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Assessing the Power of Energy Competitors

Posted: 01/1998

Assessing the Power of Energy Competitors

By Bryan C. Spielman

The emergence of competition in the deregulating energy sector has been a hot topic
over the last year. Energy companies competing for energy-related services also are
looking to offer combined energy and telecommunications packages aimed at industrial,
commercial and residential customers.

The entry of these new competitors into the already crowded field of telecommunications
service providers demonstrates the need for increasingly sophisticated marketing
strategies. These strategies require robust operational and technical infrastructure
support, including data warehouses, so carriers can determine the value of their customers
and the proper competitive response.

Competitive Analysis

In evaluating competitors, it’s important to differentiate between product and
customer/market-based competitors. Winning companies are shifting their strategic focus
from a product- to a market-based orientation, the implications of which are fairly
significant. The following table helps frame some of the differences between a
market-focused organization and a product-focused one. (See table below).

Because most competitive organizations are positioning themselves as market-focused
companies, traditional utility and telecommunications companies are not likely to pose
major competitive threats. However, many old-line companies are beginning to shift their
focus from product to market through lightly regulated or deregulated subsidiaries. Many
are engaged in significant data warehouse efforts to segment their customers and determine
which attributes make a customer valuable to them. The value of a customer varies as much
as the strengths and weaknesses of the organization that serves it. For example, a
traditional interexchange carrier (IXC) would be much happier with a customer with high
long distance usage than one that uses a lot of custom calling features and makes mostly
local calls. So, the first step in looking at competition is to see which companies are
competing for customers for your most profitable products.

Energy Competitors

Competition in the energy business is at a nascent stage of development. Many states
have legislated competition, but few are experiencing it. The Pennsylvania Pilot is a good
place to look at current and potential competition along the dimension of energy-related
services. Several energy-related service companies seeking to become national players are
licensed by the state of Pennsylvania to compete for the 75,000 PECO Energy Co. customers
who are eligible to choose a new electric utility supplier. Among these companies are
Houston Industries (NorAm Energy Management Inc.); Delmarva Power (Conectiv); Enron;
Virginia Electric and Power (Evantage); Southern Co.; EnergyOne; and PacifiCorp. Several
regional/local companies also competing for market share include Competitive Utility
Service Corp.; Pennsylvania Power and Light (PP&L); CNG Retail Services (Peoples
Plus); Bruin Energy Inc. (Mack Services Group); and Horizon Energy Co.

The table above is a limited compilation of information about some of these companies
and their customer offers. It includes such national players as EnergyOne, Enron and
Southern, along with regional players such as Conectiv and PP&L and state or local
players such as Horizon and Bruin.

Market Niches

Some companies are focusing on specific market niches. A good example is Cadence, an
entity recently formed by three regional utility powerhouses: Cinergy, Florida Progress
Corp. and New Century. Cadence aims to provide single-source energy management services
and products designed to lower energy costs for national, multilocation companies such as
retail stores, convenience stores, grocery stores and lodging.

Initially, Cadence will offer traditional products and services focused on the needs of
multisite commercial customers. These include state-of-the-art custom billing and
information services, full-service energy management, commodity procurement and
transitional pricing services.

Cadence is in the process of signing strategic supplier agreements. To date it has an
agreement with Scientific Atlanta for product development and Schlumberger Distributed
Measurement Solutions for metering technology.

Utility/Telecommunications Competition

Expanding the analysis to look at a convergent offering of energy-related services and
telecommunications changes the field of competitors. Because there is limited information
about bundled offerings in a specific area or region, this issue is best considered on a
national basis. EnergyOne, KN Energy, Delmarva Power and Light, Boston Edison and Texas
Utilities are organizations that have aggressive plans for a convergent service offering
of energy and telecommunications.

EnergyOne

In June 1997, Utilicorp United and PECO Energy Co. formed EnergyOne to offer a national
brand of energy, telecommunications, security and information-based products and services.
In addition to reselling the energy services of Utilicorp and PECO and its energy
franchise partners, EnergyOne offers its customers AT&T telecommunications services,
ADT security monitoring systems and services and Itron energy information, communications
and management solutions. EnergyOne offers its customers a convergent, one-stop customer
care solution that coordinates and integrates the ordering of products and services from
suppliers.

KN Energy

In September 1996, KN Energy introduced SimpleChoice, a package of services
encompassing energy, communications and information services including satellite TV,
wireless modem and Internet services, long distance telephone service, home products
repair and natural gas. In January 1997, KN took a further step in its partnership with
PacifiCorp and formed Enable. Enable offers utility companies a single package of energy,
communications and infotainment under the SimpleChoice brand.

MCI joined the partnership in July, adding its MCI One bundle of long distance,
cellular, paging, fax and Internet services to the SimpleChoice offerings. Other vendor
partners include Metricon for RF links; EchoStar Communications for its dish satellite
entertainment service; MexServ for home repair products and DQE WeatherWise, a subsidiary
of Duquesne Electric Co., for natural gas billing software. KN also has an agency
agreement with Qwest Communications and recently purchased a diversified natural gas
company, Interenergy. KN’s competitors are identified as NYNEX, US WEST, Visa, Bell
Atlantic, Citibank, GTE, Sears, Sprint and American Express. SimpleChoice currently is
offered to 1.7 million customers in 10 Western and Midwestern states.

Delmarva Power and Light

In November 1996, Delmarva formed a telecommunications subsidiary, and in March 1997,
Conectiv Communications announced its intent to become a regional supplier of local
telephone and long distance services. Delmarva has a partnership with Texas Ohio Gas to
supply energy to four large retail customers in New York, and with Connecticut Energy
Corp., Conectiv/CNE Energy Services, to sell natural gas, electricity, oil and
energy-related services in New York and New England. This partnership is expected to add
telecommunications services as well. Delmarva also has been aggressively acquiring
heating, ventilation and air conditioning services firms, acquiring five in 1996.

Boston Edison Co.

Boston Edison has a highly publicized partnership with RCN telecom services to offer
local, long distance, video and high-speed Internet to multiple-dwelling unit customers in
Boston. RCN provides the marketing, sales and construction expertise, while Boston Edison
provides the rights-of-way, fiber and capital. In January, it formed EnergyVision in
partnership with Williams Energy Services, a division of the Williams Companies, which
founded WilTel and subsequently sold it to WorldCom. EnergyVision was formed to market
electricity, natural gas, oil and energy-related services in New England.

Texas Utilities

In late August, Texas Utilities (TU) purchased Lufkin-Conroe Communications Co. (LCC),
a southeastern Texas-based local exchange carrier (LEC) with 100,000 access lines for $368
million. LCC also offers Internet, video and wireless services to customers in Texas,
Arkansas, Louisiana and New Mexico. Moreover, TU owns a 20 percent stake in PrimeCo
Personal Communications’ Texas markets. Initially, TU plans to operate LCC as a wholly
owned subsidiary. However, because 40 percent of LCC’s customer base falls in TU
territory, in the foreseeable future there probably will be a joint offer of energy and
telecommunications. TU also recently acquired Enserch Corp., a natural gas company that
owns Lone Star Gas, the largest natural gas company in Texas.

Other Utility/Telecommunications Efforts

Central and South West (CSW Communications)–Limited partnership with ICG
Communications. CSW/ICG ChoiceCom LP, based in Austin, markets telecom services in Texas,
Arkansas, Louisiana and Oklahoma.

Louisville Gas and Electric (Louisville Home Services)–Louisville Home Services, a
subsidiary of LG&E, recently signed an agreement with ICG Communications, a
competitive access provider based in Englewood, Colo., to market ICG’s local and long
distance services to Louisville businesses. It does not appear the newly formed entity,
The Louisville Phone Company, will offer customers a combined utility and
telecommunications bill, although customer service will be handled by LG&E. The
telecommunications offering is aimed exclusively at Louisville business customers since
ICG’s fiber and switch serves the downtown business district.

Montana Power (TRI Touch America)–Provides long distance, private line and equipment
services to its energy customers. Also, it carries a PCS license.

NORAM Energy–NorAm, a division of Houston Industries and the third-largest natural gas
distributor in the United States, serves customers in Ohio and Massachusetts and has
signed a six-month comarketing agreement with Sprint to offer Sprint’s long distance
services to its customer base.

Otter Tail Power–This cable television and telephone service provider serves three
towns in Minnesota and is partnering in a PCS license in-state. Through its acquisitions
of cable and telephone companies, Otter Tail serves about 3,000 cable TV subscribers and
more than 5,000 telephone subscribers in Minnesota.

Emerging Competitors

Clearly, the traditional separations between energy and telecommunications are breaking
down. Energy companies are beginning to emerge as serious competitors along a number of
dimensions including telecommunications.

Understanding the strength of product offerings, customer bonds and opportunities to
strengthen those bonds is critical to telecom companies, energy companies and emerging
providers of both services. Success in today’s increasingly competitive convergent
services marketplace will not be determined by the company that is first to market, but by
the provider that has the operational and technical infrastructure to acquire and/or
retain the most profitable customers.

Bryan C. Spielman is vice president of strategic services at DMR Consulting Group,
Edison, N.J. He can be reached at (732) 549-4100, ext. 8140 or at bspielman@dmrtrecom.com.


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