Energy deregulation can be confusing. To make some sense of the muddle, Inc. magazine spoke with Hugh Holman, a senior analyst at CIBC World Markets who's been tracking energy deregulation since 1997.
Inc.: How did deregulation get started?
Holman: The power industry is really the last remaining large monopoly. We've broken up almost everything else. California opened its market in 1998, and it looks as though the other states will follow.
Inc.: How big is the potential market?
Holman: Huge. The power industry is one of the largest in the United States. Revenues are more than $200 billion a year. Opening it to competition is going to have pretty dramatic ramifications throughout the economy.
Inc.: Is deregulation spawning many new companies?
Holman: There are a lot of newcomers. Some are power marketers who don't generate any power themselves. They just buy power and resell it. A lot of them are selling on the Internet, which is a natural because the wires for providing electricity are already in place. These companies don't need to build warehouses and so forth, like Webvan or Amazon.com, because the power can be delivered over the existing infrastructure.
Inc.: But how can they make money in what's historically been a low-margin business?
Holman: You have to customize your product, differentiate what you're selling. Green Mountain Energy, of South Burlington, Vt., has done that by offering environmentally friendly power, branding it, and selling the environmental attributes of the energy it's providing. In some cases it's going to be reliability that sells. Users like Amazon.com, eBay, and all of the other Internet service providers can't be out of power. So they require highly reliable service, and they are willing to pay for it.
Inc.: Are consumers ready for deregulation?
Holman: I think the proof of the pudding will be whether people switch suppliers. In Pennsylvania they've had a very successful program to educate consumers. As much as a third of all the electricity consumed in Pennsylvania is now being purchased from an alternative supplier. So in that sense deregulation seems to work: People do seem to switch suppliers when given a choice.