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Power Points: Trader McAndrew Tackles Nymex, Enron
Friday, February 18, 2000 12:14 PM

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By Mark Golden
A Dow Jones Newswires Column
NEW YORK (Dow Jones)--When I first started covering the electricity industry
almost three years ago, people told me to talk to Thomas McAndrew, one of the
original power marketers, considered by many to be one of the best.
A nuclear engineer by training, McAndrew left a job at a Southern Co. nuclear
power plant to get a masters degree in business from Harvard in 1994. He
first traded at Enron Corp. (ENE, news, msgs), and then moved to the Eastern
Group, the U.S. unit of Statoil, Norway's state energy company. Statoil
exited the U.S. power and gas industry late last year.
McAndrew and his trading team have been doing some consulting and trading on
their own account since Feb. 1. They are looking to stay together and work
for another firm.
Meanwhile, without a corporate spokesman over his shoulder, McAndrew was able
to speak his mind about the troubled New York Mercantile Exchange electricity
contract and power shortages expected this summer. He also talked about the
success of Enron at trading both profitably and online, and the difficulty of
doing both at the same time.
DJ: Why have the New York Mercantile Exchange's electricity contracts not
worked?
T.M.: The Nymex clearly lost on electronic execution of trades because now
you have Bloomberg, Altra and EnronOnline. With the Nymex, I had to call, get
a quote, the guy didn't even stand in the ring, and maybe I would get two
lots. I could execute 100 times as much over-the-counter with half the
effort.
They still think they have a monopoly on clearing trades. They don't realize
that there are at least four companies looking into it, and my guess is that
within six months one of them will have a solution. Now the Nymex has
nothing.
DJ: They will begin trading electricity contracts strictly electronically,
not in the ring at all, starting March 2. Do you think that will revive the
contract?
T.M. Not really. The industry pretty clearly told the Nymex last fall that
what we want is electronic execution with clearing of (seasonal) strips, not
just single months. But the Nymex has had the attitude consistently that they
know more than the industry. They've treated the industry in a condescending
way. All you can trade is the months, while there's a tremendous amount of
volume being traded OTC on location spreads and strips.
I expect the best volumes ever in the next four months. All it takes is the
top 10 guys to take 50% of their business to the Nymex and they would see
tremendous growth. But the only way is to have strips available April 1, at
the latest. If history is the judge, they won't do it. They should be
embarrassed.
There's a lot of interest within the Nymex not to launch strips because of
what they would have to do with crude oil and natural gas. They're an
exchange run by the locals.
How can the Nymex succeed when EnronOnline supports 10-cent two-way spreads
in the front part of the curve? It's hard to justify going to a market with
40 cents between the bid and ask just to get clearing.
If the Nymex doesn't have a strip product in place by April 1, they're done.
DJ: What do you think of Enron's online success?
T.M.: If they continue to support it the way they are, it's good for the
market. If they support it for six months and then spin it off, then that's
not good.
DJ: Are they that good at trading to continue to support 10-cent spreads?
T.M.: No. Are they that much better than the market? They're obviously very
good traders, but not that good. I don't know many traders that can do that.
Obviously it's a great story for them. The goal of EnronOnline in the short
term is to generate revenue, not profits.
DJ: Enron has maintained very good trading margins for years. You used to
work there. How do they do it?
T.M.: They hire really smart people, and they have a solid infrastructure and
great risk management. I've been an Enron shareholder for years and will
continue to be. I just bought some more. They are the blue chip of the new
energy business, risk management and now broadband.
Do they do everything right? No, but when they do something wrong they
contain it and correct it. They know when to ride their winners and when to
cut their losses.
DJ: Are the California Power Exchange and other pools inflating wholesale
electricity prices in their states?
T.M.: There's a fundamental reason for prices going up: tremendous increase
in load growth without a corresponding increase in generation. Realistically,
we should be trading in the West at the levels of PJM (the Pennsylvania-New
Jersey-Maryland pool), but because of regulatory uncertainty we're not.
What's the price cap going to be this summer? $500? $750? Nobody knows.
I think the California Independent System Operator is getting ready to find
out about the law of unintended consequences. The price cap in place is a
disincentive to building generators, which will lead to a shortage of power
and higher prices.
In the rest of the country, metal is going into the ground and they're
squeezing every megawatt out of existing plants.
There are a limited number of turbines. If you went to General Electric right
now, you'd have to wait four years for a gas turbine. Where are the people
that have them going to install them? In California with price caps? Probably
not. Look at the price of a five-year summer strip at Cinergy. You're going
to put the turbines in the Midwest. Even if you have to pay 50 cents more for
gas, who cares?
You don't make prices go down by putting in price caps. You make prices go
down by adding supply faster than demand growth.