Pilot Light

For many utilities, it doesn’t matter whether they consider themselves the dog, the hat or the race car: The monopoly game will soon be over.

As they accept the fact that new players will be competing for their customers, many are discovering the benefits of direct and database marketing.

“In days past, utilities considered bill inserts as direct marketing,” says Richard Rosen, president of Rosen/Brown Direct, Portland, OR. “Now they’re using mail, and to some extent print advertising.”

Rosen, who was an executive at Portland utility Pacific Power for 13 years, says in the past regulated utilities would try sell, say, a million of their rate-payers ancillary products such as heat exchange units to keep houses cool in summer and warm in winter, not taking into account the prospect’s income. If they had, the mailing would have likely been a more targeted 200,000 pieces.

Targeting will be more important as electric and gas companies become deregulated on a phased-in state-by-state basis, through pilot tests authorized by states as part of a mandate set up under the aegis of the Federal Energy Regulatory Commission (FERC).

In these tests, as many as 40 companies have been competing for the business of former gas and electricity rate-payers, usually via direct mail and telemarketing. To compete freely, many utilities have spun off unregulated energy services companies (ESCOs).

A good example of a database-conscious energy marketer is Mid-American Energy Services of Des Moines, IA, which has worked with Metromail for just under a year to profile customers and find out what value-added services they’d like.

The Mid-American Power utility-which operates in Iowa, Illinois, South Dakota and Nebraska-has been direct marketing home security systems and appliance warranties as separate services. Now it’s done through mailings and telemarketing, says Kevin Heisler, manager of consumer markets at Mid-American Energy Services, the ESCO formed in January. A pilot test for competitively marketing electricity begins at the end of the year. “We’re taking our first steps gently,” he says.

“As we prepare for deregulation, we’re getting information so we can gain an understanding of our customers,” says Heisler, who moved over to Mid-American from nearby Meredith Corp.

The date for when Mid-American can begin freely competing to market electricity and gas is up to the state legislature and no bill is currently pending, he notes.

Metromail consumer marketing executive Deb Kammer says her firm has been engaged in appending Mid-American’s file with demographic and psychographic overlays, to help predict consumer behavior for the company’s DM efforts.

Heisler says that database research can reveal some interesting findings, including the existence of hidden pockets of prospects for certain products. “You just don’t go after rich people for some services, as you might think,” he says. “It’s counter-intuitive.”

As phased-in deregulation continues, some energy marketers are meeting with a bit of resistance. For example, SelectEnergy, a spin-off of regulated utility Northeast Utilities, built up significant market share in New Hampshire and was looking forward to doing the same thing in Massachusetts in one of the first pilot tests in New England last year.

But now, the Berlin, CT-based company has decided not to go after residential customers in that state because the still regulated “transitional” price of 2.8 cents per kilowatt hour was too low to make it worthwhile for SelectEnergy to compete, says Peter Campbell, vice president at Barry Blau and Partners, SelectEnergy’s agency.

He notes that some big energy marketers pulled out, reportedly for the same reasons. As this was happening, he says, some Massachusetts consumer groups called for a repeal of utility deregulation.

For the moment SelectEnergy is focusing all its direct marketing efforts in the state on lead-generation print ads (in Nations’ Business magazine and Boston Business Journal) and mailings to promote energy management systems and to help build a level of trust. The energy marketer may rework its strategy after the first of the year when the “transitional” price set by the state legislature expires as further deregulation takes place.

One of the problems inherent in this process is that marketing electricity by itself-and especially to residential customers-isn’t the most lucrative enterprise under the sun, says Rosen.

“There’s probably more money to be made in selling energy to commercial or industrial accounts,” he claims. “But selling to residential customers is what they know best.”

That’s why many energy marketers are using value-added services when trying to market energy. One example is Con Edison Solutions, an energy service company spun off by Consolidated Edison in Greater New York, where a pilot test began this year.

In the spring, the White Plains, NY-based company sent out two mailings of about 100,000 pieces each to compiled lists supplied by Acxiom, says spokeswoman Salina LeBris. Con Edison Solutions was prohibited from mailing to customers of the Consolidated Edison utility. Responses to these mailings were running at about 2% up to June 1, when the pilot test began. LeBris feels the Con Ed Solutions mailings “were obviously better read” than bill stuffers from Con Ed announcing this pilot program, judging from the responses.

To reach business customers for this pilot, Con Edison Solutions used its sales force. Whether the company will use DM to reach business customers for the next pilot campaign (April 1999) is still anyone’s guess.

As with anything where’s there’s a boomtown mentality, some alleged fraud has managed to creep in. In May, Pennsylvania’s attorney general settled claims with at least one pilot test energy marketer, CNG Energy, a Pittsburgh gas provider, which allegedly falsely advertised it could save gas customers 10% off their monthly bills and supply electricity when it allegedly could not. The company settled the case and paid a $225,000 fine, but admitted no wrongdoing.

Craig Goodman, spokesman for the newly formed National Energy Marketing Association (NEMA) in Washington, DC asserts the deregulated energy industry “can’t afford to have slamming and cramming” and other practices that give direct marketing a bad name.

At press time, the organization working on technical standards and practices for the industry noted that “direct marketing is going to be a big part of it.” Goodman expects to have a first draft of new electricity direct marketing standards going by the end of this month.

At the same time, NEMA expects to issue its first standards for marketing gas. The deregulation of gas is more advanced than that of electricity. “Energy services are a more complicated product than magazines and other things traditionally sold by DM,” he says.

On the other hand, not every utility in the country is as concerned about competing to produce cheaper power. Tom Shannon, a marketing analyst at Puget Power, Bellevue, WA, says cheap power is not as much an issue in Washington, as kilowatt-hour rates are really low thanks to hydropower systems in the state (4 to 6 cents per kilowatt hour) whereas rates can be as high as 15 to 18 cents in California and on the East Coast. He says there’s a limited pilot test going with 10% of customers in the state.