The nonstop dialogue about retail wheeling, power brokers, PoolCos, and restructuring overlooks customers and their increasing thirst for value-added services. Aside from a few emphatic words by some industrial users, little has been said about customer expectations. This article offers a snapshot of the brave new world of energy service marketing (ESM). ESM will take the place of demand-side management (DSM) and electricity marketing, blending the best of both.
ESM is simple. In contrast to DSM and its highly complex agenda, ESM seeks only to deliver value to customers. The industry has never decided whether DSM is a customer service, supply-side substitute, or environmental crusade. But ESM clearly offers products and services that customers want and need (em pricing options and contracts, information services, end-use services (actually selling lighting, heating, cooling, drive power, and so on), operation and maintenance, and financing for energy equipment investments, among others.
Utilities that wish to compete only in the electricity commodity business will find their margins shaved to a bare minimum. Survivors will search for broader geographical markets. The ESM arena offers many opportunities for higher profit margins.
Electric utilities have always revered the large industrial customer. But those customers just want a low price. And their market clout will only grow under under competition. On the other hand, most nonindustrial customers have a different focus. They represent a prime market for ESM. These customers must concentrate intently on their market and usually lack the time or interest to tackle energy options. Yet they can be highly receptive to assistance in lowering operating costs, improving comfort, meeting environmental rules, and simplifying their everyday lives.
There's Still
Money Out There
Why should a company add ESM to its business plan? In part, for the same reason used to justify integrated resource planning (IRP): Customers can save a lot of money installing energy-efficient technologies and systems. If an intelligent and innovative ESM company can tap this market, customers can gain substantial value and the ESM company can build profits. But to unlock this market, ESM players must overcome barriers to energy-efficiency investment, such as high initial cost, lack of capital, fear of technology failure, and lack of information or availability.
The table below estimates the energy-efficiency portion of the ESM market under the scope of current energy service company (ESCO) and utility programs
(two- to five-year time frame). Calculations assume that energy-efficiency investments would be made in an unregulated market in which no cross-subsidies take place.
Beyond energy-efficiency applications, the market can be even more lucrative; its potential to expand limitless. The market for "customer solutions" could grow as large as $25 billion per year, including communications, billing assistance, financing, entertainment, power quality, environmental compliance, and productivity enhancements.
Utilities today are in the best possible position to pursue ESM. They can still use ESM to protect long-term market share, just as the City of Austin and Public Service Co. of Colorado link DSM program participation to continued electricity purchases. Utilities still have an advantage in market positioning, just as AT&T did in the long-distance market. But AT&T lost approximately 30 percent in market share during the first few years after the Bell breakup, and has only now regained the level of revenues it enjoyed in 1984. To avoid that fate, utilities must embrace ESM. Don't worry about lost revenue from specific programs. Worry about ESCOs, who are itching to steal utility customers.
The Roots of ESM: Blending DSM With Marketing
Customers gain from higher energy efficiency when they can maintain their level of service while cutting costs. But they can also profit by increasing energy use if the value they derive from the energy outweighs the cost. To the customer, more or less energy is not the issue. Energy use is a continuum in which customers make constant tradeoffs between opportunities to spend dollars in the most appropriate place. Customers look for solutions; DSM that considers only energy savings will not consistently help customers find solutions. Instead, a marketing representative should be able to approach the customer with a vision to resolve its energy and business problems (em not with a myopic view to simply boost sales or savings. Energy savings and growth can be created simultaneously, as DSM impact evaluations prove. The words "snap-back", "take-back", and "program failure" may carry negative connotations in the world of DSM, but they describe what is actually intelligent consumer behavior.
Pacific Gas & Electric Co., a leader in DSM, was criticized last year for running advertisements implying that residential customers might want to keep their homes at 70 to 72 degrees. TURN (Toward Utility Rate Normalization) commented: "It seems odd to tell people in an ad they can keep the house warm and 'We'll finance it for you'" [California Energy Markets, NewsData Corp., Feb. 11, 1994]. In fact, the ad is not at all odd; it is merely consistent with a customer value strategy. A customer value marketing strategy might promote several such "odd" goals: comfort for the homeowner, financing to eliminate cash flow difficulties in high-cost months, weatherization and appliance programs to help lower energy bills, information programs on how to operate the home most efficiently, and or the promotion of new time-saving electrical appliances. These programs may increase or decrease energy use, but that's not important. The key lies with the increase in customer value, based on the customer's own choices.
Developing a Strategy
One can imagine how a consumer marketing expert might describe DSM: The attempt of regulators, consultants, lawyers, and accountants to argue incessantly about the best way to put technologies in buildings, without the customers' input or consent. While IRP may be appropriate under a monopoly environment, the consumer ultimately determines the success of a given product or service in a competitive market. The skills and knowledge developed through DSM must be transformed from a focus on resource obligations to an understanding of customer value choices.
Many utilities find themselves in a precarious strategic position. While they face unprecedented competitive challenges in the retail market, their actions in the retail market are still subject to rigorous regulatory scrutiny. Competitive market forces and burdensome planning requirements are working at cross-purposes. The market requires utilities with pricing flexibility, the ability to develop and promote new products and services, and the freedom to act quickly to changing conditions (em capabilities inconsistent with traditional regulatory oversight. Utilities and regulators must collaborate to produce a transition strategy that allows beneficial resource plans to develop, while also enabling utilities to meet competitive pressures.
The actions of the next two to four years will determine the success of the energy service market. Dropping DSM programs completely at this time would leave many benefits on the table, and the energy-efficiency infrastructure that has been built in recent years would be threatened. Depending on how the transition materializes, the ESCO industry may thrive or stall.
Within several years, many DSM/energy service applications will likely take place outside of the regulatory environment. Utilities will increasingly choose to form unregulated retail companies separate from their distribution service companies. ESCOs are already moving into many service territories, both with and without the local utility's cooperation. Many of the large ESCOs are owned by utility companies (see table of major ESCOs). Among recent energy service activities by utilities: San Diego Gas & Electric Co. has formed Enova, Boston Edison has acquired Coneco; Potomac Electric Co. has formed Pepco Services to offer customers customized services; Bay State Gas, Connecticut Natural Gas, and Koch Gas Services have partnered to form KBC Energy Services; and Public Service Electric & Gas has formed Public Service Conservation Resources Corp.
Utilities and other companies are scrambling to position themselves as the energy providers of choice. But, in contrast to the low barriers to entering the electricity brokering market, the skill sets required to succeed in ESM are quite complex. Technical knowledge, energy-use modeling, sales and marketing savvy, superior customer service, financing ability, and relatively deep pockets are all required. Finding ESCOs to acquire, or finding employees with these appropriate skill sets, may become very difficult in the next few years.
Utilities will also need to accept a higher level of failure for
product/service introductions. The ESM market is inherently riskier than normal utility operations, and will require a streamlined decisionmaking process. But the biggest risk for utilities is losing the close relationships they have cultivated with their customers over many decades.
ESCOs already focus primarily on the customer, particularly the customer's business needs. They work diligently with trade allies to ensure timeliness and high levels of customer service. They have built relationships with strong financing organizations. And they have developed sophisticated market segmentation strategies to identify customers most likely to benefit from their services. While energy efficiency is often the cornerstone to an ESCO-customer agreement, many sales are clinched by the promise of improved operation and maintenance conditions, product quality, and working environment.
In today's market, we have dozens of ESCOs. However, none of these yet dominate the market. In the near future, one or more companies will rise and become major players in large regions, or even nationally. The two key qualities a "super-ESCO" must offer are trust and value. A few companies are positioning themselves now to offer ESM over wide regions. Honeywell, Johnson Controls, Entergy Systems and Service, Southern Electric, ENRON, and Jefferson Gas/Electric have each made moves into many utility service territories.
Companies with skills in both independent power development and ESM may occupy the most powerful competitive position when markets open up. Their unique blend of expertise could lead them to form an "independent vertically integrated energy provider," the analog to the franchised-based, vertically integrated utility that may soon be dissolved. Several combination IPP (independent power producer) and ESCO businesses exist already. But what if General Electric decides to go into the business? They already make turbines, substation components, electric meters, communications systems, some commercial appliances, and virtually every major residential appliance. With their household name and the ability to dominate so many parts of the delivery chain, they could be a formidable national presence.
Potential competition from nationally recognized firms gives customer programs added value. While lack of regulatory scrutiny may make other service territories attractive business markets, utilities should not ignore their home territory. Name recognition and trust on the part of a utility's current customer base is a powerful market advantage that must be fortified to retain market share. It is always much more effective and less costly to retain a customer than to win a new one. Also, competition recognizes weakness and will hit the most vulnerable service territories first.
While debate over stranded investment and power pools dominates discussions of deregulation, the real arena of the competitive future will lie in the homes and businesses of customers. Hopefully, we can learn from other recently deregulated industries. After price wars that last for years, some companies realize that differentiating and expanding their products and pursuing specific market niches is the road to profits. Utilities must decide for themselves what type of company they want to be: low-cost commodity provider, intelligent aggregator of brokered power, regulated distribution company, or ESM provider. Unfortunately, many utilities will not seek their strategic direction until forced to by aggressive competition. Only a few will move out in front and pursue customers with the fervor of Federal Express, Nordstroms, MCI, and Merrill Lynch. Utilities are at a unique crossroads today. The strategic marketing decisions they make now may dictate their success for decades to come. t
William LeBlanc is project director of market strategy at Barakat & Chamberlin, Inc., specializing in strategic marketing, bidding, DSM, and competitive assessments for the firm's clients. Mr. LeBlanc holds an MS and BS in mechanical engineering from Stanford University, and a BA in management engineering from Claremont McKenna College.
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