How ETRM Got the RM bit…
Back in the late 90’s, the ETRM (and CTRM) software category didn’t actually exist. There were probably a few solutions around for oil trading and perhaps a few for trading metals and ags/softs but they didn’t resemble the solutions you would see today. Power and natural gas had not been liberalized and other commodities were mostly bought and sold on a long-term contract basis. Natural gas marketing functionality at this point was often a module in a production & revenue accounting solution. Vendors like Allegro (now ION), Energy Solutions and Ensyte Energy software got their start in this area.
Then, in 1992, FERC Order 636 came along in the US and natural gas was unbundled and a wholesale market created. A host of new small vendors emerged offering natural gas management solutions – among them was TransGas Management (later renamed to TransEnergy Management) where I and Patrick started our vendor-side careers. Other vendors competed with us such as DMA, DC Systems, and Primo. Allegro, Energy Solutions and Ensyte survived and thrived in this new market while some gas companies either sponsored solutions like Alta (Williams & PanEnergy) or offered their internal solution to the market like Tenneco with the TenSpeed system.
North American power markets were next to get the treatment and many of the vendors rushed to develop power solutions or add power capabilities to their existing software. New vendors emerged focused on power trade management as well coming in from financial markets like ZaiNet, SunGard and OpenLink, while others came in from the more physical side of the power business like ABB, Henwood, and NEA. Others were start ups focused on power like PowerTrade, ArcIT, EnerX, Nucleus and ACES. Some of the earlier natural gas vendors added power capabilities and some did not choosing to serve a more niche natural gas market. All of this is documented in our book – now a little dated but still of value – Trends in ETRM Software – A Primer.
The deregulation of electric power however, also had another impact. It essentially created a need for ‘risk management’. I recall being at TransEnergy and taking calls from customers and others in the industry asking if we did risk management as well. I have to be honest and say I had no idea what they were talking about! The inbound inquires reached a crescendo in no time at all and we tried to learn about risk management. I remember attending some courses in Houston where the emphasis was on how to manage price risk with derivatives, for example. The fact is that there were very few people in the ‘commodities’ side of things back then that knew what risk management was. In fact, it was this appetite for risk management that probably brought the financial vendors to the table as they had price risk capabilities for financial and other asset classes that could be modified appropriately. The problem with those solutions at the time was their lack of physical transaction management capabilities for power and gas.
Initially, many existing gas and power trade management vendors started to add features and functions to cater for this demand for ‘risk’ usually guided by users. These would include mark to market and various ‘risk’ reports. It was very rudimentary stuff by today’s standards. Aquila saw an opportunity and brought a commercial solution to market called RiskWorks but it had to be integrated with the physical trade management solution. It was an imperfect world back then (some might say it still is!) but very exciting and a lot to learn. As the merchant traders emerged and thrived, solutions now needed to handle both physical and financial trades and offer straight through processing to boot. A lot of under capitalized and small vendors were trying to do an awful lot to cope and some took in investor capital to help at that time. It was the ‘wild west’ of software I recall somewhat nostalgically.
As a marketeer who had been trained in Silicon Valley by Stu Schuster and his team at Sybase, Inc., one thing I was sure about was that to make any progress, we needed to create a software category. There were so many ‘names’ being used to describe an amorphous yet coalescing group of software solutions that it was confusing to users and buyers alike. Vendors referred to energy trade and transaction management, trade management, risk management, energy management and a host of other descriptive names. Something needed to be done. My memory of exactly how it was achieved is now hazy at best but somewhere along the line, we managed to convince most vendors to use the term Energy Trading and Risk Management (ETRM) to describe the software category. It slowly took off even though some vendors like for example, SolArc, stubbornly stuck to trade management. Later, as the category broadened to include non-energy commodities, we at the then newly rebranded CommodityPoint at Patrick’s suggestion started calling the category E/CTRM software. The name stuck.
The thing is though, looking back, we really didn’t have a clear idea about risk management and how it would evolve. We (the industry), viewed a few reports like Mark-to-Market and P&L as risk tools. And in a sense, they were at that time and everyone was trying to understand what was needed in this area. Things have improved a lot of course. Many CTRM and ETRM solutions now come with quite a lot of risk management capability and not just around price risk but including credit and other risks. Despite that, if you really want a more sophisticated approach to risk – to value complex assets and contracts or perform complex calculations such as a Monte Carlo simulation, then you are probably looking at a specific risk application like a Lacima, Kyos, Ascend, homegrown solution, Beacon, and so on, to do that. It’s still an imperfect world in E/CTRM. But at least we all call it by the same name!
Trends in ETRM Software – A Primer by GM Vasey & Patrick Reames is available still on Amazon etc. Though it is now dated, it does offer a historical perspective of ETRM and CTRM software that can be useful.
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