E-Marketing: Is Energy Missing the Net?

Before the industry can tap into the Web's full potential, it needs to remove some roadblocks - without regulating itself into a corner.

Everyone involved in energy recognizes that deregulation is driving major changes in how the industry operates. What some may not recognize is that the evolution of e-commerce is compelling even greater changes in the way energy is marketed and purchased in both wholesale and retail markets.

A recent report by Forrester Research Inc., an independent research firm that analyzes the impact of Internet and other emerging technologies on business, consumers and society, projects that 25 percent of business-to-business sales of natural gas and 11 percent of business-to-business sales of electricity will be conducted online by 2004. Most of the transactions are short-term contracts with standard provisions.

Branding and customer convenience drive the retail market. Internet energy stores allow residential and small commercial customers to purchase and pay for services online.

"People are not using the Internet because it is cool," says Frank Getman, president and chief executive officer of Houston Street Exchange Inc. "They are using the Internet because it is helping them do their jobs more efficiently and effectively."

The energy business is high-tech in terms of the generation and delivery of energy but not in terms of customer service and marketing. The Internet is the medium for changing that.

"The Internet enables companies like Altra to use new technology to make communications easier, making it easier to consummate, manage and settle transactions," says E. Russell "Rusty" Braziel, chairman of the board of Altra Energy Technologies Inc. Altra provides business-to-business e-commerce products and services to the energy market.

"That improves the industry overall in terms of efficiencies and in terms of costs."

The Regulator's Role: Online or Out of the Way

HoustonStreet, Altra and Essential.com are examples of a new type of Internet company called a metamediary, which furnishes information-based services. The metamediary brings together many different buyers and sellers, and provides complementary support services such as risk assessment and scheduling. A recent report by technology analysts at Bear Stearns predicts that energy metamediaries will transact nearly $90 billion in e-commerce in 2003, making energy one of the largest Internet markets.

Despite progress in customer service by energy metamediaries (see sidebar, "Early 'Dot-Coms' Eye Big Potential Markets"), some impediments to achieving the full benefits of e-commerce in the energy industry remain. In the electric segment, regulatory issues continue to dominate.

"The best thing that regulators can do for this market is to open up markets as quickly as they can," says Getman. "They should stay out of the competitive energy markets and leave that to market forces."

Braziel agrees. "We would see faster progress on the industry's ability to use all information technologies, including the Internet, if we were moving faster toward a truly open-ended deregulated system," he says. "There is still a relatively small number of states that have full open access to retail customers."

Commissioner Curt Hébert Jr. of the Federal Energy Regulatory Commission says the best thing his agency can do for the energy sector is to observe developing markets before taking any action. "We have to be very careful about trying to run the economy, especially when it comes to new technology," he says.

Hébert cites as an example the hands-off approach of the Federal Communications Commission in allowing competition to develop in telecommunications, particularly with regard to new technology. "I don't know what the call-waiting and the call-forwarding and the three-party calling of electricity is, but I know it is out there."

Internet energy companies also are concerned that regulators at all levels do not understand the Internet and the potential impacts of their actions, because changes in the Internet environment outpace its regulation.

"Regulators should consider two principles," says Vinod Dar, CEO of Energy E-Comm.com, which advises energy and utility clients about Internet strategies. "If they don't understand, then they should do no harm. They should also be asking what they can do to empower the consumer to take advantage of choice."

Hébert says regulators must maintain reliability, noting that the briefest outage can cause major problems with both hardware and software for businesses and consumers dependent on computers.

"Our role is to make sure that the utilities that are under our jurisdiction have adequate reserves to meet reliability standards and also that planned outages are not scheduled during really hot or really cold periods," he says.

Varda Lief, senior analyst with Forrester Research, suggests that the FERC appoint a technology czar.

"They don't necessarily need to take the lead, but they need to be fully informed," she says. "They need to be involved, and they need to be making decisions that have an appropriate technology basis. I don't see them doing that yet. They are making decisions about policy outside and apart from technology."

Pulling Out the Stops: Look to Other Industries

The issues that stand in the way of e-commerce reaching its true potential in energy are ones that in many cases other industries already have encountered and resolved.

Electronic Interface Standards. One thing a technology czar might do is facilitate the development of standards for electronic interface in the electric business, says Lief. The industry needs to develop a common language for extended markup language communications, or XML, between marketers and the electric companies that will deliver electricity to consumers.

"In this age of the Internet, all [electronic data interchange] should be conducted by XML," says Potter.

"The Gas Industry Standards Board has done an excellent job in designing communications standards between marketers and pipelines," says Braziel. A similar effort is needed in the electric segment. While several initiatives were started last year, no clear leader is addressing the issue.

Getman agrees that standards are needed, but remains wary of regulators.

"I think it would be a mistake for regulators to tell folks what the data transfer standards are going to be," he says.

Service Pricing. Pricing is the biggest regulatory problem for retail energy marketers like Essential.com, according to Potter.

"The regulators establish standard-offer service that is priced below market," he says. "That's the case in Massachusetts. That's the case in Rhode Island. That is true in almost every state."

Enrollment Concerns. "In order for a customer to switch a supplier, the customer must give us or any other supplier their account number, and it has to be accurate," Potter says.

In the long-distance business, the account number is the telephone number, and everyone knows their telephone number. Not only are consumers less familiar with their account numbers for electric and gas service, the numbers may be as long as 20 digits. Typos are common.

"That one fairly simple issue has a negative impact on customer conversion in the retail space," he says.

Contracting issues can be problematical for both retailers and exchanges. Some states require a wet signature, so although business can be conducted online, off-line paperwork remains necessary. House Commerce Committee Chairman Tom Bliley (R-Va.) has introduced legislation that would standardize the use of electronic signatures by giving them the same legal recognition as a paper signature. States would still be free to address other contract issues.

Security Issues. Cyber-crime became front-page news in February when hackers attacked major websites, shutting them down for prolonged periods and cheating them out of business. The events prompted federal law enforcement agencies to call for a coordinated strategy against Web crime and tougher penalties for perpetrators. The problem is a serious threat to national and economic security in the United States, according to the FBI.

Nevertheless, some Web companies say security shouldn't concern customers.

"Within the infrastructure of the Internet, security tools are available to deploy whatever standard of security a customer wants," says Braziel.

That consummating the transaction and scheduling the transaction are separate steps in the existing spot markets for gas and electricity provides additional protection. "We believe it is highly unlikely that power could be moved inadvertently."

Privacy is a related matter. In online energy trading, buyers and sellers generally are not aware of each other's identities until after the transaction has been consummated, if at all. "Companies that are doing business on our system have signed a comprehensive contract stating exactly what our restrictions and constraints on using data are and that they understand precisely how we will use the information," Braziel says.

Although one might expect security and privacy to be more of a concern with residential and small-business customers, Potter says that is not the case.

"Our target market is the Web-enabled consumer. Most people that shop online don't have too many issues with securing information," he says. "We have a secure website. Information is not shared between suppliers. It shouldn't be an issue."

Is Energy a Victim of its Own Prudence?

Companies like Altra, HoustonStreet and Essential.com are demonstrating that the Internet can be an effective tool for energy marketing at the wholesale and retail levels. Many utility companies, however, are failing to take advantage of that opportunity, say critics.

Energy E-Comm.com recently evaluated the websites of 100 companies in the energy and utility business and found most of them lacking. The evaluation criteria included an analysis of the use of Internet capabilities and their appropriateness for the product being offered, the ability of the customer to actually purchase the product of choice over the Web, the logistical process of delivering the purchased product, and the ability of the site to encourage an ongoing relationship with the customer.

The study found that "senior executives of [energy and utility] players have expended little effort to clearly define where an e-commerce strategy fits into an organization's overall game plan." In many cases, websites offered little to attract consumers and, beyond that, nothing that would give Wall Street a perspective on how the company will maintain or increase its revenue stream.

Dar says that poor energy company websites give competitors an opportunity to make inroads in the business without much resistance.

"The gas and electric industry has the largest customer base of any industry, and yet it seems that it is about to lose this customer base through sheer absent-mindedness," he says.

The problem, in Dar's view, is not that utility executives don't know that the Web exists; rather they don't appreciate how quickly the transition to e-commerce is taking place. He notes that in the past, deliberate due process was the key to success in the utility industry. "The system prized taking its time to reach a decision, communicating a decision and implementing a decision," he says. "The company that was the slowest often won."

The Internet has reversed that. "The 'Net basically says that the person in first with an imperfect product and an imperfect business model will end up beating the person who takes another six months to come up with a perfect product and a perfect business model," Dar says.

"Getting things done quickly, learning, changing and adapting are basically the core business processes of the Internet. That is exactly opposite the business processes that have been enshrined into the utility industry."

One reason behind the problem is that energy industry executives and managers have been much slower to adopt use of the Internet for personal and business transactions.

"A CEO says his customers surely cannot be that Internet-sophisticated," Dar says. "When you examine his customer base, his customer base is far more sophisticated about the Internet than his executive team."

Forrester's Lief says that energy companies are extraordinarily concerned about how they will fit into the Internet.

"They are aware that they don't have a great skill set to deal with it," she says. "They are not marketers. That's the biggest issue." In many cases, it may be difficult for them to become marketers. "Marketers tend to go to a place where marketing is paramount, like Procter & Gambel or an advertising agency. That is not the case in the energy companies, and that is going to be an issue." The energy industry marketer can find it hard to act because of a limited budget and uncertain corporate commitment.

Energy companies have three choices with regard to the Web, according to Dar.

First, they can embrace e-marketing. "This will require completely reorganizing their organizations, their culture and their approach to things," he says. "In the past, the customer was a given. The focus of the companies was inward. If they are to succeed with this option, they must turn their focus outward onto the customer."

Dar says that will be impossible for most of the 150 investor-owned companies in the United States, not because they don't understand the need or can not find the technology, but because it requires a fundamental change in the company's overall priority. "It is an opportunity largely for new entrants in this space who don't have the baggage of being as internally focused as utilities."

The second option is for energy companies to ally themselves with businesses that are customer-focused and marketing-driven by becoming their back-office and delivery partners, concentrating on fulfillment.

"It is their only natural advantage. The only way you can have physical fulfillment is by going through their delivery infrastructure," Dar says. "Instead of fulfilling for themselves, they will end up fulfilling for the 'dot-coms' who will actually manage or control the customer interface."

The third option is to sell the company. Dar adds, "I don't believe they have the fourth option of saying it isn't going to happen in their lifetime or thinking that they can somehow prevent their customers from finding out about the Internet."

Patricia Lloyd Williams is a freelance writer in the Washington, D.C. area. She has more than 20 years of experience in the electric industry.

Early "Dot-Coms" Eye Big Potential Markets

Energy innovators say the Web gives them an edge in serving customers.

Power marketers, energy companies and other traders bought and sold nearly 3 billion megawatt-hours in 1998, according to HoustonStreet, a Web portal for trading wholesale energy products. Almost all of that business was conducted by telephone and fax. Emerging wholesale energy exchanges for online trading provide traders with real-time access to critical information and the ability to trade 24 hours a day. The Internet's immediate liquidity, improved efficiency and reduced trading costs are drawing traders away from the phones.

Altra. Altra was one of the first metamediaries - that is, Internet platforms for bringing together buyers and sellers - to facilitate energy trading online.

"Our business model is integrating the transaction chain electronically so that transactions can be consummated online, managed online and settled online with a minimal level of human administrative work in the process," Braziel says. The company's Altrade platform offers a marketplace for natural gas liquids, crude oil and electricity. Altra serves all segments of the energy transaction chain, including producers, trading and marketing companies, and large end-users. About 1,800 energy traders use the system.

Braziel estimates that Altra facilitates up to 50 percent of all trades for natural gas liquids in the United States. His goal is to achieve that level of saturation in other markets.

"It is complicated for buyers and sellers to find each other in the electric business, and it is particularly complicated to schedule transactions across systems where the buyers and sellers don't own the wires," Braziel says. The Altra system integrates the transaction so that if it is consummated online, it can be scheduled with systems Altra also offers. About 125 clients use Altra's risk management, scheduling and accounting software to manage the transactions, whether done online or the old-fashioned way.

HoustonStreet. While Altra is generally recognized as the leading natural gas exchange, the electricity industry is still up for grabs. HoustonStreet Exchange Inc. launched its first trading floor last June with an eye on the No. 1 position. HoustonStreet offers PowerPit, which allows "physical" traders to negotiate deal-specific terms and conditions. Users of SpeedWay, HoustonStreet's other option, trade blocks of 50-megawatt on-peak power for a period of one month, negotiating only price and the number of blocks.

Eighty-five companies, including eight of the top 10 power marketers, are trading on HoustonStreet's exchanges. The system is fully Web-based - no need to buy special software - and allows traders to conduct business just as they would by phone or fax, only faster and more efficiently, with access to news, weather reports, stock quotes and even sports scores on the trading screen.

HoustonStreet also plans an exchange for the trading of crude oil and refined products at the wholesale level, and may expand into natural gas and derivative products in the future.

"We want to be the premier site for Internet energy trading of all types of energy commodities, not just electricity," says Getman.

Competition among exchanges is likely to be fierce during the next few years. Getman says there is room for more than one electricity exchange but not as many as ten.

Essential.com. Essential.com, which bills itself as the Web's first energy and communications retail superstore, targets Web-enabled residential and small commercial consumers. It sells brand-name products for services people need in their homes and businesses, including energy, communications, Internet access and entertainment. It also offers a choice of suppliers within the categories.

"We offer a great opportunity for suppliers to build their brand, acquire customers and reduce their ongoing marketing, billing and customer service costs," says Bob Potter, vice president for business development. Consumers get convenience, lower costs and special promotions coupled with online consolidated bill presentment and payment.

By the end of last year, Essential.com, which started operations last June, had more than 20,000 customers and was growing at better than 100 percent each month. While the company offers telecommunications service and Internet access in 47 states, expansion into the electric business beyond its home state of Massachusetts has been slower because of regulatory issues and the lack of electricity suppliers interested in the retail market.