Energy Supply Management Services in a Post-Enron World

Art Malatzky | Oct 13, 2002

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Industrial and commercial energy users who are looking to outsource energy procurement are finding a changed landscape for services following the demise of Enron and the exit of several other large players from the field of energy service providers. In addition to Enron, which declared bankruptcy in December 2001, others such as Duke Energy, Dominion Resources, Aquila and more have elected to focus on core energy businesses and leave the service aspect to others. The changes have left a number of industrial and commercial customers searching for new service providers, with fewer such companies from which to choose.

Medium and large industrials and commercials, particularly those with energy bills exceeding $5 million per year over multiple locations across a number of states, have faced a dilemma for years – whether to build expertise in-house or outsource all or part of their energy procurement program. With the increased complexity brought about by deregulation, the increased price volatility of recent years, and the increased knowledge and focus required to effectively manage energy procurement, many companies chose to outsource all or part of their purchasing efforts. Large energy supply companies, seeking to capitalize on this demand for services, entered the market to serve this need only to find that providing energy services is far different than simply providing the commodity. Whereas providing the commodity typically involved bulk transactions involving little day-to-day customer contact, with little need for an in-depth understanding of the customer’s individual needs, the provision of energy services is the exact opposite. Effective customer care requires regular contact with multiple locations, and an in-depth partnering relationship with the customer. Effective relationships require having a customer focus, a willingness to devote the time, people and effort required, and an understanding that quality, not quantity, is the key to long term success. Large energy supply companies found this niche to be more of a problem than they could justify by the returns, and have pretty much decided to leave the services field to others.

With the exit of so many large players, energy procurement service providers now tend to be smaller, independent companies, which can focus more closely on building partnerships with customers and on serving their individual needs. While some large, integrated, energy supply companies such as Sempra, Alliant and TXU continue to provide services, the market appears to be moving more and more toward independent service companies with a more narrow focus. Companies such as Pace Global Energy Services, based in Fairfax, VA, and Compass Energy Services in Richmond, VA are independent, and can provide an unbiased approach, free of any potential conflicts. They and others provide procurement, risk management and strategic planning services to commercial and industrial customers nationwide, managing the day to day energy demands of their customers. Companies such as these build working relationships with their clients and get involved to a far greater degree with their customers than most large integrated suppliers are willing or able do. Chris Ziegler, President of Compass Energy Services, in explaining the difference in approach, said “In the commercial and industrial markets you really have to get involved with your customers and get your hands dirty to succeed. The large supply companies just don’t seem willing to make that effort right now.”

The success of the independents is also driven by the feeling among many customers that the integrated supply companies may have a bias toward their own supply resources and, as a result, may not always be providing unbiased advice and counsel. That lingering doubt, now coupled with the reality of Enron and the questionable practices of others, contribute to the move of industrial and commercial customers toward truly independent supply managers.

Beyond doubts about bias, however, is also the uncertainty resulting from the financial health of many of the large energy supply and service companies. The news is filled with questions about the short and long term viability of various energy companies such as Williams and Dynegy, and customers have valid concerns as to whether a number of large energy companies will be able to perform over the life of any contract they sign. Commercial and industrial customers in search of energy services who have those concerns are turning to niche players – independents – who are committed to the service end of the business.

In this new age of post-Enron uncertainty, what should a customer in need of supply management assistance be looking for? First and foremost is expertise. The supply management company must have the people and the experience to more than adequately serve your needs. They must be managing a significant number of facilities nationwide so that they have a wide enough range of knowledge about energy issues across multiple states and multiple regulatory jurisdictions. They should have people with a broad range of experience, including significant energy procurement for commercial and industrial companies. And they should have specific people with specific backgrounds that fit your needs dedicated to your account. Second, the company must be unbiased in its approach to energy procurement. If affiliated with a large energy supplier, their contract must stipulate their independence, and they must be able to demonstrate clearly and verifiably how they maintain their independence. If they are independent, they must deal with a large enough supplier base so as not to favor a select few. They must be willing to open their bid process for review in the event of any questions. Finally, the company must be dedicated to customer service. They must provide a range of references and encourage contact with them prior to contract. Ask good questions and insist on good answers about how your company, specifically, will be served.

The energy industry is in a major state of flux right now, and the changes brought about by the events of late 2001 and 2002 are making it more critical than ever that industrial and commercial customers obtain the help they need in purchasing energy at fair prices.

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