Enron, IBM, AOL Form Retail Energy Venture
A new "dream team" of companies formed last week appears to have
more than enough market muscle and expertise to succeed where
others have failed in the retail energy market. Enron Corp., IBM
and America Online have launched an ambitious plan to build a major
national retail energy company with IBM as back office manager,
Enron as energy supplier, and AOL as the key link to the small
While Enron has come down this road before and had to turn back,
this time it has a lot more help, a much better plan and a lot less
to lose. According to analysts, Enron will have a 60% stake in The
New Power Company, which will be based in Greenwich, CT, with a
branch office in Houston. IBM, AOL, General Electric and others
will be the other equity partners.
Most of Enron's financial commitment to the new company will be
through value-in-kind investments. Enron will provide the new
company's energy commodity pricing, risk management, and government
regulatory affairs. IBM will build the corporate infrastructure,
man the call center and build the company's web site, and AOL will
give the company access to its 22 million customers via a six-year
strategic alliance covering access to three AOL brands --- AOL,
CompuServe and AOL Digital City.
The company also will get a $120 million initial investment from
Donaldson, Lufkin and Jenrette, CalPERS pension fund and the
Ontario Teachers Pension Plan.
"We've studied the residential and small business market for
several years and believe this is the optimal way to provide value
to these customers," said Enron CEO Kenneth Lay. "By assisting in
setting up an independent company, Enron is able to leverage its
core competencies of energy and risk management, while partnering
with other industry leaders to give The New Power Company
extraordinary and immediate depth and capability." Lay will serve
on the company's board.
H. Eugene Lockhart, former president of AT&T Consumer
Services, president of Bank America's Global Retail Bank and former
president and CEO of MasterCard International, has been brought on
board as the new company's CEO. Lockhart has been joined by a
number of high-level executives from the telecommunications and
financial services sectors, including William Jacobs, former
executive vice president of MasterCard International; Marc Manely,
former chief counsel at AT&T Consumer Services; and Tony Watt,
former vice president of operations technology and planning at
AT&T. Several Enron executives also will be coming on board,
including among others, Lou Pai, CEO of Enron Energy Services; John
Hendersen, Enron's vice president of risk management, Kathleen
Magruder, Enron's director of government affairs; and Jim Badum,
Enron's chief marketing officer. Lockhart said this team of
companies and people will make the difference between winning and
losing in the retail energy market.
"What we get from each of those players is scale," Lockhart said
in an interview with NGI. "You think about it. Each of these
institutions has put in the distinctive advantage of what they do
best. Enron has put in a commodity master service agreement, which
guarantees us their best wholesale price [for gas and power].
That's locked in margin right there. IBM has put in their
processing capability so we get scale advantages from day one, and
that is a tremendous advantage. I will be able to cut a bill for
The New Power Company and collect the money and answer a care
service call cheaper than I could at AT&T on a per-unit basis.
Third is AOL; they put in their distinctive confidence, the
Internet, and we'll be able to acquire and serve customers for a
fraction of what it would take if we were to do that by more manual
means. So that's where the difference is."
One major feature that will be supporting New Power's retail
marketing efforts will be Enron's guaranteed best commodity price
over at least the next three years. "We then can trade against
[that] or pass it on and sell to our consumers," said Lockhart.
Enron also is providing significant administrative and financial
accounting support as well as licenses for commodity purchasing,
trading and risk management software.
To back up its marketing efforts with solid corporate
infrastructure, the New Power Company has signed a 10-year, $1.5
billion service agreement with IBM Global Services, which will
build, staff and run core components of its back office functions.
IBM will provide systems integration services and numerous hardware
and software products. It also will help develop The New Power
Company's e-business strategy and delivery capability.
"This is a unique opportunity to build a world-class back office
infrastructure to support The New Power Company's first mover
strategy," said Doug Elix, IBM senior vice president and group
executive, IBM Global Services. IBM will develop and host the
company's web site from its Southbury, CT e-business hosting center
and plans to add another center in Charlotte, NC. It also will
provide billing and revenue management functions.
Thomas Cotney, vice president of the utility and energy services
industry for IBM Global Services, said the job eventually should
require a large IBM staff. "Over time it will depend on how much
market penetration they actually achieve. The deal size that we put
out is sort of a conservative estimate of how many customers they
will acquire and the service generated for us as a result of that,"
he said. "I'm not at liberty to tell you what that number is. Our
revenues are almost all variable. We receive fees when we service
customers, answer a question on the phone and when we produce a
bill. If they get next to no new customers, I get next to no
incremental revenue. So we grow as they grow. Our interests are
very closely aligned."
He said a key part of the deal with IBM was the risk-sharing
arrangement. IBM ended up taking a single digit percentage
ownership in The New Power Company. "It was a deal point for them,
if you will, to prove that we were aligned with their interests."
IBM has been in this line of work for some time and holds a 14%
market share in the services and consulting business for the energy
industry. Its last retail marketing partner was PG&E Corp.
"Frankly one of the reasons we won this...business was the
lessons that we've learned, not necessarily from PG&E, but just
from being involved in a deregulated energy market," Cotney added.
"One of the big lessons that we've learned was that the California
market deregulated with no standards about how the IT operations
should take place. What you saw was an ad hoc, highly expensive
method of communication evolve through happenstance more than
"The industry needed a clearinghouse function and that's one of
the biggest components of this deal [with New Power]. We developed
a service offering called VeriTRAN that will move the customer data
about how much energy was actually consumed and ship that data over
to the energy marketing company or any subsequent company in its
accurate form. We maintain the data integrity, and we offer
everybody involved the opportunity to do one simple interface
instead of the 36 that took place in California."
"The New Power Company will use our clearinghouse function in
all of the markets that they enter and I'm absolutely convinced
they will be in every market in the U.S.," said Cotney. "That, more
or less, makes [my VeriTRAN] product the defacto standard. The
clearinghouse is created for their use and they are charged a
prorated share of the cost, but it's there once they've entered a
market for anybody else to use."
Deal Titillates Analysts
Merrill Lynch analyst Donato Eassey is practically convinced
this combination will finally be the one that succeeds in the
small-customer energy markets. "Obviously with top-shelf companies
like AOL, IBM, GE Financial and some other players," this company
has the best chance to succeed, he said. "...What package has the
best opportunity for you to reach the most potential customers? AOL
brings that. What software package company would you rather do
business with than anybody? Good chance it's IBM, right? What
trading company do I want to align with? On the gas side there are
several of them, but the two that stand out are Dynegy and Enron.
"I think it's way too early to predict [the growth of the new
company]," he said, "but I think it will be substantial. Keep in
mind what has happened to retail [e-commerce] on any product so
far. It's just started to get accepted. But if I can go in and buy
clothes and cars or anything online, why can't I go in there and
buy energy, be it for a day, a month, a year. Keep in mind that as
[Enron does] this they are going to build another conduit of market
intelligence on which to trade off of on the wholesale side for
[energy] marketing. Again, I think the effective way to do it is
on-line, and America Online is a good way to go about it."
PaineWebber energy analyst Ronald Barone focused on the good
timing of the transaction in addition to the companies involved.
"...[R]ecurring operating profits in the residential/small business
energy arena have been the exception not the rule," Barone noted.
"In fact, while Enron was one of the first players to get in and
get out of this market a few years back, many other small players
have since continued to make little economic progress in their
efforts. However, with the: 1) economies presented by effective
online initiatives; 2) exiting of marginal players competing for
customers; 3) ever-increasing number of states providing consumer
choice; and 4) fairly rapid roll-off of transition charges, margins
in the 'mass market' operating environment have been improving
lately." Barone notes that Dynegy has done well in retail lately
through its Georgia Natural Gas marketing alliance with incumbent
utility Atlanta Gas Light and Piedmont Natural Gas in the Georgia
market, where the company has amassed 500,000 customers.
"Overall, [an] improved environment, combined with what appears
to be a compelling national team-based strategy leveraging off of
the expertise of some of the most widely respected companies in the
world, could place Enron on track to dominate yet another facet of
the energy industry," said Barone.
He also noted that "with little (if any) future direct
investment from Enron" in the New Power Company, Enron's near-term
earnings have little risk exposure from this deal. "However with
annual residential energy marketplace revenues estimated at greater
than $125 billion per year (even before the potential for
non-energy cross selling); as well as Enron's traditional 10-20%
market share capabilities... there is potential for sizable
incremental income streams down the road."
With plans to launch in two states, New Jersey and Pennsylvania,
in August, The New Power Company intends to grow rapidly, crossing
10 more states by the first quarter of next year, Lockhart said.
"We would expect to be in the millions of customers over the next
four or five years," he added.
While it plans to sell gas and power initially, New Power will
broaden its product offering eventually, said Lockhart, to include
"energy-driven" products, such as appliances, air conditioners,
water heaters and the like, supported by customer service and
warranties. Lockhart said fuel cells currently are not on the list.
"There are a few other things that are more proven with a higher
near-term margin for us. I'm kind of intrigued by fuel cell
technology, but I'd like to give it a chance to mature."