[BETA] Fortnightly

The battle to control profit margin really boils down to a battle for the customer premises, where the serious money resides.The gas and electric industries in the United States control about $900 billion in assets (production, logistical, merchant). They employ these assets to serve about 150 million customers (counted separately for gas and electric), but they manage to offer only two rudimentary products (em molecules and electrons (em and at only two levels of service: firm (supposedly) and interruptible (obviously). Such a poverty of consumer content stands without precedent in the history of U.S. business.

That this game is coming to an end should elicit no surprise.

True retail competition in the gas and electric industries will become a transforming and quotidian reality within five years, creating great shifts in revenue and capital:

s A $50-billion drop in annual consumer energy spending.

s From $200 to $300 billion extinguished over seven to 10 years in noncash book value in the pipes and wires and energy production industries.

s Tens of billions of dollars in new investments, particularly gas-fired merchant and distributed generation plants, and computing and communications systems.

s Many more billions in new enterprise value for efficient and innovative firms.

The old business model emphasized industrial technology and quantitative increases in consumption of energy commodities. The new model, supplanting the old, will accentuate information technology and qualitative increases in consumption of energy services.

By itself, electricity as a commodity does nothing for the consumer. However, electricity plus technology plus knowledge about needs leads to a service, such as lighting. Consider the soft ambient illumination desired for a small, informal dinner party. Now imagine the different intensity needed for a large, formal gathering, or to focus attention on a valuable painting. Those who doubt the power of quality to add value and propel spending should compare the 500-to-1 ratio of the price of a bottle of Romanée Conti or Chateâu Petrus with a bottle of jug wine of the same volume and alcoholic content, from the same region. No wonder, then, why customers will pay well and willingly for an energy service but remain loath to pay much for just electricity at the meter.

Real spending on energy commodities will fall noticeably over the next couple of decades. The real prices of molecules and electrons have nowhere to go but down. Just as certainly, however, real spending on energy services or features will rise sharply. Vendors of energy commodities (and plain logistical capacity) will see their business positions erode, while purveyors of features (i.e., quality) will ascend to strategic heights. Cerebral capital will wrest value from physical capital. Corporate growth in the energy enterprise will reflect ideas, not things; quality, not quantity; packaging, not unbundling.

Scarcity, Abundance, Convergence, and Value

Consumers, retailers, and economies in general organize around resources whose real prices are falling rapidly (indicating abundance, not scarcity) and hence, whose primary demand is exploding.

Today, the energy industry (gas and electricity) has entered an era of systemic physical abundance, but one coupled with a scarcity of consumer content. This physical