Internet
Mavericks:
Still Working Out of the Garage?
November 1, 2000
By Carl J. Levesque
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 Fortnightly 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 Fortnightly 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 dynamic pricing, trigger
points, and price signals.
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.
Carl J. Levesque is associate
editor at Public Utilities Fortnightly.
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