Internet Mavericks: Still Working Out of the Garage?

Deck: 
e-Commerce is consolidating, but there's room for the little guys too.
Fortnightly Magazine - November 1 2000


 

e-Commerce is consolidating, but there's room for the little guys too.

Thomas Edison built the electric utility industry virtually from scratch out of his workshop, so can Internet mavericks do the same for e-commerce? Or has the moment passed for the garage startups, leaving it to the big utilities—or better yet, the large conglomerates and multi-company joint ventures—to attract capital and introduce the new ideas?

Perhaps there is still room for both. Or at least that was our take, here at the Fortnightly. On that assumption, we interview four chief executives of new e-commerce startups: two from large, well-funded industry giants, and two from smaller, niche-type ventures.

"We are connecting suppliers and buyers over the Internet," says Joe Zelechoski, interim chief executive officer of Enporion, a business-to-business e-procurement exchange and industry alliance that has been attracting new utility members recently. We also interview Andy Patterson, vice president for strategic analysis at American Electric Power. AEP was one of a group of electric utilities that announced plans in July to launch a web-based exchange for arranging transmission capacity, a venture that heads boldly into the unsettled earth of regional transmission organizations.

These projects suggest that e-commerce is consolidating, with the venture capital migrating to the larger, more established enterprises.

But don't tell that to Cody Graves of Automated Energy Inc., or Jason Ambrose, of Plurimi Corp. They are attempting to carve out their own niche as crucial players in the race to energy deregulation and competition.

For Graves, a former state utility regulator, that means providing both utilities and electric customers with Internet-based software to analyze usage and billing information in real-time. At Plurimi, Ambrose also offers real-time data over the Net, but in his case, it's pricing information, allowing electric customers to halt usage when prices reach a conceivably predetermined level.

"How do you balance supply and demand without knowing what's going on on the consumption side?" asks Cody Graves. "The traders all know the supply side. Go to the various trading boards and look at what Enron and Williams and those people are doing. They know what's going on on the supply side. But nobody really knows what's going on on the consumption side...."

Joe Zelechoski
Interim CEO, Enporion
(E-Procurement)

Enporion (www.enporion.com), billed as an open global procurement exchange to help the energy industry cut costs, follows on the heels of the energy trading platforms (such as HoustonStreet.com) that emerged in 1999. Enporion was formed in August by a consortium of Allegheny Energy Inc., New Century Energies, Minnesota Power, Northern States Power, and PPL Corp. Later, in early October, Enporion added Ameren Corp., CMS Energy Corp., KeySpan Corp., and UGI Corp. to its list of founding members. It announced that it would start operations later in 2000.

The spoke with Enporion interim chief executive officer Joe Zelechoski, about the future of procurement exchanges and the danger of antitrust regulation for large, multi-company e-ventures.

Why is the innovation from energy e-commerce coming from utilities partnered with technology companies rather than from single entrepreneurs with seed money?

For the longest time the supply chains in the utility industry were not forced to be competitive. But that has changed, as states are now deregulating. You can no longer assume that ratepayers will pick up your costs. So, everything is open for scrutiny, every part of your business.

If you look at the percentage of your O&M costs associated with materials and services it tends to be a fairly high percentage. So now one [should say], "What innovative ways can we improve the supply chain of these utilities?"

My experience was that for the last couple of years everybody was saying that it was going to be e-commerce. It was no longer going to be EDI [electronic data interchange], because EDI kind of stalled, because of the effort it takes to connect one buyer with one supplier via EDI. We connect buyers and suppliers over the Internet. The Internet is going to eliminate the rigorous standards of EDI and is going to allow a lot more transactions to take place—simpler and less expensive.

In announcing the auto-exchange last fall by bringing together thousands of suppliers, the three car manufacturers started to put a different twist on e-commerce. Instead of doing business on the Internet with one energy company with one supplier, the idea was that we have the Internet now and we have e-procurement technology that didn't exist three to four years ago. Those combinations allow a marketplace to form. They provide so much more than just e-commerce. You can do a lot of value-added services that energy companies could not create on their own.

By joining an exchange, brick-and-mortar companies can attack their supply chain issues and get e-commerce benefits and a lot of other value-added services just by connecting to this exchange. If there are a couple thousand suppliers hooked to this exchange we can now do business with a thousand suppliers without individually having to call and connect and coordinate with each one of those suppliers. The suppliers now have access to several hundred energy companies that will be hooked to an exchange.

Will the phone and fax disappear?

Routine transactions of calling a supplier to get their current price on a widget, whether the buyer does it or clerical support does it, that doesn't provide a lot of value to us. It also takes time for salesmen to look up the information. The marketplace will have that information available via electronic catalogs. Routine information that you go out and search for will be at people's fingertips. Just by the fact that you have five suppliers who supply widgets and all five of them have their catalogs online and when a buyer goes online to buy, all those catalogs come up and you can compare without going to different Internet sites.

We are not eliminating phone calls. The phone calls in the future will have more value than just, "I am calling to get your price, I don't have your catalog in front of me." Those phone calls don't provide value. But calling somebody to say, "I have a special project coming up in six months, how do I get space on your production line so that I know I am going to get a timely delivery and better pricing six months from now?"

That is the kind of phone call we want to have surrounding the exchange.

How are you dealing with antitrust law?

Our exchange is open and based on the size of the anticipated founder group, which will probably be two to three times the size it is right now, and the number of energy companies that will come on board as members. We do not believe, and our council does not believe, that we will have any issues with antitrust surrounding safe-harbor rules.

How we treat suppliers is going to send an important message. What we don't intend to do is go out and do a competitive bid, pick a company, and only deal with Supplier A for widgets. Our intent is to have a marketplace where we have a number of widget suppliers. We want the competition and if we settle on one and don't sign up any other widget suppliers, that one is going to end up with an advantage. Even if they are low-bid this year, eventually if they are the only one that you can buy from on our exchange the price will come up and they no longer will be the low bid in the marketplace.

Our strategy for aggregating is where it merits consideration we will. We may do it among a small handful of buyers with no antitrust issues affecting us. We will have a preferred supplier out there or two if the market is big enough but we would want to have some alternative suppliers out there who this year did not win the bid but next year might.

When will you be online?

It is being built now and it will be available later in the fourth quarter.

What is the overall cost of the exchange?

That number we have not gone public with.

Will your exchange trade as a public company?

This business may go IPO [initial public offering]. That is always a possibility. We are focused on building a good business that provides a good return to the founders and provides good values to the users.

How will you make your money?

The money will be made through transaction fees and through fees for value-added services such as auctions and catalog content, and such things as collaborative design features and settlement. It is possible that we could have a financial package as part of this exchange, where we help people who are buying and selling to settle up their charges between them. The ultimate solution may be that Enporion pays the bill and a buyer gets invoiced once a month, instead of getting 5,000 invoices during the month for various suppliers.

What happens to Enporion if utilities are re-regulated?

I believe even if they were regulated that marketplaces would remain the way to do business. The marketplace can drive out six to nine percent of your costs in supply chain. Public utility commissions are going to say, "Why aren't you in the state of X,Y,Z in a marketplace? You could be saving six to nine percent on materials and services and by not participating your rates are higher than they should be." The regulation issue is no longer a key on the success of Enporion to be a viable alternative. Sooner or later, if a utility in a regulated state isn't in an exchange, their commission is going to say, "Hey fellas, you are missing out on an opportunity here and our audit finding is that you should be in an exchange and saving ratepayers that money."

Some utilities will say, "I don't want to get into an exchange yet, because any savings that I enjoy I am going to have to pass back to the ratepayer, so why don't I wait." But sooner or later, when these exchanges are running, they are going to ask about those savings.

Andy Patterson
Vice president, strategic analysis,
American Electric Power
(Transmission Capacity)

With so much still up in the air about regional transmission organizations—and no RTO approved as yet—it's noteworthy in and of itself that American Electric Power, Carolina Power & Light, Duke Energy, and Unicom Corp. plan to turn RTOs into customers. They would plan to launch an Internet-based, electric transmission exchange that would offer a single portal for arranging transmission capacity.

While the exchange is to be open for use by any group in the industry, including power marketers, merchant generators, utilities, and aggregators, Andy Patterson, vice president-strategic analysis at AEP, acknowledges that the real market for its service would be RTOs.

There's no doubt that the stakes are high. According to the companies involved, more than $4.5 billion in revenue was generated industry-wide in 1999 from wholesale energy transported in the United States. Meanwhile, the four partnered companies alone transported approximately 100 million megawatt-hours of wholesale energy across their transmission systems in 1999, operating and managing more than 60,000 miles of transmission lines.

The spoke with Patterson about the RTO issue, the long-term vision for the exchange, how the exchange will work, and how it will make its money.

Why is the innovation from energy e-commerce coming from utilities partnered with technology companies rather than from single entrepreneurs with seed money?

There are a couple of reasons. I think the energy markets are generally not well understood, especially the information flow between the people that are participants in the sector and the people that have assets in the sector.

Take the exchange we are involved with. Reservations, scheduling, billing, and settlements for the transmission business is a bit of an arcane business. It is not one that is well understood, even within utilities. So for somebody to come from the private sector without a real strong background in the area, it would be difficult to do a startup. Not impossible, but difficult.

Will your exchange go public?

It has the potential for a public offering and that would be attractive. It is nice when you make these investments to be able to monetize the investment. At this point we haven't really decided.

How does your exchange relate to the whole RTO thing?

That is a good question—and one of the big obstacles we face.

The market has not really formed. The market for this service would be regional transmission organizations or RTO equivalents. The challenge is to position the business for RTOs that are going to form and give them an option on a value-added service that would be useful to them and a business that they would not necessarily want to form themselves. Our view is that the RTOs are going to have so much to do to put themselves into a position to function that they will be looking for opportunities to get third parties involved to help.

Do you envision that many RTOs would pool all their transmission capacity in one place?

Yes, conceptually that would be the idea. Electronically, you could make a market for a fairly broad piece of the geography, and through that, you create a lot of desirable characteristics.

Can such a thing replace the OASIS model already approved by the FERC?

We believe the business design that we are targeting is very consistent with FERC's model. We believe that a business that brings transparency and makes a market for transmission is something that is consistent with where the Federal Energy Regulatory Commission ultimately is trying to end up. [OASIS denotes the Open-Access, Same-Time Information System, created by the FERC to serve as a clearinghouse for transmission capacity.]

What are you doing to mitigate antitrust problems?

You solve the normal issues that you would expect to arise regarding information flow between people who are long on assets by involving legal counsel. The business as it is currently viewed would have a totally independent board and an independent management team and the utilities themselves would be passive investors. So that should help.

How will you make money?

The exchange could charge a price for every transaction, or sell seats. In addition, there are opportunities for information mining. If you are managing a lot of the transactions around the asset, you are going to be a source for how the market is performing. It is also typical of an exchange to get advertising revenue by posting advertising banners.

Will the exchange have to deal with different models for pricing grid congestion?

The opportunity here is to put a vehicle forward so people can get transmission capacity where otherwise they would not be able to.

The business is trying to bring value to the difficult situation where you are trying to move power across several control areas. It is difficult because you have to hit several OASIS sites; you have to coordinate them among a number of parties and it is not a very precise effort.

When you are a trader and you are trying to make things happen quickly and you are trying to participate in a market that may not be around for a very long time—well, the whole process of arranging transmission capacity is not the most efficient. What the business is meant to do is provide a tool for people to bring this more transparent look at the market and a more free flow of reservations and scheduling activity.

Do you need physical rights to make the exchange?

The exchange is not meant to take control of the capacity. We wouldn't own the capacity per se, all we would do is make a market for it. But you face two big obstacles.

First, there is not a tradable unit of commodity. "Available Transfer Capacity" is calculated a little differently depending on where you are. So there is not a common agreement on how to calculate ATCs. Second, you need some rules to govern the exchange in terms of how people can be treated fairly to make arrangements and to do the buy-sell transactions.

You are seeking to standardize those things?

You would need to or you would have a difficult time making a market.

What the exchange is meant to do is make a market so that people can see the capacity that is available. The pricing algorithm that is being used does not have to be the same everywhere in the country. You could buy things on a different pricing basis.

How did you come up with this idea?

It came from people working with the OASIS transmission marketing function that is resident within the utility. Some of the folks that are managing day-to-day operations and who are making OASIS sites available have started to recognize the need to be able to make a market for transmission capacity. The germ of the idea came from deep within the reservation and scheduling function.

Who approves your project?

The first level of approval is the steering committee that represents the consortium and all the member companies are represented. The next level of approval would be for each member of the consortium to get his or her parent company to be willing to invest. So you have two levels of approvals.

How much money are you talking about?

We have a lot of dollar figures that we are kicking around but it is still premature. We are still trying to get a sense of what the market is willing to pay for understanding reserveable transmission rights.

When do you expect to be operational?

When you launch a business there is a need to study the opportunity to make sure that it is real. We are finishing that stage. The expectation is that we are moving ahead but it remains to be seen what the timing is and what are the first sets of steps we are going to undertake as a group.

Jason Ambrose
CEO, Plurimi, Inc.
(Demand-side management, with dynamic pricing, for large-volume customers)

Contrary to those that say it's the utilities making the e-play, Plurimi Inc. (headquartered in San Francisco) stands as testament that e-business in the energy industry still offers opportunities for outsiders. In this case, Plurimi has chosen a niche much closer to the retail customer: demand management—via the Internet.

Founded in April by Jason Ambrose and Deirdre Polson, Plurimi offers Internet-driven software (PRISEM), that allows electric utilities and energy service providers to communicate to large electric customers in real-time the price they are paying for their electricity.

Access to the real-time information allows customers to make cost-based decisions on when and if to curtail power usage, conceivably based on a user's predetermined price "trigger point," which, if reached, would indicate that the cost of the electricity would not justify its purchase. Backers of this kind of technology say that its use allows deregulated markets to be truly realized, as it gives the customer the choice of whether to buy or not to buy—decisions that ultimately impact the price of a commodity.

To be sure, Ambrose's Internet resume reads like an e-history book: involvement with Internet startups, primary technical resource at early online service company Internet Profiles Corp. (I/PRO), and even contributor to the pre-web, interdepartmental networks of the Stanford Medical School. These days, though, when talking to Ambrose, the operative words are , , and .

What led you to delve into the energy industry, and specifically into the area of demand management software?

My father has been in the energy industry for over 30 years, handling pricing for a lot of the large utilities. So I've been very familiar with the energy industry all my life. This is an opportunity to apply my experience on the Internet side to what's going on in the energy industry.

This is your first venture into the energy industry, right?

Yes, that's true, but we don't think of this really as an energy play, per se. What we're really addressing is the need for businesses to be to able to change their business operations on a dynamic basis in response to dynamic pricing.

So down the road, it's not just going to be electricity. It can be things like bandwidth, wireless access—any sort of commoditized good that businesses will use, and the price will be determined on a real-time basis. So we think of it as a natural extension of what we traditionally have done with Internet companies for businesses, but we're just starting with electricity based on my background and the pricing need that's in the industry right now.

What makes software essential for demand-side management?

The key ingredient that has been lacking so far is for customers to understand what their value of service is. So it doesn't do any good to send them price signals or create price incentives for them to curtail load unless they know what they value that electricity at, given how they operate. If you're going to pay me $10,000 to shut off my factory, how do I know it's not worth $20,000 or $50,000 or $100,000 for me to operate it, or vice versa?

Is the software useful only for interruptible customers?

No, we think of this as more generalized to all end-use customers. We think the direction of where the electricity industry is going to go—for deregulation to really work and for the market to get efficient—is where dynamic pricing is communicated down to more and more end-use customers. So it's not just for interruptible, it's for people who are on real-time programs, people who can participate in demand buyback, even for the people who have a very high value point, [such as] semiconductor plants—they want to stay operating no matter what.

Do you have a future if electricity is re-regulated?

That doesn't affect our value proposition. There's a separation between the wholesale market and the retail market that's irreversible.

The generation assets have been sold in a lot of these markets, and you can't put that genie back in the bottle.

Who buys your product?

It's evolving into two separate products. There are communications platforms for utilities to broadcast the prices to their customers, but there's really a second product that allows these enterprises to gather pricing information from all the different utilities irrespective of whether or not [the utilities are] using our particular platform.

Are you approaching utilities and energy providers only, or are you going after their large customers as well?

I think that's an excellent point. We were very concerned about making sure that we get as much customer feedback as possible on both sides of the equation. So that's exactly what we're doing right now—talking to many different large Fortune 500 commercial and industrial end-use customers, as well as utilities, to say, "Okay, what is it that you need to see to make these types of programs work." It's been very successful, we've gotten some incredible feedback, and there's a lot of interest, and we think we have a very strong sense of what we need to do in our products to make these programs successful.

Cody Graves
CEO, Automated Energy Inc.
(Consumption monitoring, with real-time metered data, for small customers)

At Automated Energy Inc., the long-term vision goes straight to the residential customer. Founded in August 1999 and now headed by a former state utility commissioner, the company's focus resides on the customers'—large or small—right to access their own data, a right that obviously has implications for the utility as well as regulators.

Automated Energy sees its products as a market enabler, as something essential to the success of deregulated markets because it allows the consumer to influence consumption. "[Automated Energy founders] Tim [Huneycutt] and Scott [Thompson] understood the need for this kind of information to be made available to the market, that markets will not operate efficiently without timely consumption data," observes chief executive officer Cody Graves.

The company's software and systems use the Internet as a vehicle to provide an electric customer with real-time access to such data as how much electricity it is using and when, enabling the customer to analyze trends and reasons, say, for usage spikes. The system also incorporates AccuWeather data into its system so that weather can be factored into analyses. Graphs and charts can be created and superimposed onto each other with the click of a mouse to compare hours, days, weeks, and months. Usage at individual buildings within a college campus can be read and compared individually. Data can be compiled for an industrial user's fleet of factories across the country, all at Internet speed.

Graves, a former commissioner at the Oklahoma Corporation Commission, joined Automated Energy in January after working for a law firm and doing aggregation work for a school board association.

Has your experience as a utility regulator helped you in e-commerce?

Well, I describe myself as a recovering regulator [laughs]. I think it's helpful in a sense that what we're not doing is deregulation in the traditional sense of the business. It's a restructuring, and there's always going to be this component of regulation/public policy. It's legitimate that we have to deal with it, and I think it helps to have an understanding of that. I know people like to bash regulators, but there are legitimate concerns and policies, and they're going to be cautious and err on the side of protecting consumers rather than just throwing the doors open to markets.

What we have to do is have an understanding of that concern—to make sure that as we try and open markets, we allow customers to take advantage of market opportunities instead of [regulators] having to worry about protecting them all the time.

How does your product help customers to help themselves?

What we do, in its distilled or essential version, is provide the detailed billing for the industry using the Internet. The way we describe it to people is that we ask them, "How would you assess your long distance or your cellular calling plan." You might get a bill that said 685 minutes, but wait a minute_how many on-peak minutes did I have, and how many off-peak minutes? If I'm supposed to have a certain number of free incoming minutes, and some of my minutes on the weekend are supposed to be free, how do I know if that works? How do I compare prices if Verizon sends me an offer to change my service, but I don't really know how I'm consuming it?

You can't make a comparison in today's market. Consumers don't have access to that kind of detailed consumption data. Our goal and objective is to provide the technology and systems solutions that allow consumers to be able to access their consumption data on a regular, on-demand basis.

At the heart of your business seems to be the issue of the consumers' right to have access to their own data.

We believe very strongly that the information that comes off that meter belongs to the customer. And the customer ought to control where that data goes. If they want to send it to you, as a power marketer, so you can try and aggregate it with 1,500 people in the neighborhood, then that's great. If they don't want to give it to anybody and they want to continue to buy standard offer from the utility, that's fine, because when you get down to it, particularly at the residential level, consumption of electricity can show a lot about people's lifestyles. There are large industrial consumers that closely guard their consumption data [for competitive reasons].

Do you sell also to the utility or energy service provider?

Our technology works equally well for anybody. It just depends on who recognizes the value and who wants to take advantage of it.

Who is your largest customer?

Probably [property management and real estate development concern] TrizecHahn. We are currently rolling out our services for their properties in Houston, Dallas, Tulsa, [and] St. Louis. Also, [oil and gas company] Halliburton. We're monitoring their large loads for them so that their energy manager at a central point can know what's going on at any point in time across the company.

Would you like to go after the residential customer as well?

Yes. We think it's important that this data be collected at the residential level. There are still some issues, not the least of which is the regulatory access to the meter piece, because if utilities are going to charge you two or three hundred dollars, you'll never get a price point that works. You get that issue resolved and technology continues to develop, we think that we can get the price points down that you can provide this to people for a couple bucks a month—similar to caller ID.

I'm a parent of one teenager and two more to come. The notion that I can say, "Your mom and I are going to be gone for the weekend, so no partying"—and then come back and verify that there was no party that went till 2 in the morning—you could do all sorts of neat things with that.

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