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SCIENTECH IssueAlert, October 11, 2000
Online Niche Players Capitalize on Natural-Gas Shortage, Bypass Utilities
By: Will McNamara, Director, Electric Industry Analysis
===============================================================

SmartEnergy, a Con Edison competitor, is offering New York and Westchester
consumers price protection with the ability to lock-in today's natural-gas
rates for a period of one year. In a separate announcement, myHomeKey.com
announced that it will offer energy savings packages designed to reduce
energy consumption and lower rates for customers in the face of rising
energy costs.

ANALYSIS: As reports continue to accumulate that a natural-gas shortage
will send prices skyrocketing this winter (see my IssueAlert from Oct.
9 on the subject), the most common response from electric utilities has
been to warn their customers that they will see higher rates over the next
few months. I can point to several examples. Minneapolis-based Xcel Energy
announced a few weeks back that its natural-gas customers could face heating
bills that are 35 to 50 percent higher than their bills last winter. Dominion
East Ohio has warned its residential customers that they can expect to
pay about $70 more per month for natural gas from November through January.
And the warnings are coming not only in the Midwest and Northeast*where
low winter temperatures drive up energy bills every year*but in the West
as well. In California, PG&E warns that its customers can expect to see
their winter bills increase by about $25, to an average bill of $75 (compared
to $50 last winter). These are just a few examples of utility companies
across the United States playing damage control, trying to minimize the
customer outrage when customers suddenly see their bills double or triple.

Along with their warnings, these utilities give reasons*perhaps seen as
excuses by the public*for the rising cost of energy. There is a shortage
of natural gas across the country, brought about by a drop-off in production.
It was an unusually hot summer, which depleted supplies for energy. Demand
in general has grown to surprising levels.

Meanwhile, start-up online companies that many of us have not even heard
of are using the rise in natural-gas prices as a golden marketing opportunity,
and attempting to take business away from traditional utility companies.
SmartEnergy is a perfect example. In existence just since April 1999,
SmartEnergy offers electricity and natural gas to residential and small
business customers. According to EnergyGuide.com, for an average home in
New York City, SmartEnergy's natural-gas rates typically have run about
$189 per month, compared Con Edison's $140. Under its new promotion, 
SmartEnergy's
plan for natural gas guarantees that New York City and Westchester gas
customers who sign on with their service now will be locked into current
natural-gas rates for the next 12 months. This promotion comes at an ideal
time for those who opt to switch, as natural-gas prices should begin their
projected sharp increase over the next few weeks. Based on recent forecasts,
SmartEnergy is claiming that Con Edison customers who make the switch can
expect to save up to 40 percent on their energy through the winter months.
The start-up company also is offering 500 United Airlines Mileage Plus
Reward Miles credit and $25 sign-up bonus to entice customers away from
Con Edison.

Based on the available information about SmartEnergy, it is unclear how
the online provider will be able to guarantee the 40-percent reduction
in natural-gas rates. I would presume that SmartEnergy has entered into
some hedging strategies to minimize its risk in the event that natural-gas
prices remain high into the next year. Any prudent provider would have
a hedging strategy to protect itself, and locking itself into 12-month
contracts without its own contracts for obtaining natural gas at spot market
prices would certainly raise questions about the future of SmartEnergy.
In addition, SmartEnergy will have difficulty in recruiting customers away
from Con Edison and other utility providers. Many customers still have
reservations about signing on with an online company that they do not know.
There will be some customers who jump at the chance to lock in current
rates for 12 months, but many others will stick with the company that they
know even if their rates increase.

I did a quick search around Con Edison's Website to see if it might be
offering an alternative offer to retain its customers, but could find nothing
that the utility is doing to specifically address the projected increase
in natural-gas prices this winter. Con Edison does offer a level billing
program in which customers receive a consistent bill amount each month,
alleviating fluctuation in their bills. Yet, as a utility company, Con
Edison has a standard offer of service that regulators closely monitor.
It is possible that Con Edison could request changes to the standard offer
service, which would likely need to be approved by the New York Public
Service Commission. The PSC could agree, or determine that the competitive
offers by providers such as Smart Energy are a positive result of 
deregulation.
In addition, Con Edison could be hampered by fuel contracts that may not
allow it much flexibility with regard to lowering its rates. Overall, Con
Edison probably does not have a lot of flexibility regarding the rates
it can charge customers, thereby making this offer from SmartEnergy difficult
to beat.

The other online start-up taking advantage of natural-gas prices is 
myHomeKey.com,
which made a recent promise to reduce home heating, oil, natural-gas, and
electricity rates. The marketing route that this online start-up is taking
is energy efficiency*teaching households how to more effectively use their
energy and, hopefully, save money as a result. Energy is not the only service
of the myHomeKey.com; it is also involved in home maintenance and repair,
appliances, home monitoring and moving services. Yet, I learned that 
myHomeKey.com
just recently launched co-branded sites with KeySpan Corp. and TXU Energy
Services to "provide millions of local customers" with the ability to check
energy efficiency in their homes.

What's important to note about these two developments is the advantage
that online energy providers have over traditional utilities. As utilities
try to disengage themselves from regulatory-bound rate structures, online
companies have the freedom and flexibility to offer attractive products
and billing options to customers in deregulated states. There are the online
providers that we know about, such as Utility.com and Essential.com. 
Utility.com
has not yet started to sell natural gas, although it has established a
partnership with Sempra Energy in which Sempra Energy Trading will sell
natural gas in deregulated markets via the Utility.com Web site. Utility.com
plans to start selling natural gas by the end of this year, but it has
not developed any marketing campaign in this regard. Essential.com continues
to open up its service across the Mid-Atlantic and Northeast regions. Yet,
on a weekly basis, new start-up online energy providers surface, eager
to grab their own share of the retail market.

I also wonder where The New Power Company is in all of this rush to capitalize
on the marketing opportunities surrounding the rise in natural-gas prices.
It would seem like a natural for TNPC to make a big splash with its own
marketing efforts, as it already promises lower prices for both natural
gas and electricity. In any event, as the natural-gas shortage may become
a public relations nightmare for utility companies across the country,
it conversely could work to the advantage of the more agile online providers
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Sincerely,

Will McNamara
Director, Electric Industry Analysis
wmcnamara@scientech.com
===============================================================
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