The natural gas exchange’s move to buy Oxen Inc., owner of the Alberta Watt Exchange, is part of the Calgary-based NGX’s strategy to add more electricity products to its trading arsenal.

“It’s an emerging market here in Canada,” says Peter Krenkel, president of NGX, a subsidiary of TSX Group Inc. He adds that the NGX already has several power products on its own system, currently accounting for 5%-10% of monthly trading revenue. This new deal will roughly double that figure.

“This new group of contracts added to our suite of products will make us bigger players in the power markets,” he says.

Although Watt-Ex’s power forward contracts will simply be rolled onto the NGX platform, the power exchange also trades Alberta Ancillary Services and is the primary mechanism for the supply of these support services to the Alberta Electric System Operator. NGX plans to run the auctions and specialized services sides of the business on separate parallel platforms, says Krenkel.

“We don’t mix our forward market with those specialized services,” he says, adding that at some point, however, the company may integrate the two.

NGX is also eyeing the Ontario power market, working with the Ontario Power Authority so that it’s in a good position when the province opens up, which Krenkel hopes will be in the near future.

“We did run some power auctions in Ontario earlier this year,” he says. “To us, that’s an important first step in putting power supply in more parties’ hands.”

IN REGULATOR’S HANDS

NGX followed a similar strategy when it first entered Alberta’s power market four years ago, although it’s working more closely with the regulatory body this time around, Krenkel says. He cannot provide an expected timeline for trading in Ontario, however, as that is in the regulator’s hands.

On the natural gas side of its business — NGX has been trading the commodity since 1994 — the exchange is focused on U.S. expansion, says Krenkel, noting that with roughly half of Canada’s gas production exported to the U.S., NGX continues to add markets south of the border. Several key points in Western and Eastern Canada today anchor NGX, and the strategy is to follow those pipelines down into the U.S., providing trading products along the way. NGX already offers several trading points on gas destined for the California market, for example.

Even though the electricity market’s potential is much larger than that of natural gas, Krenkel points out that power’s regional nature makes it difficult to establish the same strategy of continental trading that NGX currently boasts with natural gas. “Historically, the power grids in Canada have fallen under provincial jurisdictions,” he says. “They’re kind of islands.”

And because each province has its own unique market characteristics and regulations, Krenkel has no illusions that NGX will be trading power fast and furious anytime in the near future: “It’s going to take a very, very long time to get there.”

The Watt-Ex purchase will cost TSX Group less than $5 million and is expected to be completed in mid-September. NGX, with an employee roster of 36, would like to hold onto Watt-Ex’s seven employees, who are also based in Calgary, says Krenkel: “Good talent is hard to come by.” IE