Introduction Inconsistent regulations across states and lack of standards for independent energy transactions have created significant challenges and inefficiencies for the key participants to those transactions. But the shift that has already affected the way we procure other business products and services is now driving energy e-commerce. Energy consumers and energy suppliers are benefiting significantly from existing and emerging Internet commerce applications. This white paper discusses the fundamental challenges facing energy buyers and sellers in the traditional energy economy and describes emerging Internet technology solutions that provide vital benefits to both energy buyers and sellers in commercial and industrial markets. Levels of Energy Transactions There are three primary levels of business being transacted in competitive energy markets, some via the Internet, and some still using traditional methods. Wholesale On the wholesale level, trader-to-trader activity takes place to build a portfolio or the position of energy traders in the market. 1.3 trillion dollars of energy is transacted in the wholesale arena yearly. It is a crowded market with many traders and electronic trading platforms, all fighting for market share. Residential At the residential level, there are a number of businesses offering combined telephone, Internet, cable, and other services. The largest impediment is the rate at which deregulation is occurring and the amount residential customers are saving. Market research has found that savings in some geographies from switching providers could amount to as little as $3 per year. From the residential customer’s perspective, it doesn’t make sense to switch unless the savings are significantly more substantial. The motivation simply isn’t there. The deregulated residential market may work when a customer wants to purchase all the aforementioned services in a bundled product offering. For those who can crack it, the residential market is sizeable and has margins larger than any other.

Facts and Figures Compelling Results Suppliers active on the Enermetrix.com Exchange realize lower cost of sales than other suppliers utilizing traditional techniques. While the traditional cost of sales for suppliers is 7 to 10 percent, the Exchange can reduce this cost component to 2 percent. According to a 1998 independent study by Hamilton Consultants, New York Gas buyers using the Enermetrix.com Exchange, who were switching from utility default service to a third-party supplier, reduced their energy costs by 9.7 percent on their first transaction and 19.2 percent on their second transaction. Consumers switching from an RFP-based, third-party energy supplier to a supplier on the Enermetrix.com Exchange reduced their costs by 6.1 percent on the first transaction and 11.9 percent on the second transaction. Cost reductions for second transactions are higher for both new and experienced consumers, because it is during the second transaction that customers realize the full benefits of the electronic commerce procurement process. Preliminary results in other states in the Northeast have yielded reductions of as high as 30 percent.

Commercial and Industrial

Another level is the commercial and industrial (C&I), or retail
energy marketplace, where energy suppliers, selling energy from
their portfolio, need to reach commercial and industrial customers.
There are many commercial and industrial customers looking at e-procurement
because of the savings and efficiency. In this market today, an
Internet exchange can match energy buyers and sellers, acting as
a vendor-neutral marketplace that results in the best prices and
efficient processes for buyers.

For the remainder of this white paper we will be discussing transactions
in the C&I energy marketplace.

Traditional Energy Buying and Selling

Deregulation of the energy industry has fundamentally changed the
industry’s economic model from vertically integrated to free market.
In the past, the vertically integrated utility managed the supply,
transmission, and distribution of energy, as well as performed all
other aspects of customer service. Under the free market model,
supply is sold into a wholesale trading environment. Entities that
participate in the wholesale trading environment then resell their
traded positions in the retail marketplace subject to the rules
of the local distribution company and the seller’s contract. The
seller executing the independent energy transaction is typically
an energy marketer.

The proliferation of independent energy transactions has created
significant challenges and inefficiencies for buyers, sellers, and
utility distribution companies and has led the way for a paradigm
shift in the industry to online energy transactions.

The Traditional Model

The challenges facing buyers and sellers using traditional methods
are many. Energy commodities are volatile, and prices of energy
and ownership positions on energy commodities change frequently
while traditional energy procurement methods and energy sales cycles
are static, measured in weeks or months. There are many players
in the market and deal parameters on both the sell and the buy sides
are inconsistent. There are hundreds of sellers selling a financial
instrument to millions of buyers. There are serious ramifications
for both parties in executing transactions in this unpredictable
environment.

The Buyer

For energy buyers, the deregulation of the energy industry is an
important long-term, competitive issue. Energy costs typically fall
into the top three to five operating costs for a business. An opportunity
to reduce energy costs is an opportunity to reduce the per unit
production/operating costs of a business’s goods and services. Businesses
are competing in an increasingly global competitive economy and
simply cannot afford to produce goods and services at costs that
are even marginally higher than their competition, especially when
alternatives exist.

Bottom-line driven organizations switch suppliers of any product
for minimal savings as long as such savings out weigh any switching
costs and risks. Although the choices available in retail energy
allow buyers the opportunity to reduce costs, very few buyers have
been able to optimize savings in the new environment. Some have
actually increased their energy costs, increased their financial
risk, and increased administrative management costs. This places
those energy buyers at a competitive disadvantage. The savings won’t
come into effect until there is an efficient process that matches
buyers of the commodity and services with the optimum seller(s).

The Seller

Energy suppliers are entities that span the spectrum from organizations
with 5,000 traders and billions of dollars in physical assets to
trading rooms with five people and no physical asset ownership.
Energy commodity traders that resell their positions to the energy-consuming
marketplace are experiencing significant sales and marketing overhead
and inefficient transaction processing. Direct energy/commodity
salespeople must collect energy consumption data from buyers, forward
that information to their pricing desk, retrieve the offer, and
present the offer to the buyer. Because no commodity trader ever
consistently outperforms every other commodity trader, the salesperson
is at the mercy of market volatility and his or her trading desk’s
performance at the time of the transaction. As a result, the average
solicitation results in a less than 10 percent closure rate. These
inefficiencies and resultant high overhead create cost burdens for
suppliers, including the opportunity to only bid on business, because
even unsophisticated customers check two or three prices; the disclosure
of positions to numerous non-buying entities; and accounts with
consumers who must suffer the high overhead cost of doing business
with that supplier.

These challenges continue to add millions in additional annual
operating costs for energy buyers and sellers. Existing technology
and e-solutions can overcome these challenges.

The E-Commerce Solution

Energy is becoming one of the biggest sectors of the booming e-commerce
marketplace. According to Forrester Research, utilities are the
third-largest industry in terms of total potential online business
trade, right alongside banking and financial services.

Energy is a commodity whose quality cannot be distinguished from
one electron to another. One supplier cannot offer a higher quality
product than the next. However, the Internet offers advantages that
allow suppliers to differentiate themselves by offering energy to
more customers at lower costs with an easier transaction process.
Energy buyers see savings in time and money.

The Internet provides the platform to move the industry a step
further, offering energy buyers and suppliers efficiencies of scale,
easier processes, consistency in terms and conditions, access to
vital information, historical data, credit information and more-
all leading to savings.

Advantages of E-Business

The overhead and operating costs associated with reaching new markets
is one of the largest costs energy suppliers experience. One of
the greatest efficiencies of using the Internet to transact energy
business is that it drives down these costs and the cost of transactions,
which in turn results in lower costs to energy buyers and a better
opportunity to win business. The direct sales and marketing of a
commodity and the procurement of energy commodities with paper buying
procedures are a losing value proposition. In the past, sellers
have had to hire huge direct sales forces, arm them with contracts,
and send them out to conduct business door-to-door or over the phone.
Suppliers have since retracted from, or significantly reduced, their
spending on this sales strategy because customer acquisition costs
were substantial, and they simply were not making money.

For energy buyers, the saving and process improvements from using
an online exchange are significant. When a customer buys the commodity
from the supplier through an online exchange, the customer receives
more offers, increasing the chance for savings, and they are able
to take advantage of market volatility instead of it working against
them. When the market price matches the buying price and criteria
of the consumer, a transaction can occur.

In general, the advantages of business-to-business e-commerce are
weighted more toward the buyer than the seller. In the past, a seller
of anything from plastics to chemicals to energy had more knowledge
than the buyer. An online exchange puts the power of information
into the hands of the buyer. The buyer has the control to list the
terms, conditions, and criteria by which they want to procure energy
and force an “apples to apples” evaluation. Sellers then make offers
based on that criteria.

Internet Saves Time and Resources

Doing business over the Internet saves suppliers money and resources.
Labor efforts are narrowed substantially. By doing business online
through a third party, energy suppliers gain access to customers
without having to pay a direct sales force, reducing and even eliminating
customer acquisition costs.

The Internet can also be used to complement the traditional sales
force of a utility or energy service company. Exchanges provide
the tool to handle the complex details required to procure energy
so that companies can concentrate on core competencies. They may
also use the opportunity to sell a new service to existing clients.

Web-Based Solutions for Buyers and Sellers: Online Energy Transactions

An Internet exchange takes buying and selling energy to the next level,
eliminating costly and time-consuming processes such as paper RFPs,
streamlining the transaction process, and facilitating the sharing
of data with enterprise systems. Energy buyers and sellers realize
immediate savings when they have the opportunity to participate in
an online exchange.

Standardized Purchasing Procedures

The online energy transaction is a real-time post-and-bid environment
where transactions occur daily to match the needs of commercial
and industrial energy buyers and energy sellers. The exchange assures
that buyers’ energy orders reach the largest possible group of suppliers
over the longest possible time period, subsequently resulting in
lower prices than would be available through more traditional energy
procurement approaches.

An exchange fully automates the procurement process, making energy
purchasing easier, and reducing the time buyers need to spend on
the energy procurement function. In today’s deregulated market,
energy buyers are bombarded with often confusing information from
numerous energy suppliers, many of which the buyer knows nothing
about.

An Internet exchange eliminates the time-consuming and resource-draining
traditional procurement method, while ensuring customers get the
best possible price for their energy needs. An Internet exchange
allows for the standardization of terms and contracts under which
suppliers and buyers operate. With traditional methods, terms and
conditions could be drastically different, making the best offer
difficult to determine. Now buyers can compare “apples to apples”
to determine whether they are getting the best price. Internet-based
purchasing systems reduce the confusion associated with non-standardized
contracts. A rules-based exchange facilitates conformity of supplier
standards, as well as predictable results for buyers.

Overcoming Market Challenges

Businesses seeking to overcome the challenges created by market
changes should consider conducting business over the Internet. Because
of its ever-increasing size, accessibility, speed and functionality,
the Internet is the most efficient and powerful environment in which
to interact with a wide range of customers. The impact that the
Internet will have on virtually every aspect of every business cannot
be overstated.

Business environments are being driven by new business rules and
processes. Focusing time and effort on improving old value chains
is not enough. An example of this would be to create electronic
version of a paper RFP. Although this is better than the mass mailing
of RFPs, it does not fix the problem of why RFPs are not optimal
for commodity transactions. Those who seek to automate old value
chains will likely be rapidly surpassed by a competitor’s focus
on creating new value chains in technology and process improvement.

Old and inefficient value chains need to be replaced. Every step
of every value chain requires or creates some information. New processes
involve new data sets and information technology is a key differentiator
in executing better than the competition. Decide which new pieces
of information are required in a value chain, what process needs
to be executed, and which old process is no longer needed. Automate
the new model – not the old one.

Competitive energy markets are driven by transactions (exchanges
of product, service, and payment) that occur between buyers, sellers,
and utilities. Internet-based models that seek to optimize the new
transaction environment must process and manage transactions as
opposed to sharing information in bulletin board environments under
subscription or advertising-based models.

The transaction platform that will be most widely adopted by participants
will not only be highly efficient, but it will also provide the
parties with high value-adding, energy-related knowledge and services.

Challenges Facing Energy E-Commerce

E-commerce is redefining business processes, but there are other
challenges that need to be overcome.

E-commerce energy platforms can be difficult to get started. An
equilibrium of buyers and sellers is needed to induce a competitive
market environment. Without a balance of both, the potential exists
for one of the parties not to realize value and leave the platform.

Domain expertise is critical. It is far easier for a company with
energy expertise to deploy a platform than it is for a company with
a platform to develop the expertise in energy procurement.

Overcoming E-Commerce Challenges

The electronic links to local energy suppliers, along with information
services available through today’s energy management service firms,
greatly increase efficiencies by cutting processing and payment
times. Web-based software allows commercial and industrial users
to access and analyze energy-use data and associated costs on a
real-time, hour-by-hour basis. Timely information on load profiles,
bill summaries, exception reports, and weather means users have
an increased level of control over one or more commercial and industrial
facilities.

A study by Andersen Consulting in mid-1999 noted that the websites
of most utilities are informational, and not transactional in nature,
but utilities facing more competitive marketplaces are developing
Web strategies. The level of development of any given utility’s
website is an indication of how serious that company is about doing
business online. According to a Chartwell survey, about half of
U.S. utility customers will have access to services like electronic
bill payment and online sign-up for service by 2001.

Energy E-Commerce Success Story

The Enermetrix.com Exchange deploys a vendor-neutral approach wherein
energy buyers are organized for real-time, competitive, post-and-bid
commodity procurement. The system is used to analyze historical
energy costs and market conditions and to execute smart energy procurement
transactions for consumers. A bid is accepted only after it is determined
that the transaction is favorable to the buyer. The consumer is
relieved of the challenge and wasted time and effort in dealing
with multiple sales organizations. The energy procurement process
is reduced to a computer transaction that yields compelling results.

The Future of Energy E-Commerce

The Internet is quickly becoming a distribution highway for business
transactions. What will the future of online energy business look
like?

We will see many energy sites announced in the coming months, all
in search of being the winner in their category. Most will fail,
some will be acquired, and in the end the companies that succeed
will have gained liquidity by providing efficient processes and
value added services to their users. There are many more considerations
involved, such as getting load profiles from the utility; obtaining
real-time, smart metering; arranging for utility bill credits; third-party
verification of changes in energy provider to assure that slamming
was not involved; and the amount of time it might take for the utility
to transfer customer information.

When everything shakes out, three companies will own 70 percent
of the market – one company from the wholesale side, one serving
the residential market, and one for the commercial and industrial
sector. The vertical energy market is one that will not have enough
room for multiple solutions that each capture 10 to 15 percent of
the market. It is more efficient and makes more sense to view the
energy industry like the paradigm of the computer network. The value
of the network increases by the number of nodes connected to the
network, squared. Once an exchange starts to gain ground and becomes
the industry standard, it will have the advantage over the competition
and other companies contemplating entering the market.