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Electric Avenues

Telecommunications reform breaks down old barriers and creates new opportunities.

If you own a small business in California, chances are you've already begun to benefit from electricity industry deregulation, which officially began in the state on March 31. California, which previously had electricity costs 30 percent to 40 percent higher than the rest of the nation, now gives consumers the ability to shop around for a power service provider, band together with other consumers for increased buying power, or, for residential customers, stay with the same electricity provider and receive a 10 percent discount on their bills.

As more states jump on the deregulation bandwagon and open their markets to competition, opportunities to market power and related services will abound, says Ken Maize, editor of Electricity Daily, an online journal for the electricity industry. The potential U.S. retail market is more than $220 billion per year, says Maize.

So what does it take to break into the wholesale power market? It helps to have a consumer-friendly selling proposition, as did Mike Peevey, founder and CEO of New Energy Ventures, a Los Angeles electricity retailer. Peevey and his partner, Mike Burke, started New Energy Ventures (NEV) in 1995.

As an "aggregator"--a power marketer that services the combined electrical needs of many customers--NEV was in a position to get deals on electricity on the California Public Utilities Commission's Power Exchange, a virtual auction house where investor-owned utility companies compete to sell electricity to power marketers like NEV. The bill that provided for the industry's deregulation stipulated a three-and-a-half-year rate freeze for businesses that use public utilities. Currently, NEV easily undercuts the prices offered by public utility companies. NEV may capture only a small percentage of the difference between the public utility price and the Power Exchange price, but without the high overhead of maintaining or building transmission lines or power-generation facilities, its profit margin becomes significant. NEV estimates it will do nearly $1 billion in sales this year.

Still, says Maize, making money as an aggregator in this brave new marketplace is harder than it sounds. "It's not going to be like selling Avon or Amway," he says. "State utility commissions will continue to regulate the industry, and they'll require you to know what you're doing, to have a supply of electricity and to have deep enough pockets to finance the venture."

Power marketing isn't the only way to make money from electricity deregulation. Billing, meter-reading, energy consumption analysis and other services usually handled by public utilities are also up for grabs.

Although deregulation in California seems to be working--at least in the commercial and industrial power markets--Maize believes nationwide electric power deregulation won't happen any time soon. "There was a time when it looked as if electrical deregulation was going to happen at the federal level, and the market was really going to open up," says Maize. "That has not come to pass. So now you have a piecemeal approach, usually in states where electricity prices are high and the existing system doesn't work as well as it should."

Case in point: To date, 12 states--among them Connecticut, Nevada and Virginia--have enacted restructuring legislation.

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This article was originally published in the September 1998 print edition of Entrepreneur with the headline: Electric Avenues.

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