A new “dream team” of companies formed last week appears to havemore than enough market muscle and expertise to succeed whereothers have failed in the retail energy market. Enron Corp., IBMand America Online have launched an ambitious plan to build a majornational retail energy company with IBM as back office manager,Enron as energy supplier, and AOL as the key link to the smallcustomer marketplace.

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 lessto lose. According to analysts, Enron will have a 60% stake in TheNew Power Company, which will be based in Greenwich, CT, with abranch office in Houston. IBM, AOL, General Electric and otherswill be the other equity partners.

Most of Enron’s financial commitment to the new company will bethrough value-in-kind investments. Enron will provide the newcompany’s energy commodity pricing, risk management, and governmentregulatory affairs. IBM will build the corporate infrastructure,man the call center and build the company’s web site, and AOL willgive the company access to its 22 million customers via a six-yearstrategic alliance covering access to three AOL brands — AOL,CompuServe and AOL Digital City.

The company also will get a $120 million initial investment fromDonaldson, Lufkin and Jenrette, CalPERS pension fund and theOntario Teachers Pension Plan.

“We’ve studied the residential and small business market forseveral years and believe this is the optimal way to provide valueto these customers,” said Enron CEO Kenneth Lay. “By assisting insetting up an independent company, Enron is able to leverage itscore competencies of energy and risk management, while partneringwith other industry leaders to give The New Power Companyextraordinary and immediate depth and capability.” Lay will serveon the company’s board.

H. Eugene Lockhart, former president of AT&T ConsumerServices, president of Bank America’s Global Retail Bank and formerpresident and CEO of MasterCard International, has been brought onboard as the new company’s CEO. Lockhart has been joined by anumber of high-level executives from the telecommunications andfinancial services sectors, including William Jacobs, formerexecutive 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 atAT&T. Several Enron executives also will be coming on board,including among others, Lou Pai, CEO of Enron Energy Services; JohnHendersen, Enron’s vice president of risk management, KathleenMagruder, Enron’s director of government affairs; and Jim Badum,Enron’s chief marketing officer. Lockhart said this team ofcompanies and people will make the difference between winning andlosing in the retail energy market.

“What we get from each of those players is scale,” Lockhart saidin an interview with NGI. “You think about it. Each of theseinstitutions has put in the distinctive advantage of what they dobest. Enron has put in a commodity master service agreement, whichguarantees us their best wholesale price [for gas and power].That’s locked in margin right there. IBM has put in theirprocessing capability so we get scale advantages from day one, andthat is a tremendous advantage. I will be able to cut a bill forThe New Power Company and collect the money and answer a careservice call cheaper than I could at AT&T on a per-unit basis.Third is AOL; they put in their distinctive confidence, theInternet, and we’ll be able to acquire and serve customers for afraction of what it would take if we were to do that by more manualmeans. So that’s where the difference is.”

One major feature that will be supporting New Power’s retailmarketing efforts will be Enron’s guaranteed best commodity priceover 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 financialaccounting support as well as licenses for commodity purchasing,trading and risk management software.

To back up its marketing efforts with solid corporateinfrastructure, the New Power Company has signed a 10-year, $1.5billion service agreement with IBM Global Services, which willbuild, staff and run core components of its back office functions.IBM will provide systems integration services and numerous hardwareand software products. It also will help develop The New PowerCompany’s e-business strategy and delivery capability.

“This is a unique opportunity to build a world-class back officeinfrastructure to support The New Power Company’s first moverstrategy,” said Doug Elix, IBM senior vice president and groupexecutive, IBM Global Services. IBM will develop and host thecompany’s web site from its Southbury, CT e-business hosting centerand plans to add another center in Charlotte, NC. It also willprovide billing and revenue management functions.

Thomas Cotney, vice president of the utility and energy servicesindustry for IBM Global Services, said the job eventually shouldrequire a large IBM staff. “Over time it will depend on how muchmarket penetration they actually achieve. The deal size that we putout is sort of a conservative estimate of how many customers theywill 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. Ourrevenues are almost all variable. We receive fees when we servicecustomers, answer a question on the phone and when we produce abill. If they get next to no new customers, I get next to noincremental revenue. So we grow as they grow. Our interests arevery closely aligned.”

He said a key part of the deal with IBM was the risk-sharingarrangement. IBM ended up taking a single digit percentageownership 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 energyindustry. Its last retail marketing partner was PG&E Corp.

“Frankly one of the reasons we won this…business was thelessons that we’ve learned, not necessarily from PG&E, but justfrom being involved in a deregulated energy market,” Cotney added.”One of the big lessons that we’ve learned was that the Californiamarket deregulated with no standards about how the IT operationsshould take place. What you saw was an ad hoc, highly expensivemethod of communication evolve through happenstance more thancareful planning.

“The industry needed a clearinghouse function and that’s one ofthe biggest components of this deal [with New Power]. We developeda service offering called VeriTRAN that will move the customer dataabout how much energy was actually consumed and ship that data overto the energy marketing company or any subsequent company in itsaccurate form. We maintain the data integrity, and we offereverybody involved the opportunity to do one simple interfaceinstead of the 36 that took place in California.”

“The New Power Company will use our clearinghouse function inall of the markets that they enter and I’m absolutely convincedthey will be in every market in the U.S.,” said Cotney. “That, moreor less, makes [my VeriTRAN] product the defacto standard. Theclearinghouse is created for their use and they are charged aprorated share of the cost, but it’s there once they’ve entered amarket for anybody else to use.”

Deal Titillates Analysts

Merrill Lynch analyst Donato Eassey is practically convincedthis combination will finally be the one that succeeds in thesmall-customer energy markets. “Obviously with top-shelf companieslike AOL, IBM, GE Financial and some other players,” this companyhas the best chance to succeed, he said. “…What package has thebest opportunity for you to reach the most potential customers? AOLbrings that. What software package company would you rather dobusiness with than anybody? Good chance it’s IBM, right? Whattrading company do I want to align with? On the gas side there areseveral 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 newcompany],” he said, “but I think it will be substantial. Keep inmind what has happened to retail [e-commerce] on any product sofar. It’s just started to get accepted. But if I can go in and buyclothes and cars or anything online, why can’t I go in there andbuy 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 marketintelligence on which to trade off of on the wholesale side for[energy] marketing. Again, I think the effective way to do it ison-line, and America Online is a good way to go about it.”

PaineWebber energy analyst Ronald Barone focused on the goodtiming of the transaction in addition to the companies involved.”…[R]ecurring operating profits in the residential/small businessenergy arena have been the exception not the rule,” Barone noted.”In fact, while Enron was one of the first players to get in andget out of this market a few years back, many other small playershave since continued to make little economic progress in theirefforts. However, with the: 1) economies presented by effectiveonline initiatives; 2) exiting of marginal players competing forcustomers; 3) ever-increasing number of states providing consumerchoice; and 4) fairly rapid roll-off of transition charges, marginsin the ‘mass market’ operating environment have been improvinglately.” Barone notes that Dynegy has done well in retail latelythrough its Georgia Natural Gas marketing alliance with incumbentutility Atlanta Gas Light and Piedmont Natural Gas in the Georgiamarket, where the company has amassed 500,000 customers.

“Overall, [an] improved environment, combined with what appearsto be a compelling national team-based strategy leveraging off ofthe expertise of some of the most widely respected companies in theworld, could place Enron on track to dominate yet another facet ofthe energy industry,” said Barone.

He also noted that “with little (if any) future directinvestment from Enron” in the New Power Company, Enron’s near-termearnings have little risk exposure from this deal. “However withannual residential energy marketplace revenues estimated at greaterthan $125 billion per year (even before the potential fornon-energy cross selling); as well as Enron’s traditional 10-20%market share capabilities… there is potential for sizableincremental 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, crossing10 more states by the first quarter of next year, Lockhart said.”We would expect to be in the millions of customers over the nextfour or five years,” he added.

While it plans to sell gas and power initially, New Power willbroaden 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 andwarranties. Lockhart said fuel cells currently are not on the list.”There are a few other things that are more proven with a highernear-term margin for us. I’m kind of intrigued by fuel celltechnology, but I’d like to give it a chance to mature.”

Rocco Canonica

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