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SCIENTECH IssueAlert, October 17, 2000
Dynegy Launches B2B Portal and Trading Site
By: Will McNamara, Director, Electric Industry Analysis
===============================================================

Dynegy, Inc. announced the launch of Dynegydirect, an Internet-based, 
commission-free
B2B portal and trading site for energy and communications commodities.
Dynegydirect will be introduced to Dynegy customers in a phased-in rollout
that started on Oct. 16, with online trading commencing over the next several
weeks. Through the portal, Dynegy customers will have self-service access
to Dynegy's bid and offer prices across U.S. power, natural gas and 
natural-gas
liquids products. U.K power and natural gas, as well as coal, emission
allowances, weather derivatives, international natural-gas liquids, and
bandwidth will be offered in the coming months.

ANALYSIS: This is a major undertaking for Dynegy, but perhaps not very
surprising as the company is following many of its competitors into the
big-league online trading market. Dynegy is following a trail blazed by
the likes of EnronOnline, Entergy, AEP, etc., in establishing a portal
to "enhance liquidity, improve customer control and create greater trading
efficiency." Of the various online trading sites that have been announced,
Dynegydirect appears most similar to EnronOnline*clearly the leader in
the field*because it is principal-based. In other words, Dynegy will be
a participant in all of the transactions, either as a buyer or a seller.
Unlike EnronOnline, which is completely online, Dynegydirect will allow
customers to conduct their transactions with Dynegy over the telephone
during and following the launch of the site.

Over the last year, Dynegy has identified its strategy as wanting to become
a leader in the converging energy and communications business. In addition,
according to Dynegy's CEO Chuck Watson, the company's goal is to gain a
10-percent share (or 70,000 MW) of the U.S. electric market over the next
five years by acquiring plants, building them or negotiating the right
to sell power produced by others. Along with a strident strategy of building
merchant plants in areas where demand is growing significantly, Dynegy
presumably plans to now use its trading portal to market the power it has
either generated itself or bought on the wholesale market.

I spoke late yesterday afternoon with Blake Young, Dynegy's chief information
officer and president of Dynegy Global Technologies, about the new site
and how it will compete against such stiff competition. First, Young said
that Dynegydirect is a "component of a broader strategy" to support Dynegy's
comprehensive electronic business efforts. What this means is that 
Dynegydirect
ultimately will be much larger than just a trading portal, including such
other electronic businesses as e-procurement and energy supply chain 
management.
The portal will be particularly customer-driven, in that it should provide
many windows of opportunity for Dynegy customers to maximize their management
capabilities.

Dynegy has been planning a trading operation for some time; its growth
as a power generator and marketer has been an indication that Dynegy 
recognized
new trends in the energy industry. You may recall that a few months back
Dynegy teamed with Williams in investing $25 million each for minority
equity stakes in eSpeed, Inc. As noted in SCIENTECH's IssueAlert from Sept.
25, eSpeed is investing $2 million in TradeSpark, which plans to create
electronic marketplaces for natural gas, electricity, coal, weather 
derivatives,
nitrogen oxide, and sulfur dioxide emission credits. TradeSpark is using
the infrastructure and capabilities of eSpeed. In other words, eSpeed is
TradeSpark's "enabler." As an investor in eSpeed, Dynegy stands to profit
from TradeSpark's pre-launch market valuation of $40 million. At this point,
it is not clear if Dynegy intends for Dynegydirect to be a competitor to
TradeSpark as Dynegy stands to profit from both trading operations.

How does this all relate to Dynegydirect? According to Young, Dynegy is
pursuing commodity trading along two venues. The first is a proprietary,
one-to-many format in which Dynegy will participate in all transactions
as either a buyer or a seller. This operation will be conducted on the
Dynegydirect portal. The second venue is an anonymous, many-to-many format
in which Dynegy will participate along with multiple buyers and sellers.
This operation will take place on TradeSpark, which became operational
in early October. Dynegy is a participating member in TradeSpark along
with Coral Energy, Dominion, Koch Energy Trading, TXU Energy Trading, Williams
Energy Marketing and Trading, and Cantor Fitzgerald. Entergy also plans
to come on board as a member and investor once its venture with Koch closes
later this year.

Other key attributes to Dynegydirect, as identified in the announcement
of the site, are that its "highly configurable floors will enable customers
to group products in a customized fashion for convenient access." In addition,
customers can trade on multiple floors simultaneously, and the site's 
real-time
price updates will allow them to see prices on all of their floors, enabling
them to make immediate decisions on prices and volumes.

Young said that Dynegy is extremely confident that the portal's technology
will be "well accepted" as it is JAVA-based (meaning, among other things,
that it is flexible enough to operate between MACs and IBMs) and 
object-oriented.
While these are important from an IT perspective, as would be important
to CIO Young, perhaps more importantly is that the site offers an opportunity
for Dynegy to support the growth of its businesses and offers a 
cost-efficiency
tool for customers.

In August, Dynegy announced that it is acquiring Extant, a privately held,
Colorado-based communications solutions and e-commerce company. Extant's
primary line of business is in providing connectivity solutions and broadband
capacity to communications businesses and information providers, enabling
them to exchange information and provide voice, data and video services
to their customers. The acquisition will mark Dynegy's first significant
penetration into the telecommunications sector. While not directly related
to this new portal, the acquisition of Extant is relevant because Dynegy
intends to eventually trade broadband capacity on the site. Extant's broadband
capacity will help to support Dynegy's trading of this commodity.

While the move to online trading is a smart, and almost inevitable, decision
for Dynegy and other energy companies wanting to remain competitive, the
competition and risk associated with this venture are formidable. Clearly,
Dynegy has found a market edge with its eSpeed /TradeSpark affiliation.
TradeSpark is already up and running, as compared to many announced trading
sites that have launch dates next year. In addition, TradeSpark is creating
a large liquidity pool by bringing together several mediums, including
the Internet, voice brokering and eSpeed's 300 millisecond private global
network. The many-to-many format which Dynegy is pursuing through TradeSpark
is an obvious route for the company to follow, and one with considerably
less risks associated with it. On the other hand, building its own 
Dynegydirect,
in which Dynegy is the principal player, sounds like a Herculean task.
For perspective, Enron was the first company that came out of the gate
with an online energy trading portal. EnronOnline has a 12-month lead*along
with transactions in excess of $100 billion*ahead of Dynegy, or any company
that is just now developing a trading portal. It appears that Dynegy plans
to build Dynegydirect from the ground up, unlike its involvement in 
TradeSpark,
which is already up and running. This could become a lengthy and costly
endeavor.

As I finished writing this analysis, Dynegy reported third-quarter earnings
of $.55 per share. In particular, Dynegy reported that recurring net income
from Dynegy Marketing and Trading increased to $141.0 million, representing
80 percent of Dynegy's consolidated net income (compared to $26.8 million
in the third quarter of 1999). Obviously, Dynegy's commodities marketing
and trading operation is on a very significant growth mode. The launch
of Dynegydirect*along with ongoing participation in TradeSpark*is a key
element of this growth.
===============================================================
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Sincerely,

Will McNamara
Director, Electric Industry Analysis
wmcnamara@scientech.com
===============================================================
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