UtiliPoint International IssueAlert
Patrick Reames - VP Trading and Risk Management

If your company is in the market for a new ETRM system, it’s certain that you’re going to be paying substantially more for it that you would have 3 or 4 years ago. The energy trading and risk management systems market, while still competitive, is certainly not the “cut throat” environment it was in the immediate post-Enron years. Given current levels of activity, many vendors are “fully subscribed” and can afford to be more disciplined in their pricing than they were several years ago.

Not only can you expect to pay more for licenses, you can also expect that consulting services for implementing the product will be more costly. Vendors are growing to meet demand, however, they are all competing for the same talent, and as such, their costs are rising. Non-vendor implementation consulting is facing similar resource pressures, competing with not only vendors for quality resources, but with the energy industry itself.

Yes, vendors of energy trading and risk management systems are generally a happy group these days. Many are reporting that 2006 was a record year for sales of new licenses, records that were just a year old as 2005 was, for many of the group, an all time high. As we’ve noted in the past, high commodity prices coupled with increased volatility and regulatory pressures are continuing to push large numbers of buyers into the market place. Additionally, there continue to be a few new entrants, primarily banks and hedge funds.

The Bottom Line on 2006

Looking back at 2006, UtiliPoint tracked more than 40 deals that were completed during the year. We gleaned the information from public sources (press releases), “word on the street” sources, and from discussions with the vendors themselves. We’re certain that we haven’t been able to track every deal, as some ETRM clients are very strict about confidentiality, but we’re confident that we have captured the majority of them.

We’ve looked at the deals done in North America from the perspective “was the deal driven by a specific commodity?”, even if the transaction involved more multiple commodities. We did this in an effort to better determine the drivers in the market as a whole. A large number of deals done last year include multiple commodities; in fact it appears that more than half of all deals involved more than a single energy product. There were still a large number of new licenses that involved only a single product, as there are a number of companies that do business around a single commodity (e.g. airline fuel purchases, a producer that markets only gas), or companies that have multiple legacy systems that are specific to individual commodities and are interfaced together. They may be comfortable with some portion of their overall internal systems (or are so heavily invested in that replacing them all is prohibitively expensive), yet they still have a need to address inadequacies around a specific commodity.

What we found in the 2006 data is consistent with a trend established over the last several years. Power continues to drive most deals, with about a third of all ETRM purchases. Systems purchased to primarily support natural gas trading accounted for 19% of the deals identified. System purchases primarily for fuels management had what is probably the category’s strongest year with about 11%. Crude, crude products, coal, NGL’s, and LNG combined accounted for about 19% of the market for new systems. Deals where there was no discernable “lead” commodity accounted for about 17% of all deals reported. These were primarily purchases by merchants, banks, and hedge funds which actively trade in virtually every energy commodity.

In terms of who’s buying, last year the merchants, utilities and producers were the most active buyers in the market. Significant deals were also done with power marketers, end users, and refiner/distributors. Again, these buying patterns are on trend with what we’ve have observed over the last several years. One difference, however, is in the sheer number of deals being done. Again, most of the venders in the space, particularly the larger ones, are reporting that 2006 was a record sales year.

A Leading Indicator for 2007

At UtiliPoint, we regularly receive inquires from companies who are in the early stages of the ETRM buying process. These buyers are seeking various degrees of advice and insight, from those that would like a brief overview of potential vendors to companies that are seeking more in-depth advice and guidance in purchasing a new system. In the last 6 weeks, we’ve received almost a dozen inquiries, a volume that exceeds any similar period before. While we like to think that part of the increased volume is due to our good reputation in this area, certainly another contributing factor is that there are just more companies looking to purchase new systems.

We look at these queries as a good leading indicator of future activities. As the buying cycle for most ETRM systems tends to be 9 months or longer, the level of activity we’re seeing from these early stage buyers indicate another strong year for ETRM vendors. And the nature of their businesses provides a view into the types of deals that will be consummated by the end of this calendar year. While we of course hold in the strictest confidence the specifics of any individual inquiry, if we look at the aggregate of the suggested activity, it yields some interesting information.

A caveat to this discussion: We certainly don’t believe that we are involved with every potential purchaser in the market. We are also certain, for a number of reasons, that we receive more inquiries from buyers of physical systems than buyers that are looking for “financial only” systems. That being said, the details behind these inquires confirm a continuation of the trends that we have noticed over the last 2 year - buyers are now looking for a single system that can address multi-commodity trading operations and manage both physical and financial transactions. From a commodity standpoint, and again consistent with the last couple of years, most of the buyers are firstly focused on power, with gas as a follow-on commodity. However, there are still a good number of buyers that will be shopping for systems with a primary focus on natural gas. Many of these inquiries indicate that there are also numerous buyers for systems also capable of managing crude, fuels, coal and other commodities.

Every inquiry we’ve received involves at least basic risk functionality consistent with hedging, including the ability to capture futures and options. They are also looking for the ability to run mark-to-market and value at risk. None of the inquiries said that their decision would be driven primarily by requirements for sophisticated risk functionality; however several indicated that the availability of higher end risk tools was definitely a purchase consideration.

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