Power Struggle

Kenneth L. Lay, chairman and chief executive officer of Enron Corporation, says deregulation of the electric markets will save $60 to 80 billion of the $200 billion consumers pay each year for electricity. “It’s equivalent to the largest tax cut in history,” says Lay, who built Houston-based Enron into a $20-billion-a-year corporation by taking advantage of the deregulation of natural gas markets. Now he has turned his sights on electricity, a market that has seen six years of growth with no letup in sight.

With electric markets to businesses and homeowners opening up to new competition, deregulation of the electric industry is the “sleeping giant” of U.S. energy markets, says Lay.

Lay thinks the lessons learned from deregulation in the gas market apply to the electric market as well. “Consumers want lower prices,” he says. “They want better products, and they want the ability to choose their suppliers.”

While electric power has been a commodity for a century, buyers almost always bought from one supplier at a regulated price. Now in many markets, multiple companies can compete for a customer’s business at any price. And the company doesn’t have to be an electric producer, but could be a broker. Enter the sales edge.

How many sellers will there be? First, nearly 200 electric utilities can now sell into each other’s markets. Second, 300 to 400 power marketers, firms that do not produce electricity but just buy and sell it, are playing a role.

Third, consider other energy companies. Many big electric customers are not really buying electricity, but energy or power which might come from gas or oil as well, at a price. So oil and gas companies can compete for traditional electric customers, and electric companies can try to snag oil and gas consumers.

Anybody else? Sure. Since you can buy power anywhere, what counts is the ability to deliver it into homes and offices. Any firm with rights of way and the right type of lines into offices or homes might compete as an electric company. Telecomm firms have some nice distribution grids.

In other words, this is the kind of wide open market ready made for aggressive sales organizations. And it will require many different types of selling.

Some power sales are purely short-term trades at “spot” prices: so many megawatt hours for delivery, say, two hours from now. This market works a lot like other commodity markets – soybeans or stock, for instance. It is fast and furious and it runs around the clock. Up-to-the-minute knowledge of the market and attention to the latest trends pay off for the aggressive, well-managed sales organization.

Other power sales are longer term, much more complex and require deeper selling skills. For instance, a major manufacturer wants a secure and affordable power supply for its new plant. Should it buy gas, oil or electric power? From which supplier? At what price and escalation rate for the next 20 years? Should it hedge the risk that prices will increase with another contract?

A long-term power marketer has to know much more than this week’s electric prices to sell effectively to such a customer.

Twenty-four hours a day
Andy Gelbaugh traded kilowatts for 15 months with Sonat. He rotated shifts constantly. During the day he managed the next day’s schedule of energy needs. At night he did his record keeping. The rest of the time he did forward trading on the hedging desk. “It’s a 24-hour-a-day business,” says Gelbaugh, who is now a senior power analyst with C.C. Pace Resources.

In an emergency, prices can peak as high as $3.50 per kilowatt-hour, nearly 100 times the normal price. “Prices can go through the roof,” Gelbaugh observes. “There is no leeway in an industry where supply is finite and demand is instantaneous. You sell purely on location, time and price.”

Electric spot prices are quoted for tomorrow or on a next-hour basis. About 30 to 40 brokers have also been creating a forward market, setting prices for delivery over the next 12 to 18 months.

This spot market technically began in 1992-93. “The big ramp up came in 1996,” Gelbaugh remembers. “Now it keeps getting bigger. It seems to grow exponentially in total volume traded.” However, the number of power traders may taper off soon. “Market volatility could drive a few firms out,” Gelbaugh says. “It’s cutthroat.”

What kind of salespeople can survive in this market? “It doesn’t hurt to know how the electric power system works,” Gelbaugh says. The market began with electric utility veterans who understood the physical flows of electric power across the transmission grid. But that technical knowledge became less important as clear pricing patterns developed. “Now it’s becoming like a financially traded commodity,” Gelbaugh says. “It draws people from other trading industries. The brokers go after traders who have the ability to pick up the business quickly.”

Some of the most effective marketers are restructured divisions of the old electric monopolies. A few utilities, like Southern Energy, anticipated the free market and learned to prosper. For these firms, “the old utility mentality has gone by the way,” Gelbaugh observes. “They got smart and learned fast, very fast.”

Deregulating retail
Deregulation has changed the selling patterns for electricity under much longer-term contracts as well.

“Like any market, we think of it in different segments,” says Steve Voorhees, executive vice president of Sonat Power Marketing. “First, there are the large wholesale customers, like utilities, that generate their own power. Second, there are large end users, like industrial firms. Third, there is the mass consumer market.”

Competition in mass electricity markets began in the UK. Norway and Sweden have joined the UK. “Australia and some South American countries are also doing it,” Andy Gelbaugh notes.

In the United States, New York and Pennsylvania are furthest along in allowing competition for individual households. New York is in the process of deregulating its utility giant, Consolidated Edison. Pennsylvania has completed a pilot program. Illinois is perhaps a year from full deregulation. Maryland is close to it. “Deregulation should appeal to all the Northeast states with high electric rates,” Gelbaugh notes.

“There is no one-on-one sales relationship in the mass consumer market,” Steve Voorhees says. “It’s all advertising and promotion.”

Longer, deeper sales
But complex sales skills are useful in the first two of Voorhees’s segments: utilities and large end users of electricity. These users like to buy their electricity long term. “Selling to them is like a lot of sales processes,” Voorhees says. “It’s fairly sophisticated and requires specific knowledge of your customers and the services available.” This is not individual selling, however. “One person can’t do it all,” he adds. “It’s more a relationship. A lot of listening has to happen.”

Voorhees calls these long-term sales originations to distinguish them from trading on the spot market. Sonat is among the top 30 spot traders in the U.S., but among the top five in originating long-term power sales in its target markets. While sales among electric utilities are mostly deregulated, large end users are still customers of their local public utilities, so sales to these markets still have a number of regulatory restraints.

Like Enron, Sonat sells not just electric power, but gas and oil. Voorhees’s group also offers consulting services and engineering assistance in a joint venture with Stone & Webster aimed at large industrial customers.

Sonat specializes in selling to large industrial customers. Selling electricity to industrial plants is even more complex than selling natural gas. “Large industrial plants use electric power in complicated ways,” Voorhees notes. “They use electric to generate steam; they have major demands for electricity in their production processes; and they may want to put a generator on site. You need to understand the plant, what its processes are, what the alternate fuel supplies are and the economics.”

A long-term power contract will usually be indexed to a spot market indicator, such as quotations on the New York Mercantile Exchange. Sonat can arrange a parallel contract, or “hedge,” to protect the customer against unwanted price risk.

Voorhees believes some customers will shift toward these longer-term contracts or hedges, and away from too much reliance on spot markets. In late June of 1998, spot prices of electricity spiked briefly at $7.50 per kilowatt-hour, nearly 200 times their average level. “Lots of utilities will be seeking longer-term contracts to guard against the risk of prices getting out of hand,” he says.

Voorhees is confident that the nation’s power markets will stay hungry. “Demand is still growing, and the utilities’ capacity has lagged because they are reluctant to invest in new capacity.”

Sonat looks for salespeople with “basic sales skills,” Voorhees says. “It’s not in-your-face selling, it’s more of a partnership.” Sonat’s sales teams need technical knowledge of both electricity and their customers’ needs. They also need “structuring skills,” Voorhees says. “We want people who like to solve puzzles. You have to take all the unlimited number of facts, pick out the relevant ones and structure a proposal that both the customer and your own company will buy.” Structuring is not necessarily a rare skill, he acknowledges, “But it is a very valuable one.”

Changing cultures
Utility companies like Sonat and Enron have reinvented themselves into vigorous competitors. Most public utilities have not.

Peter Michie, a former sales executive with IBM and Xerox, now leads Performax, which is helping more conventional power firms change their selling cultures. “Traditionally, utilities have been operations-driven and engineering-driven,” Michie says. “I think many sales execs still don’t know they will have to compete.”

In fact, even the word sales may be unfamiliar. “Their marketing departments are more like social services; they give to charities,” Michie says. “Their so-called sales departments are really customer service organizations. They give away services. They need to segment their markets and learn to sell value-added services.”

Michie tells his utility clients they need to change the entire culture of their sales and marketing unit before they hire new salespeople. “Without the culture change, even if you get top Xerox or IBM salespeople, they won’t stay. They will just cut each other’s throats.”

A sales culture requires accountability above all. “They must have consequences for failure and rewards for success. They need to measure productivity. They have got to get away from reacting like customer service reps and be proactive, to create opportunities.”

Effective power selling does not necessarily require advanced technical degrees, in Michie’s view. “From my experience in high-tech industries, I learned that good salespeople can find a way to sell something, even if they don’t understand it all.” Performax helps link sales functions with the utility’s systems and engineering staff to provide reps with technical support before each sale.

Performax has worked extensively for Canadian hydroelectric companies. These are huge enterprises with lots of inexpensive electricity to sell to a power-hungry market in the Northeast, Midwest and Pacific Coast of the U.S. But they must rebuild the selling culture from the ground up. Michie outlines the basic steps:First, revise the company’s entire mission statement. Proactive selling will not work unless the entire firm is committed to competition.

Second, define the ideal customer-focus culture and plan how to get there.

Third, build the organization, job models, sales processes and management systems necessary to make the culture work.

Fourth, retrain your people to work within the new systems.

Fifth, and only after disciplined processes are already operating, automate where you can save time or improve results.

Sixth, develop the culture by enhancing your sales skills. Be ready to part with the people who cannot work in the new system.

Michie knows competitive selling is a real stretch from the utilities’ old customer service culture. So he puts the emphasis on processes and disciplines. His background as a pilot in the Royal Air Force taught him to respect procedure, he says. And utility engineers can understand processes and discipline much better than “Culture.”