Spiewak, Cogen Power Marketing
(originally published by PMA OnLine Magazine: 12/98)
With the pending restructuring of the North American electric power
industry, can a prospective power marketer profitably operate as an electric power
retailer? Specifically, how will a power marketer, generally out of the natural gas
industry, be able to compete against the incumbent electric utility and its unregulated
affiliates in competitive retail markets?
What functions make up the retail segment of the electric power industry? Can they be
segregated practicably? In which segments can a prospective power marketer expect to be
How can a prospective power marketer optimize its current retail assets? Should it
contract out a segment of the work currently done in that segment?
Should a prospective power marketer add in other complementary businesses, particularly
natural gas? How should this be done?
From its inception, the electrical supply industry could simply be divided into
three basic components:
Initially, all these assets were owned by the utility and found
within its franchise area. With the evolution of the industry and its enormous
growth, it became sometimes more economical to buy peaking and reserve capacity from
neighboring utilities and with it the means of transporting the electricity between
utilities. Therefore to some varying degree most utilities became involved in the business
of wholesaling electricity to each other, often as both buyers and sellers.
However, the customer base which formed the retail market remained intact until PURPA.
This act opened the retail market although in a limited way. The largest independent
generators were primarily wholesalers selling a small amount of power to the host facility
and the bulk to the local utility at "avoided costs". The smaller independent
generators could indeed attack the retail base with "inside the fence"
generation, specifically designed to meet the requirements of the host. A number of
companies were set up specifically to attack this market with packaged equipment. However,
these only had moderate success. Some sectors of the retail market such as hospitals with
their good load factors were obvious targets, while others, such as schools and other
customers with poor load factors, or which were not thermal energy users, were not.
Therefore, very large segments of the industrial and commercial markets were never even
approached by this type of retailer.
The largest problem with the "inside the fence" generation business was that
although the engineering costs could be reduced through the packaging of power generation
facilities as ready-to-install units, the legal, financial and other development costs
were the same for a 5 mw plant as a 50 mw plant. The economies of scale worked heavily
against the market. Even the manufacturers of the generating equipment, e.g. Caterpillar,
Waukesha, and Kawasaki have had only limited success in this market place, whether
attempting to enter it directly or through agents. The final result of all the marketing
activity under PURPA was that the utility retail monopoly remained largely intact.
The retail market which is currently developing through the deregulation process is quite
different in both its structure and in the services required. Deregulation to permit
"retail wheeling" provides the opportunity to garner the economies of scale
impossible when limited to the inside-the-fence generator modelone does not have to
build a power plant for every customer. This eliminates the economic constraints
associated with the inside-the-fence market. The developing market will be one of sales
and commodity marketing, not one of engineering, permitting and financing.
In its fundamental concepts the retail sale of commodity electricity should follow
to a large extent that of commodity natural gas.
One of the best laboratories for studying the developments of a dynamic and evolving
retail gas market is in the state of New Jersey. In New Jersey, deregulation of natural
gas sales to retail commercial and industrial customers was ordered by the Board of Public
Utilities (BPU), the states regulatory authority, in late 1994.
While individual residential customers do not you have access to the market, the BPU is
studying this for near-term implementation. Meanwhile the current order deregulates
natural gas sales to some 260,000 customers.
There are now some 40 marketers , of various size and resources, marketing natural gas in
the state. Most of them are also portraying and positioning themselves to be a marketer of
electricity when deregulation takes place. While one of our major practice areas is in
negotiating rates and transmission tariffs for retail customers, this has been a one-up
type of business. Each transaction is different, and costs are high. We have gained real
retail marketing experience with our natural gas operations in New Jersey, and it is from
this beachhead that we plan on launching our effort towards market share in the retail
electric markets. The base of natural gas retail customers can be readily approached for
contracts for electricity, using the same sales force and same techniques. Our company is
in the natural gas retail business so that it can be in the electric retail business.
THE RETAIL MARKETING COMPANY: ITS STRUCTURE AND FUNCTIONS
The customer in the electric power market has two basic criteria which are fundamental and
are given in order of priority:
1. Security of Supply
If the marketer cannot satisfy the customer that it can meet both of these criteria, then
it cannot make the sale. It is therefore from these concerns that the successful marketing
company must be structured. The following discussion consists of two parts: a discussion
of the fundamental criteria listed above, and a breakdown of the retail marketing
operation into subfunctions, so that each can be considered for expansion or outsourcing
by a prospective power marketer.
Security of Supply
Brand name is paramount. The customer is very unlikely to entrust his electricity supply
to a company hes never heard of.
Generally, in a deregulated market, the local utility forms a deregulated operation, and
immediately dominates the market. The brand name power of the incumbent is very powerful.
In recognition of this, it is not uncommon for such subsidiaries to be under some kind of
constraint imposed by the regulatory commission to try to ensure a level playing field.
This can be as simple as a general understanding regarding market share permissible for
the deregulated affiliate operation, or as complex as operating rules requiring
"comparable" service and virtual disaffiliation of commodity and monopoly
Irrespective of the constraints imposed, the local utility subsidiary has a number of
major advantages in its home market. It is usually staffed with the utilitys
Customer Representatives, it has an already-established seller/customer relationship and
the association with the utility overcomes all security of supply fears.
There will also increasingly be a number of other companies with names which are
recognizable to the customer. Some of these will be local companies from other industries.
However, increasingly, there will be national and international firms establishing a
In the New Jersey gas market there are a number of companies with recognizable names which
instill a similar degree of comfort, Chevron (for whom our firm is the exclusive broker)
being the most dominant. Other companies which are very well known in the industry, such
as Enron Capital and Trade, have no such name recognition and have to spend sales and
marketing time and money on the customer to overcome this drawback.
One notable effort "Energy One" is being introduced vigorously into the
marketplace by its parent company, Utilicorp. The initial marketing name was Broad Street,
but this is being rapidly phased out in favor of the new nationwide all-energy brand. We
understand the marketing people behind this are the same who invented Cellular One, and
they obviously realize the importance of name recognition.
The smaller companies with unrecognizable names and without the resources to create a name
are not taking any noticeable market share.
It is interesting to note that mistakes are also made where they should not be. Orange and
Rockland (a local prospective power marketer), and Shell Oil have joined forces. They
market under the name Norstar, which is as non-recognizable as any of the smallest
marketers. It would not be surprising if they did not have their phone calls accepted by
the customer for that reason, and they certainly have to expend additional time, effort
and money to even get to this first base.
In discussions with customers on this subject we asked them "Would you purchase gas
or electricity from say Microsoft or AT&T?." The answer was inevitably
"No" but often with the caveat that should either of these companies purchase an
electric utility and become part of the business, they would be certainly be considered.
The creation or utilization of a recognizable brand name is imperative. A utility has a
very good name in its service territory, and it can be readily utilized there. In other
regions, the fact that a utility does not have a recognizable brand name at present is not
an insurmountable drawback-- the vast majority of marketers are in this position.
Generation Ownership and Delivery
The ability to demonstrate the capability to deliver the at all times is of paramount
importance. The ability to demonstrate ownership of generating capacity is important but
only becomes of paramount importance during times of shortage.
Having the commodity is one thing. Being able to deliver it to the customers meter
is another. Again, the New Jersey gas situation offers some insight. Under deregulation,
the local utility still maintains control and operation of the intrastate distribution
system and carries out meter readings and all the normal maintenance and safety functions
of the system. The marketer brings its supplies to the City Gate (the local utility) where
the title is transferred to the customer from the marketer. The customer then transmits
its supplies to the site of use through the local utilitys lines. For all intents
and purposes the local electric utility becomes a common carrier. However, the customer
still must be made comfortable that the commodity will be delivered continuously to the
Three General Rules seem to define the customers concerns, these are:
1. In a sellers market, gas or electricity capacity ownership will become a
significant factor in security of supply terms. In a sellers market, price concerns are
relegated to a distant second place.
2. In a buyers market ownership of the gas or electricity
capacity has a smaller advantage, price is elevated.
3. In either a buyers or sellers market how you get from
here to there that is a major customer concern. In terms of the security of supply, it is
the suppliers ownership and access to the interstate transportation system capacity
which becomes the focus of the sale.
For example, Chevron , Shell and Enron all have gas reserves but have very little position
on the Interstate system into New Jersey. The local utility subsidiaries do not have any
gas reserves, but in a buyers market are able to exploit the fact that the weakest
link in the chain is the pipe that brings the gas from the Gulf of Mexico to New Jersey.
Marketers have to purchase this on the open market. However, the utilitys subsidiary
is often assumed to have access to its parent utilitys pipeline capacity.
Encouraging this assumption on the part of the customers, even when it is untrue, provides
a great marketing advantage to the utility affiliate. This practice is now being frowned
upon and scrutinized by the New Jersey Board of Public Utilities (BPU).
Any organization entering the competitive market must have the expertise and capability to
purchase transportation on the major transmission systems. This capability and expertise,
together with generation capacity ownership, leasing or at a minimum certain access must
be demonstrable to the customer to his satisfaction.
Although some organizations owning cogeneration capacity or even a
merchant plant may only market to the limit of their own capacity, it is unlikely that
successful marketers can constrain themselves to this type of ownership limit. Indeed, in
the gas industry, the vast majority of marketers only briefly own the bulk of the gas they
sell. However, the ability to demonstrate to the satisfaction of the client that one owns
or has title to large volumes of diverse sources of capacity is of importance and could
certainly make the difference between a sale and non-sale. It becomes of paramount
importance if shortages occur.
Therefore, a staff of professionals with the skills to physically trade and manage risk is
fundamental to the electricity commodity business. These skilled personnel will also deal
with the purchase price of the commodity and by extension serve to support the sales and
marketing effort with alternative pricing mechanism and agreements that could be offered
to the client.
Price is always a concern, but the more the electric power industry moves toward being a
buyers market, the greater the emphasis on price. In the developing stages of the
market, a marketer can never escape the competitive pressure of price. Whatever sector of
the market the marketer may choose to attack will almost certainly have several other
marketers competing for that customer.
It may be thought that bidding processes, such as RFPs may be limited to the larger
and more sophisticated buyer. Experience in New Jersey has show this not to be true. Once
even the smallest consumer realizes that there is competition for his business, he will
take multiple bids. In the course of publicizing deregulation and customer choice, the
utilities published a list of approved marketers. While this may differ in other
jurisdictions, in New Jersey, the approval process is not very strict and basically anyone
who is willing to post a $10,000 bond can be approved. It is often the practice of the
smaller customer to pick as many recognizable names and a few non recognizable names off
the list to obtain a quote.
Furthermore, large numbers of businesses are members a trade association, The Restaurant
Owners Association, or the Hotel and Motel Association or the Nursing Homes Association.
Large apartment complexes and office buildings are often managed by professional
management companies who control many buildingsoften in the hundreds. For the
purpose of this report we call this the "non-fragmented" sector. These
associations and management groups form and act as buying cooperatives and work to get the
lowest price possible for their constituents.
In recent years a consulting business has arisen wherein the consultant performs services
to bring down overhead and utility costs, including phone, gas and electricity. These
consultants primarily serve small businesses and often perform their services on the basis
of sharing whatever savings they achieve for the client. Obviously, deregulation has
opened up new vistas for these consultants and price competition is elevated through their
Finally, as discussed below, in a market where the intrastate tariff structures are set
high, the marketer is not only competing with other marketers, he is also still competing
with the utility.
Initially, there is no escape from intense price competition in all sectors of the
marketplace, particularly in a buyers market and when all are vigorously competing
for market share. As the market matures it is expected that brand loyalty and conservatism
will start to develop, and as discussed later, this appears to start to develop in the
However, in these early stages, with all things being equal, even the smallest price
differential may win the day. For example, if Brand "A" and Brand "B"
meet all the customers criteria equally a fraction of a cent may determine the outcome.
Although being able to offer the customer a variety of price and tariff options has
marketing value and a Price Menu should be developed, it must be assumed that virtually
all marketers will offer similar menus. Therefore, in terms of price, a prospective power
marketers ability to win market share would largely depend upon it abilities to
obtain supplies and setting its pricing policy based upon first class market
Corporate Strategy: Pricing, Sales and Marketing
The Corporate strategy will dictate pricing and the sales and marketing approach. In any
embryonic market, the battle will be for market share, not maximization of profits. It is
anticipated in New Jersey that the "no name" financially weak companies will be
the first to fall, but this will eventually extend to even the largest company that does
not secure a market share which supports a long term marketing effort.
The overall market available will first be dictated by the rates and tariffs for
intrastate transportation and ancillary services provided by the utility. In New Jersey,
the marketers took the position that it was of primary importance to ensure that the
deregulation went through as quickly as possible. As a result the tariffs presented to the
BPU by utilities went unchallenged. It is doubtful that this will happen again where the
now-experienced marketers are involved.
Of the four gas utilities in the state, only one has a rate structure which enables the
vast majority of its customers to participate in the deregulation program. The
tariffs formulated by the others have numerous cost impediments which effectively
disenfranchise a very high percentage of customers. For example, while it may cost
$2.25/Dth including the commodity to bring gas to the City Gate, the intrastate
transmission charges under the tariff can be as high as $5.25/Dth for a total of
$7.50/Dth. Under his existing tariff, the customer is paying less than $7.00 Dth to the
utility, so there is no economic benefit to change. In one utility area, with 35,000
potential customers, less than 5,000 can economically switch to a marketer. Obviously,
this has implications for the design of electricity transportation tariffs in a
Although this situation will change as the New Jersey Board of Public Utilities forces the
utilities to revise their tariffs, it can be seen that the retail transportation tariffs
set the "First Cut" for marketing purposes.
Transportation and ancillary service tariffs can make customer analysis fairly complex.
For example, different seasonal transportation rates and ratchet structures will likely
require the ability to analyze customer load profiles with increasingly fine distinction,
and with the ability to provide rapid reply to customer queries regarding price offers in
a fluid pricing environment.
We anticipate that this will apply almost universally and it is therefore necessary to
have as part of the staffing arrangement expertise in computer modelling and tariff
The computer models that the marketing company must develop run
through the full spectrum of the companies operations, from pricing policy, market
sector determination, sales support, market intelligence manipulation, nominations and
billings. For example, they allow management to compare City Gate prices plus interstate
transportation rates against the existing tariffs used by the type of customer in each
class to determine if that class has potential. A tariff class may serve many types of
customer, including, for example, restaurants and apartment buildings. Even though the
load in the apartment building may be much larger than that of the restaurant, the better
load factor of the latter may be able to take advantage of deregulation while the
apartment building cannot, due to the tariff structure. However the reverse can apply: The
utility may decide to get rid of the poor load factor apartment building and keep the high
load factor restaurant and structure a retail transportation tariff which favors the
These computer models are also naturally extended to carry out comparative analysis to
assess the profitability of particular market segments down to the individual customer
level. As price and market data comes back from the field they are also effective in
determining the competitiveness of the companys pricing policy and monitoring the
pricing policy of other marketers.
The models are also fundamental in preparing presentations for sales purposes and
offerings to clients. They are a very effective sales tool, readily personalizing
correspondence and data analysis sheets. They are also naturally extended to the
nomination and billings process and other after-sales support.
The importance of the gas market in electricity sales
The initial objective in any marketing plan is to obtain market
share, but although all marketers are likely to adopt this strategy, the formulation of
sales and marketing policy and their implementation will probably vary widely.
Nevertheless, on the basis that for every gas dollar spent the customer spends between 7
and 12 times that amount on electricity, it is the electricity market that is the prize,
and the ultimate objective of virtually all marketers is to obtain maximum market share in
this commodity sector.
It is for this reason, to obtain customers now, that all the marketers in New Jersey are
selling gas at the marginal cost level. The basic premise being that if you are the
customers gas supplier, then the chances are very high that you will also become his
electrical supplier. It is CPMs belief that "He who wins the gas battle will
win the electricity war". As gas deregulation appears to be on a faster track than
electricity deregulation, the gas market will evolve first in many jurisidictions.
Therefore, one could readily conclude that if a company wishes to be in the electricity
market, it must first participate in the gas market, or purchase a gas marketer who has
obtained a level of market share and has a customer base.
The Cost of Sales and Brand Name Develoment
In any event, when striving for market share, when the potential customers number in the
tens of thousands, the cost of sales and the efficient use of the sales force becomes of
vital importance. Each marketer will have decided which sectors he wishes to attack and
how he wishes to proceed. As wise men often agree and fools seldom differ, the chances are
that a number of marketers will be attacking the same sectors. It is therefore the
"How" which becomes important and where name recognition becomes a major asset.
The name Mobil or Chevron gives those companies immediate credibility and opens the door
to their salesman, whereas a Garden State Gas Co. or AGF Direct Gas Sales, Inc. leaves
these companies with a credibility problem which is a major added burden.
Therefore, as a Brand Name can both dramatically cut the cost of sales and improve the
chances of completing the sale, the development of the brand name must be adequately
budgeted for as part of the Marketing and Sales cost.
However, even with a brand name, one must limit the number of times that the sales
personnel have to visit a customer. One marketer with a national brand name was on average
visiting the potential customer at least 8 times and phoning him at least 12 times before
making the sale. In an efficient marketing and sales operation, the number of visits can
be kept down to two and it is possible to achieve sales with just one visit. We actually
have cases on record where the sale was made without a visit and carried out entirely on
through phone, fax and mail communications.
A detailed description of a full marketing and sales operation is beyond the scope of this
report. In general, the number of sales personnel and the modus operandi are tailored to
suit the initial objectives. Advertising, seminars and public relations operations would
be fundamental in any marketing plan. The prospective power marketer name (or other
selected name) must become recognizable to the customer as a major provider of commodity
in the markets to be broached.
The fact that the prospective power marketer does not have a household name for supplying
electricity into the deregulated retail market is not as major a deterrent as it may first
appear. The fact is that there are no household names in this business at the moment. As
previously stated, companies such as Mobil, while having instant credibility in the gas
business, are not known as electricity suppliers, and electricity suppliers such as
Utilicorp are in the primary stages of developing a brand name. An Enron, Louis Dreyfus or
Williams Company, who are extremely well known inside the industry atthe wholesale level,
have the same difficulties with this problem in the retail market. A utility is in a
similar position to Utilicorp, with a track record as a retail electricity supplier but
virtually unknown outside its own geographic area.
Apart from creating brand name recognition, an advertising, public relations and seminar
program serves to support the sales effort in a cost effective manner. It is cheaper for
100 potential customers to come to see the sales people than the reverse. Other support
functions such as trade shows, from experience in the gas market, do not appear to be very
effective sales tools but are fairly effective in supporting the name recognition program.
Contract Development and After Sales Service
Unlike the gas market, which deals in contracts for as short as a month, the retail
electricity market will deal in longer term contracts. The gas market customer that can
afford to go month to month are limited to that sector who have oil as an alternative back
up fuel: Very few companies have the luxury of another back up source of electricity.
In terms of both cost efficiency of sale and long term customer relationships, the longer
the contact length the better. In the retail gas market, it is the customer who has set
the tone with a bias towards a one year contract, the "lets see what
happens" approach. However, although contracts of up to three years have been signed,
it is unlikely that the vast majority of customers will go beyond a five years duration.
Most marketers therefore design contracts with "Rights of First Refusal" or
"Last Look" or "Continues Unless Canceled Within a Certain Period"
clauses. Although there is some customer resistance to this type of clause and a doubt
about their enforceability, they often achieve their objectives of extending the contract
life beyond its initial term and should be included in the contract.
In the gas market, brand loyalty seems to be partially established within the first year
of operation, with a customer unwilling to change supplier for a cent or two. It would
appear from this limited data that long term brand loyalty can be established with a large
segment of the marketplace within a three year period.
The key to this appears to be the "No Problem" ethic. As the utility is still
the provider of all intrastate services, the only real interface between the marketer and
the customer is the commodity bill and in some cases balancing. If the customers
bill is well designed so that he understands it, if it shows him his savings, if one meets
special requirements such as leveled billing and add other little personal touches, and if
the marketer acts efficiently and corrects all out of balance problems without causing the
client an undue amount additional work, the "No Problem" objectives will be
In the area of billing, a utility with its hundreds of thousands of customers is no
stranger to this concept. This experience is a major plus from both a sales and
operational viewpoint. Balancing problems are part of the supply aggregation and risk
management groups functions and problems arising here should be minimal as they are
part of the stock in trade of this business.
The Public Utilities Commission, regulation and utility tariff formation are integral
parts of the gas and electricity commodity business. The largest companies often have full
time staffs dealing solely with these matters. Although it is necessary to become involved
in public hearings, and supply comment and testimony, it is certainly not necessary for a
marketing company to treat this as anything but a part-time function, usually shared
between management, marketing and legal support staff, the latter being itself is a
THE PROSPECTIVE POWER MARKETER AND THE RETAIL MARKET
When viewing the possibilities of expanding into the retail market, CPM cannot presume to
understand the strengths and weaknesses of a prospective power marketer, in anything but a
superficial manner. However, by defining and categorizing the various skills and expertise
required in the retail marketing business, and from purely a subjective viewpoint, we
attempt to assess a prospective power marketers potential for success.
Function: The basic role of management is to establish purchase price and contracting
policies, marketing and sales price policies, personnel and staffing policies, Utility
Commission interface, high level sales meetings and negotiations with the largest
customers and suppliers and legal and contract development, and coordinate both these and
the delegated functions described below into an efficient operation.
The prospective power marketer: A utility has probably more understanding and management
skills within its organization to operate an electricity commodity business than the
majority of potential entrants. In areas in which additional or supplementary staff is
required, the company should be able to define these requirements accurately, and staff to
b) Commodity Supply Acquisitions
Function: To obtain reliable supplies of product at commercial prices. The premise is that
the profit on the commodity is made when you buy it rather than when you sell it certainly
applies in the commodity electric and gas industry. Purchasing at the right time, in the
right way is fundamental to success. Understanding the commodity market with skills in
risk management and supply aggregation are absolute and necessary required skills.
The prospective power marketer: Although the company may not have all these skills totally
in-house, the most important factor is that the management understands the concepts and
operation of a department of this nature. The skills can be acquired in the labor market
and we do not see this as a drawback to entry.
c) Transmission Capacity Acquisitions
Function: To obtain capacity on the transmission system at competitive costs. This may at
first appear to be an extension of the commodity supply acquisition function, however in
practice it is a cost and profit center in its own right. As in the gas market we would
anticipate "capacity" itself becoming a commodity, readily tradable on a
bulletin board system operated by separate and skilled professionals.
The prospective power marketer: Again as with b) above, a utility management has an above
average understanding of the process and the in-house skills required can be supplemented
by outside recruitment.
d) Brand Name Development
Function: To create a brand name which is recognizable to the customer. As discussed, a
brand name is essential to the total sales process. Without this, the chances of success
are greatly diminished.
The prospective power marketer: The company has a recognizable brand name within its
province. Whether this name should be used in any geographically extended marketing
program is outside the scope of this report. However, whatever name is chosen, virtually
all marketers are in this position. In the gas market, only the oil companies had this
attribute and although it is assumed that they could enter the electricity business, it is
by no means certain that their names will have the same influence in the electricity
market, or give the same amount of comfort as would the name of an experienced electric
company. As all marketers are going to have this problem, we do not see it as a major
drawback. If the company decides to enter the market this whole topic should be given top
priority and the name development process should begin at the earliest possible time.
e) Customer Analysis and Price Determination
Function:This fully computerized operation is the heart of the marketing and sales
program. The operation develops and operates a variety of software models designed to:
(1) determine the customers present costs under the existing LDC tariff structure,
(2) establish a price based upon policy guidelines and usage information,
(3) prepare offering letters, data analysis information for both internal use and for the
(4) prepare contracts,
(5) obtain and process competitive pricing information from the sale personnel,
(6) inform and advise management on pricing issues, and
(7) designs and operates customer nomination and balancing programs and interfaces with
the billing department.
The prospective power marketer: The understanding of transportation costs is stock in
trade to the company and the extension to the other software development activities, if
not in-house can be readily acquired. However, the personnel staffing this department
should have experience in a competitive industry. Although gas marketers have already
established this type of operation and have more experienced than a utility, we do not see
this as a major drawback. However, this aspect of retail operations, when coupled to the
additional benefits of the established customer relationship and additional market share
which may thus be garnered, gives impetus to the idea of acquiring a gas marketer as a
prelude to entering the electricity market.
f) Marketing and Sales Program
Function: To promote the company and sell its products. It is envisaged that the marketing
program would be the focal point for establishing brand name and publicizing the companys
products. In this instance the word "product" refers to the menu of pricing
options and other services provided by the company to its customers. The Marketing
and Sales operation would be staffed to suit and carry out programs to meet managements
policies and objectives. The marketing and sales programs designed would use familiar
tools and services to achieve their objectives, including but not limited to
telemarketing, fax-marketing, direct sales calls, advertising, trade shows seminars,
public relations, etc.
The prospective power marketer: The company may not now have all the skills required but
they can be readily obtained in the labor marketplace. It would not be necessary to
purchase a gas marketing company to obtain these skills and experience, but if one was
purchased the necessary personnel should be in situ.
g) Billing and After Sales Service
Function: To bill the client for the commodity consumed under the contact. This department
would also be responsible for recommending and approving bill design and customer
interface. It would also be responsible for the very important function of Credit
Checking. Although actual credit check would be subcontracted to a specialized company
such as TRW, the coordination responsibility would be in this operation.
The prospective power marketer: The utility has as much if not more experience that most
marketers in billing large numbers of customers. We see this as a plus in the electrical
The Addition of Complementary Businesses
A utility has inherent strengths in the electrical industry which
would serve it very well in the retail commodity markets and is far better suited in a
number of ways than the gas marketers that are positioning themselves for the market.
However, in two major areas the gas marketers would be in a far stronger position than the
company when the retail market emerges. These areas are:
a) Established customer base
b) Infrastructure and experience in marketing to the retail customer in a competitive
Here we define the "retail customer" as all but the residential consumer.
If market share is fundamental to the long term profitability of the business, then
establishing a customer based is of extreme importance. Those gas marketers who have
obtained a customer base will have the inside edge in converting them to electricity
customers. Electricity marketers entering the field, just to satisfy the electrical market
as and when it opens up, even with better credentials in the supply and transmission
business, will be hard pressed to overcome this disadvantage.
Furthermore, by entering the field through the gas market one can start to establish brand
name very early in the business. Utilicorp, and their Energy One" brand name,
which has even been advertised on television and in full-page ads in the Wall Street
Journal, has begun to take hold as a company with the right credentials to be a
comprehensive energy supplier of the future.
There is also very little substitute for experience and it is certainly not desirable to
enter any market lacking the experience of ones competitors. Not all things are
parallel between the gas and electricity commodity business, but sales, marketing and the
supporting infrastructures are very close indeed. This type of experience cannot be
readily found outside the gas marketing industry. The acquisition of a gas marketer would
position the company to be fast out of the gate when the electrical market opened up.
Finally, in a business that will have both its ups and downs, feasts and famines it
would seem logically advantageous to be able to sell two commodities, gas and electricity,
which do more to complement each other rather than compete.
In reality, individual companies may enter the electricity market in different ways, CPM
concludes that if one is to enter the market, the most logical way would be through the
strategic acquisition of a gas marketer.
Electric Power and Natural Gas Retailing
A. A prospective power marketer should establish a retail natural gas sales operation.
1. Electric power and natural gas retailing are highly synergistic in an open and
competitive retail environment.
2. The "sales pipeline" used for gas sales can and is readily used for electric
sales also. The person responsible for natural gas procurement is in almost all cases the
person responsible for electricity procurement.
3. In other regions, in which competition in retail natural gas sales are permitted,
marketers are regularly soliciting electric sales as well, even before such sales become
legal. This is done through contractual "rights of first refusal," options to
sell, and statements of intent.
4. Its service territory will permit retail natural gas sales competition beginning in
1996. With the opening of retail, a utility will be vulnerable to a flank attack on its
customer base by natural gas marketers.
5. A utility should establish its own retail natural gas sales operations in its own
service territory. The best defense is a good offense.
B. A prospective power marketer should act immediately. In the early stages of market
development, market share is critical.
1. The customer attains its largest savings in the first transition from regulated rates
to market-based rates. After the first cost reduction, small increments of additional
savings may be available due to intensifying competition and reduced margins, but the
gross dollar savings will not be compelling enough for customers to switch suppliers. It
will be much more difficult to obtain market share after the first blush of competition.
2. The incumbent supplier, after the initial blush of competition, will be able to attain
higher prices than new challengers, as customers will not bear the transaction costs of
changing suppliers for small incremental savings.
3. A high profit natural gas retailing operation is an ideal platform for launching an
attack on the electric power retail marketplace.
Right-Sizing and the Retail Franchise:
1. The major functions of the power industry have been expanded from the traditional
divisions of "generation, transmission and distribution," to include
"wholesale marketing" and "retail marketing."
2. In this context, proposed mergers have recently fallen under increased scrutiny by both
the U.S. Department of Justice, and by the Federal Energy Regulatory Commission.
3. Concern that excessive market power through control of generation will impede
competition are at heart of these concerns. Wholesale marketing is looked upon by
regulatory authorities as an adequate mechanism for attaining economies sought by mergers.
4. Retail marketing may itself be subfunctionalized for analysis of appropriate scale and
the most cost effective means of their provision.
5. Subfunctions of retail marketing include:
b) Commodity Supply Acquisitions
c) Transmission Service Acquisition
d) Brand Name Development
e) Customer Analysis and Price Determination
f) Marketing and Sales Program
g) Billing and After Sales Service
Each of these functions may be assessed to determine if they should be (a) outsourced or
6. Outsourcing example: Economies of scale may favor outsourcing of billing and
after-sales service. Large banks, among others, have developed highly sophisticated
billing systems which serve millions. Attempting to compete with such operations would
likely add little shareholder value.
7. Retention example: There are diseconomies of scale in management. Smaller companies are
often better able to rapidly react. Many of todays most successful large companies
are run as if they were a collection of small companies.
8. The decision to retain or outsource subfunctions is a pragmatic one, based upon
assessment of the available alternatives.
9. Among the main functions, (generation, transmission, distribution, wholesale marketing
and retail marketing), the key benefit of continued integration is the knowledge gained by
top management of each market sector.
10. While this knowledge, and the concommitant ability to devise overall market strategy
is a compelling reason to maintain positions in each market segment, the arguments in
favor of continued vertical integration is weakened by the rise of the market.
11. Each of the main functions should be required to stand on its own: the retail
marketing segment should be able to purchase from any wholesale marketer. Distribution
should be provided equally to all retail marketers. Transmission should be provided
equally to all wholesale marketers. Generation should seek the highest available price.
Regulatory impediments to market forces should be vigorously opposed, not just for the
benefit of the shareholder, but for that of the ratepayer as well.