Upstarts: Energy Deregulation

If you don't currently have a choice about where you buy your electricity, you will soon.

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A Shock to the System

Where do you buy your electricity? If you don't have a choice now, you will soon

Twenty years ago most Americans got their telephone service from Ma Bell (a.k.a. American Telephone and Telegraph) and their power from the local electric company. Today consumers can pick from among AT&T and roughly a zillion other telecommunications companies -- but most people still buy their electricity from a local utility.

Shocking, really. But that situation isn't going to last much longer. As the telecom industry did in the 1980s, the U.S. electricity industry is now undergoing deregulation. State utility commissions are unplugging their tight control on rates and allowing a range of new energy providers to enter the field.

For consumers the process hasn't been uniformly smooth. This past summer electricity users in San Diego and New York City were stung by price spikes after regulators removed long-standing rate caps as part of the deregulation process. Still, within five years, 90% of U.S. consumers will be able to choose where and how they buy their watts and volts, according to the Yankee Group, a research and consulting firm in Boston.

As you might expect, the Internet is making things interesting by providing brand-new ways for energy providers to reach consumers. And investors have certainly recognized an opportunity: venture-capital funding in energy-related companies rose from $150 million in 1999 to an estimated $300 million in 2000, according to Venture Economics, a research company. Deregulation appears to be sparking a whole new wave of start-ups.

Power to the people
Newly empowered consumers in New York City, for instance, can now buy electricity from SmartEnergy.com, which was founded in 1999 by a team that includes five former energy traders from the New York Mercantile Exchange. "We figured that there was a huge market in electricity and natural gas at the retail level," says SmartEnergy president and CEO Gautam Chandra. Someday, he says, Americans may buy their energy from familiar retailers like Wal-Mart or the Home Depot.

But it's likely that those retailers don't know much about the complex supply chain in the energy market. That's where SmartEnergy comes in. "We think of ourselves as a distributor," Chandra says. That means supplying retailers with the electricity and natural gas that they will in turn sell to consumers. SmartEnergy, based in Woburn, Mass., doesn't actually generate power. Instead, the company buys it directly from independent producers and is banking on its energy-trading expertise to save consumers at least 10%. (The energy is delivered to customers over existing infrastructure maintained by formerly monopolistic utilities.) So far, SmartEnergy isn't selling to retailers like Wal-Mart or the Home Depot, but it has struck up partnerships with newly emerging Internet energy retailers such as Essential.com and Energyguide.com.

Consumers can also buy directly from SmartEnergy, and the company offers features that it hopes will distinguish its product from that of traditional utilities. Call it commodity branding. "Customer service has been fairly nonexistent in the energy space," says chief marketing officer Jon Sorenson. With SmartEnergy, customers can use the Internet to sign up for service, reach customer-service agents, and pay their bills with a credit card. They can choose from different service plans -- such as one that lets them buy power at a fixed rate for 12 months and one that offers a rebate that rewards them for saving energy. They can even earn frequent-flier miles on United Airlines: 500 miles for signing up and one mile for every dollar spent thereafter.

SmartEnergy rolled out in New York in February and aims to be in five more states, including New Jersey and Pennsylvania, by the end of the year. Funded originally by its founders, SmartEnergy has since raised more than $10 million from outside investors. The company expects to be profitable in the third quarter of 2001.

SmartEnergy and other upstart providers still have a long way to go to make a dent in the market. As of June, only 2.2% of residential customers and 4.8% of business customers in New York State had switched from their old utility. And now, as the Yankee Group analyst Karl Jessen points out, SmartEnergy and its ilk are facing serious competition -- namely, from the NewPower Co., a potential Goliath energy provider that is funded by energy giant Enron.

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