requirement for transaction management systems and created yet another major new market requirement for the existing vendors. Once again new vendors entered the market-start-ups as well as existing vendors from the financial markets that already had risk management systems that easily might be reconfigured for energy. By the time the market stabilized, the vendor and product landscape was vastly different, and some players had disappeared altogether. In fact, this process keeps on repeating itself with one dislocation event after another wreaking havoc for vendors and buyers alike.
A Package Market?
Dislocation is not the real issue, however. Few standards exist in an industry that is fundamentally governed by the nature of the physical assets on the ground and a mostly local regulatory regime. For a vendor to design and build truly packaged software, the number of ways business gets done must be limited-there can't be too many business models. The packaged code must apply to a broad enough market to make it economic to support the package through a natural lifecycle. And that's a big problem. Different users' requirements vary dramatically based on what assets they own, how they are operated, and under what regulatory regimes they are managed. A package that is an 80-percent fit in one part of North America barely meets 50 percent in another part of the country. The consequence is that products become more and more complicated as vendors sell into an ever-larger installed base-the result is that the programmers produce nearly unsupportable spaghetti code that doesn't fully meet anybody's requirements. A poorly capitalized vendor, who has insufficient cash to support and enhance its product, magnifies the problem. Add in a major industry shift, and you throw things even further awry. This is more or less what happened to ETRM vendor TransEnergy prior to its acquisition by Altra. As TransEnergy tried to turn itself from arguably the best natural gas marketing software vendor into one that provided a comprehensive suite of risk management, electric power transaction management, and even pipeline and gathering systems, the software became unwieldy and difficult to support and maintain. An inability to keep up with the market requirements combined with poor quality code in some areas of the suite meant decreased sales and a cash crunch. The fact is that energy trading is not a shrink-wrap package market at all. It's actually a large number of small niche markets based on geography, assets, and regulatory regime.
Financial versus Physical
The industry has yet again shifted dramatically from more speculative trading models to an asset-centric trading model: We are in mid-dislocation event. Industry uncertainty has resulted in an elongated dry patch for software vendors, and there are others waiting to step in and try their hand. The current software market is dominated by just a handful of players (Caminus, SunGard, OLF, KWI, SAS, and Allegro, and on the liquid natural gas side, SolArc) that have emerged as a result of different industry events. Yet it is still a wide open market. In an asset-centric world, software support to help optimize the assets and assess the volume risks associated with them have become important requirements. Some vendors with a financial markets pedigree are able to provide tools to manage price risk and perform value-at-risk and mark-to-market position reporting, but they have no tools to help their clients (such as a utility with retail load and generation assets) figure out when to use peaking units optimally and understand the volume risk associated with doing so. Vendors from a more physical energy side of the business that were focused on asset optimization and volume risk assessment to start with will surely benefit. But energy risk management requires tools for both physical and financial risk, and these vendors may be weaker on the financial risk side. Similarly, an increased emphasis on credit risk and contract management allowing users to understand counterparty relationships and use them to establish a better view of credit exposure, has allowed new entries such as Raft International and Coopera to enter the market with credit and contract management products. If the uncertainty continues for some time and translates into a reluctance to purchase software, some of the existing vendors are particularly vulnerable to being acquired. Many packages are still weak in the area of truly flexible reporting that allows users to not just run a report, but also to drill down to the details. Instead, most come with a monumental library of canned reports, requiring users to spend consulting dollars to customize them, and rudimentary report writers that may require hiring database experts. In fact, this weakness among existing vendors has allowed SAS to enter the market and rapidly capture market share at its high end. SAS provides sophisticated tools for risk analysis in a "data warehouse" environment and has found a place as an add-on component as a result. Additional areas of concern with different vendor offerings include difficulty of use, lack of scalability, and over-complexity. For example, many traders balk at having to fill out complex screens to capture a deal in the system.
Best of Breed Versus Standard
In the early days, vendors aspired to a one-size-fits-all model-the all singing, all-dancing, do-everything, application. Given the industry's evolution, most now aspire to offer "best of breed" components, or the best component for a particular function, such as power trading. Some vendors would like to be the single supplier of those best of breed components. This development is not surprising given the number of stranded vendors-that is, those focused on niche markets-and the inability to meet everyone's requirements with a single solution. The move to a best of breed model introduces additional complexities. It allows users to use different components for different aspects of their business (such as deal capture, risk management, and back office); or a transaction solution for power and gas, integrating these solutions with a risk management system. However, the key word is "integrate," and this can be complex and costly. Of course, some vendors have built their applications in a modular fashion around their own middleware that still gives buyers the option to select a component from another vendor. Also, several aspects of this business can be standardized-deal capture and risk management, for example. The more vanilla an area is, the easier it is for the vendors to bundle it up and sell a true package. Other areas of functionality are more likely to stay a flavor of the regional operational and regulatory regime-scheduling, for example, where the needs of the transmission operator or the pipeline dictate much of the requirement. When you combine the way the industry has evolved with the ability to develop standard and consistent business practices in some areas of the business process, you get a glimpse of the future. For deal capture, risk management, position keeping, and perhaps settlement and invoicing, business processes and instruments will become more and more standardized over time. There will be enough of a potential user base that the standard package model will be more cost-effective. Even with standardization and the emergence of shrink-wrap packages, there will still be room in the market for many different vendors targeted at different market tiers. That's because there are a range of solutions available for different company sizes. For example, a large integrated energy company will probably always have requirements that it feels are either strategic and proprietary or complex enough to warrant a high-end solution. Conversely, small and more focused energy companies will look for something more vanilla and definitely cheaper.
What About ASP?
The last three years have also seen the emergence of the application service provider (ASP). Offering its application hosted remotely or locally over the internet for a monthly or usage-based fee, the ASP represents a cost-effective solution for smaller energy companies and certain niche markets-like larger commercial and industrial energy customers that want to be more independent about risk management. ASP vendors such as Kiodex and Sakonnet Technologies already exist and have had some initial success in gaining customers. However, the ASP model of product delivery is really just another way of taking a package to market. If the market is not strictly a package market, then ASP vendors will face the same issues and problems as traditional vendors. Certainly, the ASP solution is a cost-effective and small-scale one for smaller energy companies, but those vendors will undoubtedly focus on areas of functionality that are already more standard than others. An additional factor is that the ASP vendor may be more successful outside of North America where deregulation has proceeded in a manner that actually reduces some of the complexity associated with the physical delivery of the commodity in terms of the requirements for software.
A Crystal Ball
It's not about who has the best product today, whose products will integrate easiest with the key middleware, who has the best technology platform, or even who has the largest installed base. The future will more likely be like the past, where events in the industry change the fundamental rules of the game. It will be about which vendor is more flexible, innovative, and responsive to change and has the best attitude towards customers and customer care. And, if the past is the key to the future, then size and brand equity are no guarantee of future survival either. Whatever happens, the future, at least in the medium term, is likely to be best of breed from multiple suppliers-and that makes it more difficult for the user.
DATA IN A NEW DIMENSION
The National Map
Since the 1930s, the United States Geological Survey has produced and maintained topographical maps of the entire country. Today, there are 55,000 maps in total available to the public at large for viewing and reference. Since September 11, 2001, however, the importance of this national treasure, according to project director Barb Ryan, took on new meaning. Electric Perspectives spoke with Barb and Richard Hogan of the USGS about the future of the National Map and its role in homeland security.
EP: What is the National Map?
Barb Ryan: The United States Geological Survey is a science agency within the department of the Interior and it houses the nation's largest civilian mapping function. If you've seen any of our products, it was probably the standard topographic maps. Most people know them. There are 55,000 of them that cover the United States. This series of largely paper maps is about the only national coverage of this nation's infrastructure. That would include powerplants, power lines, and dams. Some organizations have better coverage of one data layer than others, for example, the FAA has all the data about airports. Some organizations have better coverage of all the infrastructure layers but over relatively small pieces of the nation's land mass, like a city map, for example, or a county map. What we learned after September 11th is that in no one place have you got both national coverage, national consistency, and completeness of information. But when we talk about the National Map what we're really talking about is taking those paper topographic maps that were constructed last century-really a national asset in and of themselves-and bringing them into this century. You have to get them off paper, and into digits. We envision it as a distributed national database where people can access all the data layers that have traditionally been on our standard topographic maps.
EP: I would imagine that digitizing this information will make it much easier to keep it up to date.
Barb: It's not just a matter of converting it from paper to digits. We are working on some very intensive partnerships with state and local governments that will allow an almost transaction-like basis for updating the maps. When a change takes place on a landscape, whoever on the landscape observes that change will input it into a national database, and that way the digital product gets updated. Rather than these cyclical updates where we go out and remap a particular part of the country, what we're really talking about is expanding our partnership network so that transactions can update the data-much like when you use your ATM card one night and mysteriously your bank account reflects that transaction the next morning.
EP: That sounds ambitious.
Barb: It is!
EP: How do you envision the map being used for homeland security, for example, either for prevention or disaster recovery?
Barb: We learned after September 11th—just like we learn after a natural disaster, a flood, an earthquake, a hurricane—that this information has to be available, accessible, and integratable before, during, and after the disaster—before for planning purposes, during for response efforts, and afterwards for mitigation efforts. I think the most important thing is that there's lots of information out there, information at the local, state, and federal levels. Heretofore, there hasn't really been an adequate means of linking it all in one place together so that everybody can get access to it, i.e., the federal folks could get access to state and local data, and conversely, state and local users could get access to federal data. Whether it's ingress, egress routes for an urban area, whether it's where is the closest hospital? Where is the closest powerplant? Where are the dams that might be subject to failure or potential terrorist attack? You want to have this information available to first responders, and oftentimes those first responders are at the local level.
EP: One of the issues for electric utilities has been the sharing out of data about their critical assets. Security has been a big concern, obviously. How do you overcome that with this project?
Barb: The best way to look at that is that it's a continuum. We're arguing that the information that has historically been portrayed on a topographic map needs to be available in the public domain. As you start to migrate down the continuum towards more classified information, you'll want to have higher security mechanisms associated with that.
Richard Hogan: This issue of security is a key component of the architecture that we're trying to put together. We have a concept that we've tested with one of our national data layers, the national hydrography dataset, that allows us to create a national framework on which high resolution or more richly attributed data can be linked. We've worked out ways in which we can keep the database up to date through transactions, but also allow state and local governments to hold richer data that can be provided when needed in a consistent way. I think this is one of the key concepts that will eventually be adopted for homeland security because there will be lots of data held at local levels or by utilities that there will be a sensitivity to. So there will be ways in which they can keep that to themselves but make it available when it's necessary. The National Map will serve as the mechanism that allows that to be done so that you don't have to reinvent the network or linkages when the disaster occurs.
EP: What do you mean by richly attributed data?
Richard: A real-life example that I know from Fairfax County in Virginia is their E911 emergency response database includes information like which windows of houses are bedrooms where children might be so that the fire responders could go to those windows first in the case of a fire response. Well, there's lots of reasons why you wouldn't want that information to be public. But information about the house, such as its footprint, would be available. That's an example of richer attribution that would be left off through various ways of standardization and building this framework, infrastructure, would allow that information to be linked very rapidly if it was necessary.
EP: I suppose the whole issue of deciding which information to include and which not to include will require a lot of collaboration between all the different parties.
Richard: Exactly, because there's a lot of different reasons why certain information might be excluded. Another real-life example comes from a utility in Baltimore County. Underground utilities there require that people trying to get permits to dig come to their database. Well, they charge for that service. If that information is available somewhere else for free [i.e., via the National Map], they would lose part of their cost-recovery. Would they like to make that information available? Possibly, but with just enough less attribution that those people who need the permit still have to access their database and pay for the information.
Barb: There's one other component, too, with this public domain issue that has to do with the need for information from the homeland security perspective. The same information traditionally has been used by state and local governments to plan housing developments and transportation routes and for a myriad of other purposes. Those purposes are still here. We still need the information for those reasons. All we've done since September 11 is add another reason to have access to this information.
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