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.