Businessweek Archives

Online Utilities Charge Up


Industrial Management

Online Utilities Charge Up

They're racing to cash in on deregulation and lure users

Until a year ago, Ragu Margapuram had been paying his local electric company between $110 and $225 a month. That's routine for a five-bedroom, three-bath house in San Jose, Calif., with an outdoor hot tub. Margapuram likes to use the tub after long days at Alteon WebSystems Inc., where he works as a quality-control engineer. But he didn't need soaking by a utility. So he switched to Utility.com, one of several upstart virtual utilities that sell power via the Internet. Nowadays, Margapuram uses the Net to pay his monthly power bill--and pockets savings of about 10%. "But I don't do it just for the savings," he says. "I was waiting for deregulation to happen. I don't like monopolies in any industry."

Legislators in Washington and most state capitals tend to share that sentiment. During the 1990s, moves to break up electric utilities and create competition in the power market won supporters in state after state. Today, even though deregulation has been implemented only in a few states, the sea change has fostered a new breed of utility company--one that exists only in cyberspace.

For these dot-com utilities, Margapuram is the perfect customer. But the newcomers will gladly serve people whose primary concern is to trim their electricity bills. U.S. consumers spend roughly $210 billion a year on power, so the deregulation drive is creating instant gigabuck opportunities. It started in California's $23 billion electricity market in 1998. Pennsylvania, New Jersey, Massachusetts, and a few more states soon followed. But the pace will pick up over the next two years, as a score of states plan to dismantle the monopolies that have sheltered utilities for decades and foster open-market competition by giving consumers the right to choose their power provider.

Entrepreneurs are racing to cash in on this bonanza--by harnessing the Internet. Some startups, including Utility.com and GreenMountain.com, purchase wholesale power from generating plants and resell it to consumers on the Net. Other pioneers, such as ElectricityChoice.com and BrightOptions.com, use the Net to sign up households and create large buying pools with enough muscle to win discounts from suppliers. And businesses can play the pick-your-utility game, too, at such Web sites as HoustonStreet.com and Enermetrix.com.FREE CONCERT. Consumers, though, are hardly rushing en masse to unfamiliar utilities. A mere 0.3% of all households with Net connections in deregulated states now buy power online, according to Yankee Group Research Inc. in Boston. But that could change rapidly as more states end the old utility monopolies. By 2005, 28% of online households will be using the Net to trim their energy bills--spending $10 billion to do so. "It helps that electricity is the perfect thing to buy online, because you don't have to touch it or see it," says Yankee Group analyst Karl B. Jessen.

Still, even $10 billion is small potatoes compared with the total market. So what's holding the e-utilities back? Not every home is hooked up to the Net, of course. And growth has also been hampered by the lethargic pace of state-by-state deregulation. But come the end of 2001, analysts expect that some 80% of America's population will be able to select the power provider they want, up from about 20% in 1999. Then, marketing and consumer education efforts will be the dominant factors governing growth.

Even in the two states leading the open-market charge--California and Pennsylvania--many consumers remain unaware that they now have the power to pick the company that pumps juice into their homes. Even if they are, it's tough to create brand excitement for something as ethereal as a kilowatt-hour. "Electricity is pretty boring," admits Andrew K. Perkins, director of strategic marketing at GreenMountain.com in South Burlington, Vt. "You have to put this sort of thing in people's faces."

Perkins did that with a free rock concert at Philadelphia's Mann Center for the Performing Arts, when GreenMountain.com Co. launched its service in Pennsylvania in the fall of 1998. The all-day event featured a lineup of rock musicians that included James Taylor, Shawn Colvin, and Kenny Loggins--and attracted some 50,000 adults and children who danced in the aisles and snacked on pizza and Ben & Jerry's ice cream. Between acts, GreenMountain execs took the stage to pitch clean energy. The company sells power produced in part by such nonpolluting sources as solar-cell farms and wind turbines. Staging the concert cost about $1 million, but it was worth it, Perkins says. A couple thousand people signed up as customers.

Utility.com didn't fare as well last October when it expanded into Pennsylvania. The e-utility, based in Albany, Calif., hoped to make a splash with a swing-music concert and a laser-light show at Penn's Landing, a waterfront park in Philadelphia. Only a few hundred people turned out. But Utility.com CEO Chris S. King plans to grab more attention later this month when he launches service in Massachusetts. His company will set up booths near the finish line of the Boston Marathon. Millions of TV viewers may catch glimpses of banners bearing such tongue-in-cheek slogans as "Fear not the meter reader."

Electricitychoice.com seems to be doing a good job of tickling consumers to join its buying pools and qualify for bulk discounts. Its ads wryly advise: "You and 10,000 of your closest friends can cut your electric bill." So far, the eight-month-old company, a subsidiary of Pittsburgh-based OnlineChoice.com, has gathered two groups of 10,000. Each pool received a handful of bids from suppliers, including the Power Direct unit of AES Corp. in Arlington, Va. "It's a good way for a supplier to get thousands of customers in one shot," says Electricitychoice CEO Sanjay Chopra. Most customers went with Utility.com, shaving about 20% off the 4.75 cents per kilowatt-hour they had been paying before.

Electricitychoice collects a bounty of $25 on every user turned over to a supplier. It's adding 500 to 1,000 prospective pool members a day, says Chopra, who plans to spend $10 million on marketing this year. By August, after just nine months of operation, he expects to have raked in $2.5 million.

Whether clever ads do much to alleviate consumer confusion, which could be one factor holding back faster acceptance of utility choice, is another matter. Under monolithic utilities, things were simple. The electric companies controlled all three links of the power chain: generating electricity, distributing it across local and regional grids, and metering it to individual homes. The new competitive model is more complicated. Most states have deregulated only the power-generation part of the equation. Consumers can now choose their power supplier, but the traditional utilities still handle distribution and retail delivery. And because the online utilities typically don't have the wherewithal to build or buy generators--and probably wouldn't want to, if they did--they buy their power from existing sources.

So, if the same generating plants are producing the electricity, and the same copper cables and wires are bringing it to homes, some consumers may well wonder what's the big deal. The analogy is telecommunications.

Most of the new long-distance carriers also exploit the existing infrastructure. They buy capacity in wholesale chunks from the phone companies, then resell it for individual calls by consumers. Yet they can offer discounts because they're not burdened with the costs of operating and maintaining the physical networks.

Ditto for the e-utilities. In addition, they use the Internet for customer service, billing, and other things that old-line utilities do over the phone or through snail mail. "One of the biggest expenses is high transaction costs," notes King of Utility.com. "The Net solves that." Consumers use the company's Web site to calculate potential savings, sign up in minutes, and pay their bills--all without a crew of customer-service employees. So Utility.com usually can undercut the regulated rate by about 20%. GreenMountain is the exception to the rule. Its clean energy carries a premium of up to 15% more than prevailing rates. Still, GreenMountain says it has signed up 100,000 environmentally minded customers in California and Pennsylvania. Utility.com won't disclose how many it serves.USER GUIDES. There can be drawbacks to buying power from the newcomers, similar to those with some cut-rate telecom services. For example, the online buying clubs sponsored by ACN Energy Inc. and TenderLand Power Co. offer lower rates per kw-hour, but they also charge a monthly fee of several dollars. That can take a bit bite out of savings for homes with smallish utility bills. And depending on state regulations, people who switch to an Internet supplier can end up receiving two bills a month: an online bill from the new supplier for the energy used, plus a paper bill from the old utility for delivering it.

To ease people into this new world of utility competition, a handful of consumer-guide Web sites provide lists of the various power suppliers, their rates, and the areas they serve. At Energyguide.com, for example, you type in a zip code and up pop the names of the rivals serving that neighborhood. Since Energyguide, like Electricitychoice, collects a commission on each customer referral, it also markets itself on other sites. One of these is LowerMy- Bills.com in North Hollywood, Calif. This portal links many comparison sites covering a wide range of products and services. LowerMyBills CEO Matthew R. Coffin says Energyguide is the second most popular destination among visitors, trailing only car insurance, and ranking ahead of long-distance and credit-card comparisons.

What's next for the e-utilities? Pulling in more consumers by hawking more than just power is one strategy. The dot-com utilities "need to evolve into a more enriching experience by adding more services," says Douglas Coons, an Andersen Consulting partner in Atlanta. Utility.com already is jazzing up its offerings. It markets Internet access and plans to add long-distance phone service next. But this will butt heads with the old-time utilities that are responding to competitive forces by branching out into the same markets (below).

For the next few years, though, deregulation should unleash enough new business to gladden all rivals. And a marathon slugfest between traditional utilities and the online upstarts should keep pressure on prices. The marketing din, meanwhile, might jolt more mainstream folks into going after power discounts. In a couple of years, e-utilities could be what helped inspire more consumers to pick the fruits of competition.By Louise Lee in San Mateo, Calif.Return to top


Burger King's Young Buns
LIMITED-TIME OFFER SUBSCRIBE NOW

(enter your email)
(enter up to 5 email addresses, separated by commas)

Max 250 characters

 
blog comments powered by Disqus