Intranet Business to Business Power Move

FRAMINGHAM (07/06/2000) - When e-commerce first entered the mainstream a few years ago, most companies believed the business-to-consumer model would provide the best long-term profit potential. But as many B2C efforts failed to gain steam--or failed outright--thinking has shifted. Today many believe that business-to-business e-commerce is the path to profitability on the Web.

The energy industry, for one, has embraced the digital age and is experiencing explosive growth in electronic trading. Forrester Research Inc. in Cambridge, Massachusetts, predicts that online trading of natural gas and electricity among production facilities, distributors and commercial buyers will reach US$266 billion by 2004, up from $30 billion in 2000.

Two intranet companies currently blazing trails in the energy industry are Houston-Street.com and Enermetrix.com. Both are making significant inroads in attracting the attention of the energy community and continue to enhance the scope and functionality of their websites. They function as online trading exchanges for the energy industry but do so from opposite ends of the market.

While HoustonStreet.com allows energy traders--who function much like stock traders--to buy and sell wholesale energy, Enermetrix.com provides a way for commercial and industrial organizations to buy energy online.

HOUSTONSTREET.COM: PHONE-FREE TRADING

Company: HoustonStreet Exchange LOCATION: Portsmouth, New Hampshire. Purpose:

Online energy commodity exchange LAUNCH: December 1999 employees: 35 REVENUES:

Not available url: www.houstonstreet.com Judge's Comment: "A good model for a hot area of e-commerce with easy navigation."

A few years ago, frank getman was president and CEO of BayCorp Holdings, and subsidiary Great Bay Power, a small wholesale power trading company in Portsmouth, New Hampshire. Over time, it dawned on him that the method through which power had been traded for years--by phone--was inefficient, especially given the potential that technology offered. He challenged his traders to come up with a better way of trading energy that would make use of the Internet.

After mulling the idea of posting power for sale on a website, Getman expanded the vision to include the creation of a central clearinghouse where electric and gas traders could trade power.

Getman says HoustonStreet.com's business model is simple: provide a better way for traders to initiate and complete energy trades. "Today, traders [that don't currently use HoustonStreet] make a deal on the phone by filling out a ticket that lists information about the deal," he explains. "The trader then puts that into a basket and someone manually enters it into the company's risk management system." But the information entered into those expensive systems--which allow companies to track their trading activity and determine financial risk exposure to the market and individual counterparts--isn't in real-time, resulting in inefficient record keeping and an inaccurate account of the day's trades. "They trade all day and once the dust settles, they still don't know how well they did," Getman says.

Today, his vision of an online clearinghouse is a reality. About 600 traders in more than 150 companies are registered to trade energy over HoustonStreet.com, and Getman is going after all 1,000 domestic power traders. To become a member, traders fill out an online registration form; HoustonStreet issues them passwords once it verifies them as legitimate traders. In September, HoustonStreet made its site available to traders throughout the United States.

User fees are figured on a sliding scale based on the volume of power traded each month. (There's a $12 minimum fee per trade.) Although HoustonStreet.com is not currently in the black, Getman is convinced that once the site's plans are fully realized--launching additional vertical energy markets for trading crude oil, refined products and natural gas--it will become a moneymaker.

BUILDING WITH TRADERS IN MIND Last July, Getman, now president of HoustonStreet Exchange (also a subsidiary of BayCorp Holdings), assembled a team of internal personnel and analysts from a handful of other companies. Together they launched the first version of Houston-Street.com. Energy traders currently log on to trade energy with other members and access information on market pricing, energy news and weather. Traders can also customize their entry pages to include stock data, sports scores and other information that is important to them.

To create the brand and user interface, Getman turned to MicroArts Corp. of Portsmouth, New Hampshire, a company that specializes in B2B e-commerce brand marketing. Getman's cousin, MicroArts President Peter Getman, spearheaded the efforts. Designing the user experience was one of the most important tasks. "It has to do with the way the buttons are shaped, the number of clicks it takes to make a trade, how intuitive the system is and the personality inherent in the way the site interacts with a user," says Peter Getman.

To develop a user experience that appeals to traders, MicroArts "puts the traders in the cockpit," says Peter Getman. "We laid it out so that users could see their entire business in front of them. They could see more, do more, get better information and have real-time information on what is happening in the markets, all on one screen."

Using HoustonStreet.com has changed the way traders like Bob Armstrong do business. As a senior power marketer at PPL Utilities, owned by PPL Corp. in Allentown, Pennsylvania, Armstrong is responsible for marketing and trading energy throughout Pennsylvania and New England. Before turning to HoustonStreet.com, Armstrong was tethered to the phone and to various disparate websites. With HoustonStreet.com, "all I have to do is stay online," he says.

"I never have to pick up the phone. I can go to my preferences and get information on the weather and generation outages. I can even talk to counterparts online. None of the other systems--including Bloomberg--offers this."

Armstrong particularly likes the ability to remain anonymous during a transaction--a feature he says makes a difference between landing a trade or losing it.

After MicroArts developed the user experience, a team consisting of personnel from HoustonStreet and Sapient, an e-services consultancy based in Cambridge, Massachusetts, took over. HoustonStreet executives provided Sapient analysts with a multiscreen mock-up of what they wanted the exchange to provide, such as the ability to support negotiations, post bids and offers, and act as an information portal, giving traders access to information that affects the supply-and-demand dynamics of pricing.

"We were able to give the commodity trader a compelling reason to give up the phones," says Ed Dragon, a director of client relations for Sapient. "It wasn't enough to be a better trading platform than any of the trading platforms that were out there. It was all about giving them a different mechanism and medium for trading power."

Traders are particularly sensitive to the time it takes to refresh screens, since any delay in updates can translate into an advantage for another trader.

To accommodate traders' requirements, Sapient incorporated push technology and chat functionality "to try to replicate the banter of how the traders go through their day interacting with each other," Dragon says.

In developing the system, everyone involved tried hard to keep moving at breakneck speed, in part to replicate the pace at which traders go about their day. "Traders are high-bandwidth people who run at a fast pace, so we had to run at an equally fast pace in the design," notes Andrew Easter, managing director of Sapient's energy services business unit. To address that challenge, the Sapient team used a sophisticated series of workshop techniques designed to create real-time prototypes. Participants in the workshops spent their days examining just how users would get value out of the HoustonStreet platform being designed.

Currently, HoustonStreet is working with MicroArts and Sapient in conjunction with the XML technology company Bowstreet of Portsmouth, New Hampshire, to imbue the site with personalization through screens that deliver content specific to the user. To do that, the team is implementing Bowstreet's Business Web Factory, a system that allows for customization of B2B Web relationships.

"We're moving toward the concept of MyHoustonStreet.com, where a trader has the trading floor right in front of him and immediate access to information and services that are relevant to him," says Frank Getman. "He chooses which news he wants to see and which weather forecasting service he wants to use, because the weather is a big determining factor in the price of electricity."

Ultimately, the goal is to facilitate a three-way exchange among HoustonStreet.com, which will package data it collects and send it to traders; third-party providers such as news and weather services; and the trading companies themselves.

"Our vision is to have a platform for every kind of energy commodity globally," says Frank Getman. That's the reason why HoustonStreet is pursuing a strategy of offering sites to trade other types of energy. Getman expects his vision to be fully realized in the United States by the end of this year. Next year, he plans to expand the site globally.

The challenge for HoustonStreet is to use its underlying technological framework to introduce new services specific to the energy commodities market in a timely manner. Since HoustonStreet.com's model is designed to be scalable and flexible, Frank Getman says that developing capabilities in the future can be handled without massively reprioritizing tasks.

ENERMETRIX.COM: POWER TO THE BUYER

Company: Enermetrix.com LOCATION: Maynard, Massachusetts. Purpose: Online energy commodity exchange LAUNCH: January 1998 employees: 50 REVENUES: Not available url: www.enermetrix.com Judge's Comment: "A totally Web-based business with a model that functions as an RFP for buyers and an auction for sellers."

By the mid-1990s, john gaus, then a project manager at The United Illuminating Co. in New Haven, Connecticut, and Jeff DeWeese, a senior engineer at Boston Edison in Boston, shared a dissatisfaction with what they saw as an unwieldy approach to buying and selling energy in a deregulated environment. In a market undergoing rapid change, they saw a disaster waiting to happen as uneducated buyers sought to purchase energy from well-informed suppliers. They spent a lot of time talking about how they could bring standards, reliability, predictability and efficiency to the buying and selling process, and eventually they developed their idea into an online energy trading exchange for gas and electricity.

Enermetrix.com, which went live in January 1998, is just that--an online trading exchange that matches buyers and sellers of energy. (If the concept sounds familiar, that's because Enermetrix.com, formerly known as North American Power Brokers' World Wide Retail Energy Exchange, won Web Business 50/50 awards in 1998 and 1999.) Based in Maynard, Massachusetts, the company currently represents about 50 suppliers, ranging from small, regional companies to global organizations. In addition, about 100,000 commercial and industrial organizations--including both mom-and-pop stores and Fortune 500 companies--currently use the exchange. Gaus, now chairman and CEO of Enermetrix.com, and DeWeese, now president and COO, took about 18 months to build a database populated with information about energy, buyers and sellers.

"It took awhile because we were working out of our basement and attic on a shoestring budget," DeWeese recalls. After the database was complete, the pair asked Impact Innovations Group, a Columbia, Maryland-based consulting company, to take the business logic from the existing database and convert it to the Web using HTML. Once Enermetrix built its own IT department, they continued to enhance the platform.

The site's method of bringing buyer and seller together is straightforward:

After becoming a member by signing an agreement to abide by the site's rules, the buyer dictates the terms and conditions of his purchase and posts that information on the exchange. Suppliers then compete to fill those needs. "We wanted to get away from the request for proposals [RFP] process, where [a facilities manager in a large organization] would ask several suppliers to give them their best price on a specific date. That date might be the highest commodity price day of the year for that form of energy," says DeWeese.

Instead, the Enermetrix.com platform provides a mechanism for comparison shopping--24 hours a day--so that buyers can buy when prices are low and when conditions meet their criteria.

Enermetrix.com makes money by charging a 1 to 2 percent transaction fee based on the volume of the deal. Ultimately the end user--which can be the buyer or the seller--pays the transaction fee. (Enermetrix.com invoices the supplying member for the fee.) Included in the fee is a matchmaking service between buyers and sellers as well as a standard contract the supplier can use to help facilitate the transaction. If the seller chooses to use its own contract, Enermetrix.com will review it and make it available electronically.

A WIN-WIN SITUATION The goal, Deweese says, was to create a system that empowers the energy buyer. While buyers post anonymous requirements on the site, sellers access the site and provide real-time market pricing. For the buying member, there is lower risk of overpaying for each transaction because pricing is dynamic. For the seller, Enermetrix.com can reduce customer acquisition costs, expand reach into various, nontraditional markets and provide credit protection.

"Our vision for the company is to make what we do the standard by which these transactions occur," says DeWeese. "It gives [the energy buyer] information and access to markets in real-time and empowers the end user to make better informed decisions."

Judging by the market's response, Enermetrix.com is well on its way to realizing that vision. Although Enermetrix.com won't divulge revenue figures, the site has attracted well-known buying members such as PSEG Energy Technologies, SCANA Online, Cadence Networks and the Connecticut Business and Industry Association. The number of visitors and transactions grows by about 33 percent per month for electricity trading and 20 percent per month for gas trading. DeWeese expects the site to handle several hundred thousand transactions a month within the next year. In addition, the company has had no trouble securing third-round financing of $20 million from investors, including Duquesne Enterprises, General Electric and Insight Capital Partners. Given the growth of the site, scalability tends to be an issue, says Al Dunn, the company's vice president of emerging technologies. "Predicting what's going to occur and having the right infrastructure in place is really a challenge," he says. To ensure that scalability wouldn't be a major concern, Enermetrix made the decision to install a Microsoft-based platform consisting of Microsoft Active Server technology and Microsoft Transaction Server for distributed objects. The database is written in Microsoft SQL Server, and many of the core transaction engine components are built using Java.

"We've continuously chosen our technology to strike a balance between development and productivity. We need the ability to create software quickly and easily, and the ability to scale to handle large numbers of transactions," notes Dunn, who started building the site while he was at Impact Innovations.

To make the site more attractive to buyers and sellers, Gaus and DeWeese continue to upgrade it, adding features users say are most important to them.

Version 3.0 of the system, released in May, provides a new look and feel for sellers logging on to the system. Among other things, it enables sellers to personalize their sites so that they can target buyers based on region and energy usage requirements.

Another change, engineered in response to customer demand, is the addition of credit checking. Unlike offline business exchanges, where the parties typically know each other, online business is often conducted anonymously, leading to questions about the creditworthiness of unknown parties. To address this problem, Version 3.0 allows rating the credit of potential buyers. The site charges suppliers a small premium for the service, but DeWeese says that enough suppliers have requested it to make it a worthwhile offering.

CONTINUED IMPROVEMENTS Next up is a move into financial liability. "It's a question everyone in the energy industry is looking at right now because everyone is looking for an efficient way to bill their clients," says DeWeese.

Offering to facilitate the transaction--which may include building a mechanism to hold funds as the commodity is transferred from seller to buyer--could also enable more players to use the exchange, such as companies that don't have the ability to handle billing functions or don't want to do the billing.

Karl Jessen, director of the energy and Internet practice at The Yankee Group of Boston, says the company's foray into value-added services such as financing and guaranteeing transactions is ultimately what will set Enermetrix.com apart from the rest.

"Back in the old days, everybody knew everyone they were trading with, but nobody really knows anybody anymore. And the big guys feel that if they don't know you, they're not going to do business with you," Jessen says. By extending credit and providing some level of assurance, "big players will be more willing to work with these companies and have some idea that they aren't going to lose their shirts. The business is already risky enough as it is."

Sites like www.enermetrix.com and www.houstonstreet.com are the future of energy trading, and both have come a long way toward making online energy trading second nature to those who used to be tethered to phones for years, says Jessen.

"They are doing all the right things," he adds, including making liberal use of many of the analytic tools available in the market today and enhancing site capabilities frequently. "They are doing everything they can to enable e-commerce, and many of those things are progressive in the trading exchange market."

Karen D. Schwartz is a freelance writer based in Potomac, Maryland. She can be reached at karen.schwartz@bigfoot.com.

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