Load Aggregation:

The Wolf at the Door?

Of course, there's nothing to stop a utility from aggregating its own customers.

WHAT, EXACTLY, IS LOAD "AGGREGATION?" Is it a threat, an opportunity, or merely a sales tactic?

Actions taken in California, as well as in pilot programs across the country, place customer aggregation on the leading edge of efforts to pull native load from electric utilities.

Ironically, present-day utilities already "aggregate" their customers (em albeit into a single group. It's called the "customer base." But nothing stops utilities from adding a few innovative wrinkles to gain value from aggregation strategies. In fact, if utilities could somehow put aside the notion of collegiality, we might see an aggressive power company profit handsomely from aggregation (em or even branch out of its service territory.

The First Wave

While energy entrepreneurs are hoping to lure customers away from utilities through a variety of new products, it is the aggregation of load and services that seems to be attracting the most attention. Aggregators work along the same lines as long-distance companies, buying co-ops, credit card handlers, and other organizations that compete for the privilege of bringing many end users together. They act as the "business agent" for the aggregated group to obtain low-cost power or reserve transmission capacity, much gas marketers have done for the last decade.

• In California, New Energy Ventures (NEV) claims to have signed up nearly 5,000 megawatts (Mws) of load (roughly 10% the state's load), and is looking eventually to aggregate 10,000 Mws.

• In New Hampshire, Granite State Energy has signed up many former customers of Public Service of New Hampshire by grouping together enough load to deliver a 20 percent overall savings using market-based electricity.

• In Massachusetts, Xenergy (recently purchased by a division of New York State Electric and Gas Co.) has used a pilot program to aggregate members of the Massachusetts High Technology Council (a group of industrials including Raytheon Corp.).

• Duke/Louis Dreyfus (an alliance between subsidiaries of a utility and a financial trading firm) signed an energy supply services agreement covering many facilities of United Parcel Service.

• Other utility offshoots, such as Southern Development and Investment Corp. (a division of The Southern Company), are similarly pursuing large energy users in other utilities' territories.

Many marketers and aggregators are active elsewhere, most of them small and generally unknown to utilities. George Leon, of National Analysts, Inc. (a utility consulting firm), summed it up this way: "You can lose your shirt to the small guys and not know it until it's over."

Likely Targets

To a utility, tomorrow's aggregated customer groups will look a lot like today's "municipal" customers, but will lack the same physical boundary restrictions. Prime candidates for aggregation include:

• Chain stores and restaurants (Enron supplies gas to many McDonald's franchise locations)

• School and medical systems (SPURR/REMAC has gathered 350 schools and colleges in California)

• Government buildings (marketers are already pursuing defense facilities)

• Apartment housing groups (Power Clearinghouse recently tried (em and failed (em to serve an Austin apartment complex as a wholesale group)

• Banks and money handlers (Duke/Louis Dreyfus just signed up First Union's 2,000 branches)

• Real estate management firms (NEV started with the Los Angeles Building Owner's and Manager's Association as its commercial base).

Aggregators will either serve these targets directly, or they will "sell" them to larger organizations, which will serve these customers as part of an even larger group. In effect, just as electricity turns into a commodity, so do the customers.

Likely Alliances

While power marketers and aggregators may compete for some loads, they will often wind up working together to gather and serve large aggregated loads.

By acting jointly, marketers and aggregators can conserve administrative resources and control the power path from "boiler to busbar." Also, power marketers may need an aggregator to act as a sales and service force when dealing with small and residential customers. Power marketers are presently focused on serving wholesale customers, while load aggregators can tailor and deliver their groups as a new form of wholesale client.

Meanwhile several utility spin-offs that began as power marketers are gradually turning into aggregators, or vice versa. Here are some examples:

• LG&E Power Marketing, a spin-off from of Louisville Gas & Electric Co., is exploring opportunities to form partnerships with aggregators.

• Brooklyn Union has created KeySpan Corporation to secure gas (and eventually electric loads) from neighboring utilities.

• EUA Cogenex, the energy services (ESCO) division of Eastern Utilities Associates, recently announced a partnership with Duke/Louis Dreyfus to begin power marketing and aggregating in the New England area.

Utilities trying to play catch-up may find it becoming increasingly difficult, due to downsizing pressures, regulatory demands, and staff limitations. Just as many utilities entered the demand-side management market by acquiring or spinning off ESCOs, they might adopt a similar strategy to crack the aggregator market, not only to retain native load, but also as a way to secure the loads of other utilities.

What Customers Want: Service

Surveys, focus groups, and one-on-one discussions indicate that customers are looking for more than just a lower price from a new service provider. Fertile territory remains to be explored in satisfying a host of customer needs, such as:

• Consolidated billing and analytical services

• Power quality and environmental compliance

• Outsourcing energy plant operations

• Energy purchasing

(customer-owned natural gas, rate analysis, etc.)

• Managing and funding energy efficiency projects.

Most of these services are available piecemeal, from a variety of vendors, such as National Utility Services, Standard Rate Review, and hundreds of other "consultants" operating out of their kitchens. Many are presently acting as ESCO's, electrical contractors, gas marketers, building management agencies, or engineering consulting firms.

Nevertheless, these same surveys and studies that identify opportunities for new services also show that most customers want to deal with one provider (preferably their present energy company, rather than a host of different vendors of varying abilities and performance. UtiliCorp's Energy One offered the first store for "one-stop shopping," but it won't be the last. Many utilities already have projects underway to employ unregulated ESCO's to consolidate analytical, engineering, and financial assistance for large customers.

Less than 4 percent of buildings are overseen by some form of energy manager, indicating fertile territory for offering energy management services where such expertise is absent. In general, most utilities have yet to look at the world through the eyes of the customer to see the value added by others. When they do, some innovative ideas should emerge.

What Customers Demand: Data

Many utility customers have grown accustomed to purchasing other commodities and services via national accounts; purchasing agents find their inability to do so with energy to be a serious handicap. Thus, the surveys deliver another consistent message from large commercial and industrial customers: Give us more data.

Customers incur significant costs simply in receiving, processing, and paying utility invoices. They need accurate and relevant information regarding their energy use and costs; the lack of it contributes to "analysis paralysis" and bad guesses. Downsizing (at the customer end) has only contributed to the problem.

Joe Megacz, energy manager for the McDonald's chain, tells utilities to "give us the data, the facts, the spreadsheets we need to make the decisions to make we're on the right rate. ... To help me do my job, do the best job you can [in supplying me with useful billing information]."

Utility Affiliates: One-Upping the Aggregators

Utilities are not powerless in these new markets. Using existing staff (and perhaps some consultants for software development), utilities may make use of unregulated affiliates to one-up aggregators through a number of options.

First, utilities are uniquely situated to offer "packages" of services that can be customized for customers, using sophisticated billing and analysis programs that can save customers money (e.g., through lowering coincident-peak demand charges, or finding billing errors). They can offer a basic billing service that combines all utility charges (em including water and telephone, not just gas and electricity.

Second, the utility affiliate can handle the customers payments, ensuring timely and accurate payments to the utility, but under terms more favorable to the utility than presently allowed for regulated utilities. Through the use of "3-dimensional" billing techniques, the subsidiary could act as its customers' "energy manager in a box," showing how energy use can be better controlled and monitored to find sources of savings, converting what is presently an expense into a potential profit center.

Moreover, when an incumbent utility can combine custom billing services with management of other infrastructure functions (such as water and waste management), the overall picture becomes much brighter for the power company that offers this service as part of its aggregating option. The utility is now providing opportunities for its customers to outsource work that is normally part of their overhead, the cost of which could be comparable to the differences between the prices offered by the utility and its aggregating competition. Since most companies pay much more for their people than for their energy, total savings from such services could greatly exceed the savings the competition is offering.

The beauty of these opportunities is that they can be initiated now, before deregulation becomes a fait accompli. A number of firms have been developing products for this market. For example Northern Indiana Public Service Co. has begun working with IBM to provide a centralized phone service to provide a any type of customer service (billing, service changes, repair information) with only one call.

Opportunities and Pitfalls

The path does not lie wide open. Public utility commissions appear unlikely to allow utilities or their affiliates to flex their "market power" (e.g., via confidential customer lists and data), and will probably require equal access to customer information for all marketers. Thus, aggregating subsidiaries will probably be left to compete with independents on a relatively level playing field, just as they do with other ESCos. The use of existing goodwill does, however, grant an edge to a utility, provided it offers services comparable to-or better than-those offered by independent aggregators.

Nevertheless, most independent aggregators presently operate with very limited resources and staffing, their shoestring budgets dependent on shoe leather. Beyond a slight price break, most are not offering much in the way of innovation, making them a manageable threat to strong utilities that can bank on good customer relations. t

Ben Blumberg and Jonathon Shaevitz are principals with InSITE SERVICES, L.P., an information and billing company headquartered in New York City. InSITE has begun offering billing and information services to the energy services industry.