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A Man with Energy to Burn

By Dean Foust Jeffrey Sprecher is nothing if not a wheeler-dealer: The son of an insurance salesman, Sprecher fled Wisconsin winters after college for the sunny climes of Southern California, where he built power plants the way some developers erect shopping centers.

First, Sprecher would ask California bankers if they would finance a new power plant if he had enough contracts in hand from neighboring utilities to guarantee its success. When the bankers said yes, Sprecher then approached California utilities and asked if they would stand as ready buyers -- which several did. Lastly, Sprecher convinced local municipalities to provide him with raw materials -- the wood and waste paper that he needed to fuel his trash-to-energy plants.

Even now, Sprecher admits he was just "an assembler of the parts. I was the glue that stuck everything together, but if I walked away, everything would have stayed in place." Sensing that California's attempt at energy deregulation was a train wreck waiting to happen, Sprecher sold his power plants in the mid-'90s, well before the crisis finally hit last year.

LONDON CALLING. Now Sprecher is applying that same ingenuity to his upstart Internet energy exchange. After assembling a powerful team of backers -- including such Wall Street heavyweights as Goldman Sachs, along with energy giants British Petroleum and Duke Energy -- Sprecher has built his Atlanta-based InterContinental Exchange into a growing force in the energy-trading game.

In the eight months since ICE went live, the online exchange has crossed more than 100,000 trades of oil, natural gas, and metals worth more than $100 billion. And with its audacious, but apparently successful, bid for London's International Petroleum Exchange, the brick-and-mortar exchange that sets pricing for more than 90% of the world's oil, Sprecher is poised to challenge energy-trading titans like the New York Mercantile Exchange.

"This is like America Online taking over Time Warner," muses the 46-year-old Sprecher. "Even if people don't like what's happening, they are starting to buy into the vision...this is a powerful business model that's going to change the way people trade."

Taking over a major financial exchange is a coup for an Internet service that was little more than a gleam in Sprecher's eye just a few years ago. After selling his California power plants in 1996, Sprecher cast about for ways to profit from energy deregulation -- and concluded that deregulation would create a growing need to better hedge against energy prices' inevitable gyrations among energy producers and providers.

"TRUST ME." A year later, Sprecher stumbled across InterContinental Exchange, a then-struggling Atlanta-based service that had been designed so that 62 regional utilities could swap energy back and forth to meet peak-hour demand -- first by fax, and later via a clunky dial-up service. With the service losing $1 million a month, the founding utility, Mid-American Energy Co., was eager to sell ICE. So Sprecher bought it from Mid-American for an undisclosed price, laid off all but a dozen programmers -- and began his quest to convert the operation into a digital commodity exchange. "I shut down their business, took a dozen workers aside and told them, 'We're going to build something big. Trust me.'"

Throughout the conversion, Sprecher resisted the urge to bring in venture investors, funding ICE's payroll largely out of his checkbook. While his programmers spent the next nine months retooling, Sprecher hit the road with the goal of convincing the energy giants to use his service.

He pitched more than 100 major energy producers, users, and traders -- most of whom were skeptical about Sprecher's digital system, believing that their market clout enabled them to spot pricing trends and discrepancies ahead of the pack. "It landed with a big thud," sighs Sprecher. "The companies I talked to said, 'We don't want transparency in prices. We benefit from opacity."

PIECE OF THE ACTION. Unbowed, Sprecher went back to the drawing board -- intent on finding some formula to build demand for his service. While many of the other upstart business-to-business exchanges were spending millions on ad campaigns to build market awareness, Sprecher spent nothing on promoting his brand.

Instead, he dangled a new and lucrative proposal in front of the energy behemoths: In exchange for guaranteeing a certain amount of trading over his system, Sprecher agreed to give each major participant a sliver of equity -- a deal he knew that the rival cyberexchanges, whose venture investors would resist any dilution in their ownership, couldn't match. While the energy companies began warming to ICE, Sprecher got an unexpected boost when Enron Corp., the Houston-based natural gas giant launched its own Internet trading service in October, 1999.

Suddenly, the energy giants rushed to sign up with ICE -- if only to prevent Enron from cornering the online-trading market. Sprecher "was at the right place at the right time," says Jim Walker, a senior analyst at Forrester Research. "The industry was highly motivated to create a new platform to compete with Enron." And for their part, ICE's users profess to be happy with the service. "It's a great system," says Harvey J. Padewer, a group president for Duke Energy Corp. "It's definitely the next wave in trading."

"UNCHARTED TERRITORY." To be sure, with its one year jump on Sprecher, EnronOnline now commands the lion's share of online trading: While InterContinental Exchange recently matched its 100,000 trades, Enron announced that it had crossed its millionth transaction, with a value exceeding $590 billion. But Sprecher countered with his own move in April: A $100 million, all-stock bid for London's International Petroleum Exchange, whose Brent Crude futures contracts serve as the benchmark price for more than 90% of the world's oil. With many of its large customers sensing that a digital format could mean a sharp drop in their trading costs and backing ICE's bid, the International Petroleum Exchange announced on May 31 that a majority of its shareholders had agreed to accept the offer.

Acquiring the London exchange not only puts Sprecher in control of trading in the high-profile Brent Crude contracts, it also gives him a seasoned management team -- which Sprecher readily acknowledges he needs. "I'm in uncharted territory here," he admits. "I'm a power-plant developer. I'm anxious to get the management that knows how to run an exchange."

Indeed, as he merges ICE and IPE, Sprecher hopes to blend the best of the digital and analog worlds: the low-cost structure of a digital exchange with the service and customer protections associated with a regulated exchange. While ICE serves simply as a matching service that assumes no liability if its participants don't make good on their end of a trade, the IPE now enables Sprecher to offering "clearing and settlement" services -- in which the exchange itself assumes the credit risk if a trader doesn't deliver. Sprecher hopes that will enable him to attract small traders wary of using any service owned by the energy giants.

UNBREAKABLE CODE? While Sprecher plans to immediately convert IPE's trading in natural gas and power to the Internet, he admits that converting the bellwether Brent crude contracts could take upwards of a year. "It's the one we're going to be most careful about converting," he says. "There are too many traders who depend on that contract."

Sprecher can't tarry, however, given the New York Mercantile Exchange's plans to launch its own electronic platform, eNymex, sometime this summer. And Nymex officials argue that even after the IPE merger, Sprecher's exchange will still be run by and for the energy giants. "They're still owned by a number of partners who have set positions in the market," notes Nymex spokeswoman Nachamah Jacobovits.

Sprecher acknowledges that the Nymex is "definitely a competitive threat," but he dismisses the conflict-of-interest issues. And he believes that it will be tougher for Nymex to build a digital system to match his operation than its officials realize. "We've been writing code for four years, and continue to write code, so we know how hard it is," he says. As it has been since he sold his California power plants, Sprecher's ability to see further into the future than his rivals may once again prove to be his most valuable asset. Foust is BusinessWeek's Atlanta bureau manager

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