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Energy + Telecom: A Good Match

Those in the know say that parallels between the energy and telecom businesses make energy sales a good and profitable fit for channel members.

May 18, 2010

14 Min Read
Energy + Telecom: A Good Match

By Khali Henderson

The telecom and energy industries have a long shared history. Many of the nations utilities also are its telecom service providers; they leveraged their private networks to not only serve residences and businesses but also to sell to telcos seeking deeper, diverse or off-net coverage. A case in point: WilTel, which was acquired by Level 3 communications Inc. in 2005, was part of the Tulsa-based energy outfit Williams Companies Inc. But there are many others still operating PPL Telecom LLC, Edison Carrier Solutions, etc. There are so many  and theyve been part of the telecom fabric for so long  that their origins hardly register.

Turnabout  telcos getting into the energy business is fair play, but is it a logical, or better yet profitable, one? There is at least one carrier, some former telecom execs and scores of agents who say, absolutely.

The Energy Buzz. Admittedly, deregulation of the energy business  though limited to 14 states  has been happening for more than a decade. Even the telecom industrys interest in it is not new. Some CLEC executives/entrepreneurs like Louis Frate, CEO of Patriot Energy Group, left the telecom industry during the nuclear winter of the early 2000s to build energy brokerages. In 2004 Alternative Utility Services Inc. exhibited at the Channel Partners Conference & Expo in an effort to recruit telecom agents to the energy sales opportunity. And many telecom agents are converts. You can (as we did for PHONE+ ASKS) contact a dozen agents and find a number of them have been selling electricity or natural gas for some time.

With only this limited evidence, its clear this conversation is not new. Yet, the energy sales workshop at the Spring 2010 Channel Partners Conference & Expo in Vegas this past March was standing-room only. And there were an unprecedented number of energy suppliers  Glacial Energy, BlueStar Energy and Patriot Energy Group  as well as the energy divisions of CLEC PAETEC and master agency World Telecom Group exhibiting new channel programs on the show floor.

Why is there a buzz about energy in the telecom industry today? The answer is a combination of factors  not the least of which is the green movement. Energy consumption  and the need to reduce it  is top of mind for businesses these days. The recession, which has forced companies to re-evaluate their spending, has paired the environmental imperative with a cost-cutting goal. All of the sudden, big-ticket items like energy have come under scrutiny like never before. Companies who are challenged by demand-side approaches to energy cost reduction are more than willing to consider a supply-side change if given the chance.

Customers interest and willingness to discuss energy certainly make selling it a more attractive opportunity for newcomers today. But there also are more specific triggers going on in both industries.

In our own, there is continued margin erosion for traditional telephony services and a potentially burdensome imperative to gear up to sell increasingly complex products with longer sales cycles. For companies that have built their businesses on a transactional model, energy sales appeals. Telecom is a business of declining margins while energy prices move up and down, so there is opportunity, said Patriot Energys Frate. From a financial model, many see opportunity they dont see in telecom.

At the same time, businesses are spending on average four times as much on energy as on telecom services. For some companies like a manufacturer, it can be orders of magnitude larger. Brad James, principal at James Communications Corp., a telecom/energy agency based in California, said he has a manufacturing client whose monthly spend is $70 on long-distance, $500 on local dial tone but $8,000 on electricity.

And, energy use  ironically in part due to additional technology such as communications and computing  continues to grow. According to the Environmental Protection Agency, data centers, for example, will require almost twice as much power in 2011 as in 2007 when the study was done.

Meanwhile the opportunity to resale electricity has become more attractive. There hasnt been a sudden increase in the number of states offering consumers a choice of providers. But James said there are reasons to be optimistic about Californias maiden effort, which is limited to opening 10 percent of the market over a four-year period beginning in June 2010. If all goes well, it could signal a greater opportunity for competitors in the future.

Whats more significant is that its become more lucrative in a few states where its already deregulated. In Pennsylvania, for example, rate caps for PPL Electric, Pennsylvania’s second biggest utility, expired Jan. 1, 2010, so its rates increased 30 percent, making it easier for discount suppliers to come into the market. As of April, more than 400,000 customers already had switched providers. On Jan. 1, 2011, rate caps expire at the last four Pennsylvania utilities PECO, Metropolitan Edison, Penelec and West Penn Power.

Analyst Paul Ring, editor of Energy Choice Matters, a publication and consulting firm, said theres also increased activity in all deregulated states because the wholesale price of energy has gone down with the recession. When its low, the independent suppliers can undercut the utility.

Although they have been deregulated for some time, Ring said expired rate caps or decreased wholesale pricing turn these markets into new opportunities, which is fueling interest from sales channels.

Suppliers are essentially salivating at being able to serve these new customers, and there are probably about 50 new electric agents/brokers/consultants who have registered with the Pennsylvania PUC since the start of 2009 in preparation for selling electricity, Ring said.

PAETECs Power Play. These kinds of opportunities have attracted telecom interests, including PAETEC, one the countrys largest CLECs. The Rochester, N.Y., company bought an energy brokerage in 2008 and in February became an Energy Service Company (ESCO) with the acquisition of U.S. Energy LLC operating in New York.

PAETEC Energy will continue to broker gas, but its primary focus and revenue generator will be in electricity. The company plans to expand its ESCO operations into all 14 deregulated markets, starting with New York City by May 2010. Pennsylvania also is on the short list. In addition, the company plans to beef up its energy division staff from nine to 35  mostly in sales  by the end of the year.

While just one company, this telcos bold move is at a minimum causing the industry to take notice. Is it on to something here?

The companys charismatic CEO, Arunas Chesonis, has done a fair bit of evangelism on the energy opportunity by speaking on the subject at telecom industry trade shows in the last year or so. Now, he has put his money where his mouth is with the U.S. Energy buy. With this investment, PAETECs energy division, PAETEC Energy, is a going concern and Chesonis has tapped his right-hand man, E.J. Butler, PAETECs COO, as its president and CEO.

PAETEC Energy’s E.J. Butler

Butler told PHONE+ that PAETECs strategy for its energy business parallels its telecom business. The idea was at the beginning we were going to go out and compete for the [telecom] commodity, Butler said. We were going to try to give people a personalized, differentiated service experience. We were going to give them cost efficiencies. We were going to give them consulting as to what was available. If we were successful over the next five to 10 years, we would see where the technology took us and we would decide where we would plant our strategic flags. Its exactly the same on the energy side.

PAETEC Energy, then will compete in the commodity electricity and gas markets, offering cost savings and consulting on whats available, he said, adding that over the next four or five years, the company will be looking at strategic opportunities, such as expense management, equipment for services and power management consulting. We will see where the technology takes us. We will see where regulation takes us. We will plant our strategic flags on the energy side the same way as when we built out the telco business, he said.

PAETECs vision, however, also includes much more synergies between the telecom and energy businesses than exists today. The company, for example, wants to bundle telecom and energy together with cross-discounting, rather than simply sell them side by side. The success of this idea is partly dependent on the realization of another of PAETECs predictions that the purchasing decisions for telecom and energy land with the CIO. We are betting more energy decisions will be made by the CIO, Butler said. The basis for this conclusion is in part the companys experiences in telecom. As telecom products became more data-centric, the decisions migrated from the controller or telecom manager to the CIO. Similarly, the IT department is at many companies, including PAETECs, the biggest energy consumer, so it makes sense that CIO would have a say, Butler reasoned.

The companys ideas about energy are exciting its indirect sales partners who would like nothing more than a repeat of the gravy train of the early competitive telecom marketplace. As an example, one of its large agents, NetGain Communications has sold off its telecom customer base to focus in part on building an energy sales business.

But, so far anyway, PAETEC stands alone among its service provider peers. Analyst Ring said as far as he is aware PAETEC is the only telephony company to become a supply company that takes title to the energy, a role that requires significant credit facilities. The few other examples he could cite operate as brokerages, which he said has a lower barrier to entry. Brokers start up every day, Ring said, noting some states dont even require licensing.

And, the analyst is not at all confident that PAETEC might be a trend setter. In his mind, PAETEC leans toward being unique in its approach. Whether that means the company is forward-looking or off-base remains to be seen. Nonetheless it has set itself up as the champion for the telecom/energy power punch.

Telecom + Energy Sales. The commonality between energy and telecom  at least from the buyer viewpoint  is that both are utilities. For this reason, longtime energy sellers say theyve had no pushback on their energy pitches from existing telecom customers. In fact, they say customers are more than eager to discuss how to repeat the savings they received from alternative telecom providers with alternative energy providers. In some ways, the telecom tie even helps the sale.

They know they saved money with their phone services, so its a good reference point, said Patriot Energys Frate.

James Communications’ Brad James

Agent James, who has been selling energy for more than four years, said that the relationship established in managing the telecommunications actually helps the energy sale. If they trust you to handle their telecom, why wouldnt they trust you to handle their energy? he said.

PAETECs Butler agreed, but added there isnt a very high hurdle since few energy buyers have any relationship whatsoever with their power company.

But for the most part, energy and telecom are two separate sales conversations. The pitch is either for one or the other even with greenfield accounts, said James. And selling into existing telecom accounts usually results in a referral from one department to another, Frate said.

What about the common buyer PAETEC talks about? We are not there yet even by PAETECs own admission. But, there is some disagreement over whether we ever will be.

We rarely sit down with the CIO or the CTO. Its usually finance or accounting, Frate said. Thats because supply-side energy purchasing is all about risk management. Its a traded commodity. What we sell is how to mitigate risks, Frate said, noting that energy is bought on a spot market or on a futures contract, where you are betting on the price today being better than it will be tomorrow. Thats very different than telecom.

When Patriot Energy entered the energy resale market in 2001, Frate thought it would be like selling UNE-P or local resale. Its not, because its traded and tied to the financial markets. It crosses into the investment business.

The fact that electricity and natural gas are physical commodities also makes them different from telecom in other ways namely they are generated and consumed. There is no excess capacity (e.g. fixed costs) as in a communications network. Every kilowatt you use has to be paid for somewhere, said analyst Ring. This makes the idea of bundling commodity energy and telecom services together with cross-discounting difficult, he said. No one has done it. Its tough to do. And, thats probably why you are not seeing more telcos get into the energy business, he said.

Butler maintains that its PAETECs intent to do just that. And, he told PHONE+, the company already has done it, converting a telecom client to an energy client with the reductions primarily coming on the telecom side. In this case the companys usage was heavily weighted toward energy by 30:1, so it made sense for PAETEC to take a thinner margin on the telecom services than it normally would to get the energy contract.

WTG’s Vince Bradley

WTGs CEO Vince Bradley sees a similar scenario: Once a prospective provider becomes the incumbent, they can provide unified billing and possible incentives on either utility to offset the cost for the opposing, (i.e., a customer who uses over 100,000 KwH in a month will receive discounted port pricing for DIA and voice-related products.

Beyond Energy Resale. What makes energy resale so attractive to telecom companies  brokers and agents alike  is that its low-maintenance not unlike long-distance presubscription back in the early days post-divestiture. Patriot Energys Frate said its basically a billing change but the customer cant request it, only the broker can. The utility company continues to provide the energy, bills the customer and handles the customer service calls.

James said commissions for electricity agents can be a bit of a gray area. Essentially, agents are paid by the broker or supply company as a percentage of the sale price per kilowatt hour. This basic unit of measure is called a mil, which equals one-tenth of a penny. Commissions can range from .5 mil to 3 mil, he said.

This part of the business is attractive to many telecom agents who see it as an easy add-on, but it may be just the proverbial tip of the iceberg. Demand-side services addressing power management, expense management, green technologies, etc. may prove to offer a continuing opportunity.

Energy auditing and retrofitting, e.g., replacing old lamps, are value adds that telecom/energy agents perform today. This is an excellent bridge for many telecom agents into the energy space, WTGs Bradley said. Additionally, agents could essentially approach clients as a project manager, balancing all human resources, e.g., telecom channel managers, ESCO certified retrofitters, etc.

Demand-side energy services also are possibly where the fabled common buyer in PAETECs vision may in fact become the CIO. The main drivers for CIO involvement will be the increasing importance of demand response, demand-side management and renewable energy, said Bradley.

Analyst Ring concurs. The way you purchase electricity now is not overly involving technology. Five years from now, it could heavily involve technology, he said. Everyone is more interested in energy management, energy efficiency. …To do that you have to measure the electricity to quantify it in real-time in order to change how you use it in response to pricing.

In other words, smart metering. Utilities are offering some of these services at a rudimentary level. But the government is pushing them to step up their game by allocating $3.4 billion in stimulus funds from the American Recovery and Reinvestment Act of 2009 to develop a smart grid technologies that automate and digitize electrical power management in an effort cut costs and conserve energy. Incidentally, telcos are keen to participate in developing this infrastructure and many already are forging partnerships to do so.

Ultimately, the collective attention of the nations brightest minds on the energy question suggests a future with many potential undiscovered opportunities for sales channels to profit should they choose to plug in.

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