Going virtual: Utilities and the e-business revolution

Dwight Allen

Deloitte Research

and

Kris Hillstrand

Deloitte Consulting

Competition is coming to the utility business just as e-business is rewriting the retailing rulebook. Industries as diverse as popular music, office supplies, and stock brokerage are discovering that end-user marketing involves different paradigms when done via the World Wide Web. Conducting transactions online entails new competitive dynamics, and opens the possibility of radically new business models. Nobody has defined any sure-fire formulas at this point-even companies with decades of experience in mass marketing are struggling to master retailing in cyberspace.

Forrester Research projects online energy sales of $266 billion in 2004. An increasingly important question is who will be making such sales. Utilities won`t have the field to themselves. Not only are new and unfamiliar entities such as supermarkets, department stores, and oil companies trying their hand at marketing energy, the Web is encouraging the entry of even more unusual entities-dot.com start-ups with few assets other than a website and some new ideas about how to deal with customers.

Utilities around the world are thus confronted with a double challenge: learning how to play the game of competitive marketing while figuring out how the game itself is being transformed by information technology.

What are utilities doing to address the new importance of the online marketplace? And how do the efforts of traditional companies compare to what the non-traditional dot.coms are up to?

Utility Dot.coms

All major electric and gas utilities have websites, and most are well beyond the stage of passively displaying information about the company. Goaded by competition or the prospect of competition, utilities want to develop more extensive and personal relationships with customers. Accordingly, many are using the Web to communicate with customers about their services, values, achievements, community involvement, and environmental protection efforts. Some provide online enrollment, account analysis, bill presentment, and payment.

Creativity is in evidence at some utility sites. For example, Southern California Edison provides a link to a separate site devoted to homeowner tips and energy use guidelines, edison@home (www.edisonathome.com). PowerGen in the UK offers a “Surf & Save” Internet access service-each minute spent online using this service earns a customer points that reduce electricity or gas bills. Electricite de France offers an animated “School of Energy” using the Macromedia Flash Player 2 plug-in software. United Energy in Australia offers “cool” PC desktop wallpaper for downloading.

Some of the utilities with competitive retail subsidiaries are emphasizing the Web as a marketing channel. An example is DTE Edison America, an affiliate of Detroit Edison serving New Jersey and Pennsylvania. At its website (www.theenergyclub.com), consumers and small businesses can calculate how their energy bill would compare to what they pay their current supplier if they switched to DTE Edison America. Customers can enroll online. Those who do thereby join the Energy Club and become eligible for discounts from local merchants on purchases of shoes, books, restaurant meals, theater tickets, and so on.

A few of the energy suppliers active in competitive markets are Web-based entrepreneurial enterprises not spawned by traditional utilities (although utilities own stakes in some of them).

An example is Utility.com. Billing itself as the first Internet electric company, it was hatched in early 1999 by idealab!, the California new-ventures incubator that also produced CitySearch, eToys, GoTo.com, and Tickets.com.

Operating in several states, Utility.com provides online enrollment, billing, and account management. It offers online review and one-click payment of all utility bills (gas, water, heating in addition to electricity). In California all of the electricity Utility.com offers is green, and it guarantees 10 percent annual savings off the incumbent utility`s standard prices. New customers receive a $25 signing bonus. Utility.com also offers advice on bill-reduction options to customers who agree to the installation of an advanced CellNet meter. Information from the meter allows Utility.com to analyze usage and suggest alternate rate plans.

A key element in Utility.com`s strategy is its cost structure. In testimony before a Congressional committee, the company`s CEO testified: “Via the Internet, Utility.com can recruit, sign up, serve, bill, and support customers at costs that are as much as 90 percent lower than traditional utility customer-service costs.”

Like Utility.com, Essential.com is a licensed energy supplier, and it provides online billing, account management, and usage analysis. However, it does not provide electricity and gas under its own name. It resells electric service from AllEnergy, the competitive retail subsidiary of New England Electric System, and natural gas service from EnergyUSA, the competitive retail subsidiary of NiSource. Essential.com plans to offer electricity and gas from other suppliers.

Essential.com offers a choice of vendors under each of several other categories of products and services as well. They include local and long-distance phone service, cellular phone service, voice mail service, Internet access service, and satellite TV service. With respect to long distance phone service, for instance, the choices are MCI WorldCom and Qwest. Like a supermarket, Essential.com hopes customers entering to buy one thing will decide to buy another, and it offers price breaks for multiple purchases. For example, a customer ordering local and long distance phone service along with electricity gets a $100 bonus instead of the $50 bonus for ordering electricity alone.

But the dot.coms seeking the attention of energy customers go beyond companies selling electricity and gas. Some are intermediaries whose purpose is to arrange or facilitate link-ups between buyers and sellers, or to furnish information to buyers. And some are hybrids performing those functions and more.

Shop-Bots, auctions & clubs, oh my!

One function some intermediaries provide is automated comparison-shopping via a “shop bot”-a software agent that performs automated comparison-shopping on the Web. The prospective buyer goes to a website, enters stipulated data defining the parameters of the product or service sought. The site launches a shop bot that moves about the Web (or checks the offerings available from vendors registered with that site) searching for deals that meet the buyer`s criteria. Most specialize in consumer electronics or other consumer goods, but EnergyGuide and EnergyOn are examples of intermediaries providing the same kind of comparison shopping among energy suppliers. Such dot.coms typically provide a link to whatever supplier the customer selects, thereby earning a commission.

Auctions and exchanges are another intermediary function. Companies such as Houstonstreet and Altra provide wholesale trading for energy companies. These sites might come to serve commercial and industrial energy customers as well. IT advances could make it progressively feasible for end users to participate in e-markets, even including trades involving complex contingencies and conditions, by furnishing relevant data, analytical tools, and interfaces in easy-to-use formats.

In the reverse auction a customer logs onto a website and announces a desire to purchase a particular good or service. Vendors hoping to win the business then submit bids. The buyer may or may not stipulate the price and terms desired, and may or may not be obliged to make a purchase from the low bidder. Reverse auctions serve both consumers and business customers, and the bidding covers an array of products and services.

An energy intermediary offering California commercial and industrial customers reverse auctions is e-ChoiceNet. The site provides a software “wizard” that walks a customer through the process of preparing a request for proposals. Once the RFP is posted, registered suppliers submit bids online. Customers are not required to buy from the low bidder, and do not have to reveal their identity until they are ready to close a deal. Consumers can select from standard packages posted at the site. Excelergy is currently expanding e-ChoiceNet to serve the entire U.S. market.

Aggregating buyers with limited individual purchasing power to qualify for bulk discounts is not new, nor is it confined to the Web. However, the Internet can simplify the formation of buyers` groups, and makes it possible to assemble especially large numbers of willing buyers. The buyers` club approach could be significant in the residential and small business market, since the cost of contacting and recruiting low-volume customers is often cited as a barrier to robust competition.

ElectricityChoice.com and GasChoice.com are Web buyers` clubs operated by Pittsburgh-based OnlineChoice.com, a start-up that plans to launch over 40 such ventures, including AirlineChoice.com, HealthcareChoice.com, HomeloanChoice.com, ToyChoice.com, and VacationChoice.com.

At its sites, interested residential and small commercial customers can register with no obligation. Once a sufficient number of buyers has been built up in a given market, OnlineChoice.com breaks the group into segments defined by load type, location, and other factors, and invites online bids from suppliers. Also the subject of bidding is the amount OnLineChoice.com is to be paid. The bidder offering the best mix of low price and high commission gets the customer list. OnlineChoice.com informs the club members of the deal and leaves it to the supplier to contact those on the list and endeavor to win them as customers. While the club members are under no obligation to accept, the list delivered to the supplier will presumably yield a high percentage of sales.

Providing the knowledge required to be an informed buyer is another intermediary function. UtilityGuide does only this. Its site provides energy news, primers on deregulation and green power, a list of energy suppliers, and a compendium of pertinent laws and regulations. Providing energy information and education is one of several functions provided by Energy.com. Based in Ohio, the company offers news and features, explanations of deregulation and energy restructuring, demand management tips, and discussion areas devoted to energy topics. It operates an online “Energy University” with courses on subjects such as “choosing a supplier” and “nuclear power.” Sites such as these earn revenues from advertisers wishing to reach an energy-aware audience.

A final intermediary function is that of reassuring customers who may be leery of alternative suppliers-especially those doing business on the Web. Energy.com bestows a Certified Energy Marketer “seal of approval” on suppliers meeting standards it has defined. To gain certification, an energy marketer must do such things as observe applicable telemarketing rules, refrain from contacting customers who have placed their names on an Energy.com “do not contact” list, attend to customer complaints forwarded by Energy.com within 15 days, and furnish a report to Energy.com explaining actions taken to resolve the dispute.

Significance of cyberspace

Energy marketing is being affected not only by regulatory policies fostering competition, but also by e-business innovations altering competition itself. While the e-business transformation is just beginning, it`s clear that in the new decade the Web will be a major factor in energy marketing, sales, and customer service.

In some ways the Web is good news for incumbent utilities defending existing customers. Using the Web, utilities can communicate with customers more frequently on a wider range of topics, develop services and pricing plans that are more responsive to customers` needs, improve customer service quality and efficiency, and integrate systems and business processes with those of their customers. The Web thus offers many options for cultivating closer relationships that are more resistant to competitors` advances.

The Web definitely benefits challengers, though. As technology improves and costs fall, the Web becomes a stronger platform from which to launch assaults on previously closed utility markets. A start-up with exceptional e-business skills may wield competitive clout out of proportion to its size. An especially impressive website, for instance, could bestow instant credibility at the incumbent`s expense. Utilities thus face the possibility that the Web will permit at least some new entrants to mature into worthy opponents in record time.

Of course, the advantages the Web grants invaders are available to any incumbent that establishes a competitive retailing subsidiary to attack the fortresses of other traditional utilities, assuming it has the requisite entrepreneurial and technical skills.

Intermediaries complicate the picture. The proliferation of sites with shop bots, auctions, buyers` clubs, and so forth implies the new era will not be one in which incumbents lose a share of their customers to competitors who then assume the incumbent`s role of serving them for an extended period. It could be more tempestuous than that. By virtue of their number and the functions they perform, intermediaries could intensify the volatility of the utility sector.

Intermediaries are in business to serve customers who are in a shopping mood. Their basic message is that customers can save money by checking what`s out there in the marketplace. They do have an incentive to steer customers to suppliers, and to that extent they are the supplier`s friend. But they have no reason to hope the relationships they help arrange are enduring. In fact, from the intermediary`s perspective, the more customers have itchy feet, the better. To that extent, the interests of intermediaries are not entirely aligned with those of suppliers hoping to “own the customer.”

The net effect of intermediaries` activities is not simple to predict. For example, while it`s true incumbents stand to lose more customers faster if intermediaries are successful, it`s also true that incumbents will have more chances to win customers back if customers are constantly questioning the advantages of their existing supplier arrangements. And incumbents` retail subsidiaries would benefit if markets were active wherever they might go.

Not that the longevity of any particular intermediary business model is assured. The variety among intermediaries manifests different assumptions regarding customer demand and business economics. Some of the variation may be a matter of addressing different market segments and their distinctive requirements, but it may well be that certain of today`s intermediary concepts will not prove to be commercially viable.

In any event, the possibility remains that intermediaries will foment price consciousness and churn. For dot.com marketers as well as traditional utilities active in retailing, this could make it difficult to promote brand loyalty.

Mastering E-business

Any utility that is planning or thinking about a role in the retailing of energy and related services should be working hard on its e-business strategy. This requires much more than creating a website, keeping tabs on developments in cyberspace, and waiting for things to come into focus before making any major commitments. Three steps are fundamental.

First, e-business should be made the responsibility of one of the utility`s top executives. Specific circumstances will dictate whether the best choice is the CIO, CFO, or another member of the top management team. The important thing is that one senior individual be a visible champion.

Second, the company should have an e-business plan that is integrated with its overall corporate strategy. The plan should cover how the company will coordinate its use of the Internet for interaction with customers (sell side), with suppliers (buy side), and among its own employees (inside). This e-business plan will be refined and modified as time goes on, but having a plan is advantageous because it clarifies pertinent assumptions, defines what is to be done, and provides a basis for performance measurement.

Finally, the plan should provide for a strong early push into cyberspace. The best way to understand e-business is to be involved. A fundamental aspect of online retailing is that it permits the constant collection of information from and about customers, and gaining insights into customers` needs and reactions is essential for staying ahead of the curve. Thus there is no substitute for being part of the scene.

Dwight Allen is communications and utilities director with Deloitte Research in Washington, D.C. Kris Hillstrand is energy e-business services director with Deloitte Consulting in Boston. Their article is based on “Utilities and E-Business: Six Scenarios for Dot.Com Retailing of Energy and Related Services, 2000-2010,” available at www.dc.com/ services/industries/energy/e-business.asp.

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The Clarion Energy Content Team is made up of editors from various publications, including POWERGRID International, Power Engineering, Renewable Energy World, Hydro Review, Smart Energy International, and Power Engineering International. Contact the content lead for this publication at Jennifer.Runyon@ClarionEvents.com.

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