Fortnightly
The Empty Net
March 15, 2000
By Bruce W. Radford
Why utilities haven't scored at e-commerce.
From what I hear, utilities would love to junk their call centers, whether
or not they run them in-house. Call centers had their moment in the sun, but
today the Internet makes them look feeble. Why hire a minimum-wage sales staff
to take orders by phone when consumers will gladly input their own bids at the
click of a mouse? You can't trim transaction costs any closer than that.
On the other hand, if a customer's revenue potential is large enough to warrant voice contact, then you're probably better off meeting the customer face to face. A call center is just smart enough to cost money and just slow enough miss out on dramatic cost savings. And good luck if your call center staff is union labor. Then you're really stuck.
Let's admit it. Utilities are floundering in the world of e-commerce.
I even hear warnings that upstart companies formed only within the last few years might launch hostile takeovers of century-old utilities. That fear isn't so far-fetched. Dot.com upstarts, built from the ground up for the online world, appear poised to take over. Wayne Gretsky said he skated to where the puck would be, but if he had played e-hockey against utilities, he would have likened it to shooting at an empty net.
IN FEBRUARY, AT HIS WORKSHOP ON E-COMMERCE, energy consultant Vinod
Dar (the engaging maverick who split from PHB Hagler Bailly last year to form
his own firm called Energy E-Comm.com), warned his audience how far utilities
have fallen behind the typical e-business in terms of equity market capitalization,
and how easily they may fall prey to takeovers from dot.coms flush with cash
that know how to sell online and that aren't burdened by a century or more of
energy experience that now may be of dubious value.
According to Dar's figures (at then-current prices), companies like America Online ($130 billion) and Yahoo ($82 billion) dwarf even the largest of energy delivery conglomerates, including Enron ($43 billion), Duke Energy ($20.8 billion), Southern Co. ($20.8 billion), and Edison International ($17 billion). Second-tier dot-coms like Amazon ($21 billion), eBay ($19 billion) and Lycos ($7.6 billion) are not far behind.
Dar's firm has been circulating for comment a draft petition that would ask the Federal Energy Regulatory Commission to open a rulemaking on the effect of e-commerce on the utility industry, and warns that the "heavy pipes and copper wires that embody 19th-century science and technology" now appear vulnerable.
Dar sees utilities retreating into a box, hibernating in an ever-smaller regulatory enclave. They would limit their activities to back-office functions like power transmission and natural gas transportation. Yet Dar believes that supremacy lies in cultivating and perfecting customer contact - where the Internet will hold sway, and where the likely winners (and takeover artists) will come not from within the utility industry, but from without.
What are the chances that a utility company will ever design a website as fun and useful as Amazon.com? And what prevents Amazon from selling electricity and gas to go along with Stephen King and Harry Potter? Nothing but federal legislation, to open up a national retail energy market with the uniformity that rewards e-commerce.
NO OTHER INDUSTRY IS SO PROUD OF ITS MONTHLY BILL. At a typical firm,
the bill is the last thing you want customers to notice. It's almost an afterthought
- sent out only after all the business is completed. But a utility often will
not talk with a customer for years except through words printed on its bill,
and then spend a small fortune on quaint bill-stuffers that consumers almost
never read. That may explain why utilities appear so reluctant to give up the
billing function, even though it probably deserves to be outsourced.
"Do I invest $100 in a CIS [customer information software system], only to find that it becomes a future stranded asset?" I heard a utility exec ask that question recently. He was worried that his state might adopt metering rules that force utilities to submit proprietary customer information to an omnibus agent for meter data management. Yet this question only reveals the crucial difference between customer contact and back-office drudgery.
As another consultant told me recently, what utilities need to do is to take the "C" out of "CIS." Keep the front-end customer contact, but loose the back-end functions that involve nothing but data handling and billing. Get rid of them. They probably belong on the Internet.
Yet again, here is where the traditional utility finds itself paralyzed.
If utilities have learned one lesson, and learned it well, it is to follow the money. And in retail energy that means the C&I segment - the commercial and industrial customers. Utilities have learned that new technology (smart meters, etc.) often does not pay for residential users, but can be deployed profitably only for the C&I class. That means that when the chief information officer asks the board or upper management for a multi-million-dollar budget to develop a new website or to expand the site's current capabilities, a "No" answer will likely come back unless the CIO can show how the strategy relates to the C&I class.
But that Internet strategy is exactly backwards. The Web doesn't appear today to provide an overwhelming advantage for utilities in their dealings with large-volume C&I customers. (Though someone will come along eventually and prove me wrong.) Recall the rate discounts that Detroit Edison negotiated a few years back with the (then) Big-Three automakers. No doubt those were high-level talks, with high-level lawyers at the table. Not a transaction to be mass-produced.
By contrast, the Internet's efficiency lies in democratization - in paring down the high transaction costs that tend to overpower potential revenues where you're dealing with a large universe of small-volume customers. In other words, for utilities to milk the 'Net the way it was designed to work, they must make a full U-turn and focus tightly on the very customers who for years they have practiced to ignore. This disconnect between the tried-and-true C&I focus and the opportunities now available online for mass marketing probably explains why utilities so far have failed to find the net.
IF E-COMMERCE CAN WORK FOR C&I, the best example might be Enron Online.
That's the website where Enron offers to buy or sell energy for or on behalf
of marketers, wholesalers, retailers or even large-volume consumers, and bundle
it with transportation or transmission to deliver it as firm.
In essence Enron has created a new spot market that is double-blind to buyers and sellers. But Enron presumably can look inside, gaining insight into supply, demand, and price trends. It recalls the example of how American Airlines set up its "SABRE" system for airline reservations, which became the industry standard, and how the competing carriers complained that it conferred market power on American.
Some utilities may be attempting to set up similar spot markets to gather bids and offers from materials providers, just as U.S. automakers joined recently to create an Internet site to facilitate their dealings with parts suppliers and manufacturers. These ideas look neat but they won't put a dent in the retail mass market.
As I heard a utility executive say recently, "We have been fooling ourselves
for years in thinking that we have been selling energy. That's not at all what
we have been doing. We've been distributing energy."
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