"Significant Others": Influence of Third-Party Consultants Grows as Energy Prices Rise

An RKS Energy Industry White Paper

Facing volatile oil and natural gas prices, U.S. businesses tell us they are looking for help to contain their energy costs so they can deliver on their aspirations for growth, stakeholder returns, and regional expansion. But where can these companies turn for this assistance? From our soundings, it appears that American businesses are increasingly drawing on third party energy consultants –not the local utility or their traditional energy supplier-- for outsourced energy products, service, and advice. Local utilities –many reducing costs and streamlining operations in a return to "back to basics" strategies–run the risk of being pushed into the background by the third party energy consultants. The result could be a fundamental shift in the relationships between major business customers and their traditional utility or energy supplier –and a long-term threat to utility growth and revenue expectations.

Feeling the Pinch

Large, multi-site enterprises participating in RKS marketing research studies say their energy-related expenses are on the rise. In fact, these businesses report that the increases in natural gas costs are outstripping their monthly electricity bills. As a result, close to a third of the firms we sampled are trying to contain their energy expenses through such actions as shifting operations to off-peak hours, overhauling purchasing and contract terms, and, perhaps most importantly, retaining specialized consultants to review current contracts and shop around for the best deals.

Nearly half of these large businesses are participating in a formal conservation or demand-side management (DSM) program with their local energy provider, but their assessments indicate disappointment and frustration with the results to date. Many of these companies now feel empowered to take matters in their own hands, arranging their own gas purchases through spot markets and the major commodity exchanges. And when we dig deeper, we find that consultants are contributing to this element of empowerment.

The strategy of aggregation is increasingly at work, as companies in the same geographical region or primary industries (such as chemicals, refining, materials processing, military bases and university campuses) pool their buying power to procure commodity energy at a discount.

For some businesses, the upward curve in energy costs has forced even more Draconian measures, from eliminating shifts, closing or mothballing facilities, reassigning or reducing staff, to closing down and relocating to a lower-cost service territory –or even offshore.

And we see few signs that prices will return to lower historical levels. To the contrary: natural gas has become the fuel of choice for 90 percent of the nation's new power plants, plus the bulk of new residential and commercial construction. Domestic gas production is not keeping up with demand. China and India –two growing economies with burgeoning energy needs and strong currencies –are aggressively shopping for long-term supply agreements –and keeping prices high.

Although liquefied natural gas (LNG) is a growing option in global markets, the U.S. is lagging in developing the infrastructure to convert, store and deliver this resource; while debates continue about the safety, security, and environmental impacts of LNG terminals, other countries are already contracting for firm LNG deliveries.

Reflecting the present supply/demand imbalance, plus the growing presence of hedge fund investors, futures contracts remain on the high side, despite high natural gas volumes in storage. Even some of this supply remains in question after the 2004 storm season and the impact of Hurricane Ivan on drilling, transportation, and storage throughout the Southeastern U.S. As a result, 2005 shapes up as an expensive year, with soaring demand outstripping constrained supplies. Weather –from winter degree days to summer air conditioning loads –remains a wild card.

Enter "Significant Others"

Against this gloomy backdrop of supply uncertainty and rising costs, large business customers are increasingly turning to third party energy consultants for assistance. These large energy users also report they are reducing the ranks of suppliers and tightening internal processes so they can negotiate a better company-wide price for energy. The effect of these two trends could be to marginalize the role of the local utility to simply one of power delivery, eliminating the opportunity to expand the customer relationship through additional products, services, and enhancements.

 The drive to reduce the number of energy suppliers, together with diminishing utility resources devoted to the needs of large, multi-site customers, creates new opportunities for third parties: energy marketers, outsourced energy service companies, and facilities consultants. In fact, our own interviews and focus groups with National Accounts –the largest nationwide chains and franchises –indicate that the chains that have outsourced some of their energy management functions are more satisfied with the service they receive from their alternative suppliers.

The big chains fault utilities for instability in the form of frequent staff turnover, inadequate business knowledge and insufficient authority from their assigned utility account representatives. These businesses say utility account service compares poorly to the support they receive from third-party energy vendors.

 Large, multi-site businesses that are critical of utility-sponsored conservation and DSM programs say they want less in the way of "talk and helpful hints" and more in the form of hands-on support of their operations. Specifically, these customers want energy audits, manufacturing line process reviews, followed by specific recommendations for driving down their monthly energy bills. And if the local utility can't deliver, they're prepared to listen to new voices in order to obtain this information.

These responses from major American multi-site businesses, chains and franchises underscore a significant development in the energy industry –the emergence of the energy consultant as a credible new third party in the customer relationship. This realignment of roles represents a fundamental shift in the business customer relationship. Unimpressed by the returns from utility-sponsored energy conservation and DSM programs, larger business customers are now seeking an objective third party to review their contracts, shop around for better deals on price and terms, and serve as an unbiased sounding board on energy-related issues.

If this trend continues, third party energy consultants will increase their influence to become independent sources of additional services, environmental solutions, and energy efficiency initiatives. These intermediaries will remain in place –and likely grow in influence –until (or if) commodity prices stabilize or decline. If the consultants remain successful in creating value and reducing costs, these third parties will have established a clearly defined role on what was formerly the local utility's exclusive turf.

For the local utility, the net effect will be a diminution of its traditional role as a source of expertise –and, with it, the loss of a stream of potential product and service revenues. Our most recent round of RKS business customer research still finds a healthy level of support for the local utility. Large customers remain satisfied with the service at the local level, and say they are willing to work more closely with their utility to deal with rising energy costs and issues affecting the competitiveness of their businesses.

 

So U.S. businesses have issued an invitation: will utilities respond positively, by building on their current level of customer satisfaction and credibility to offer more in the way of energy consulting and cost-savings advice? Or are utilities content to yield much of their critical customer relationships to third party consultants? We intend to explore this situation further in the months ahead to see how the third party relationship grows, changes, or deepens.

the Authors:David J. Reichman, Chairman and Chief Executive Officer of RKS Research &Consulting, has more than 30 years of experience in designing, implementing, and interpreting marketing research and public opinion research programs for corporate, government, and association clients. Richard G. Claeys, RKS Vice President-West, has some 20 years' experience with energy, financial, and association communications programs.

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