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UTILITY.COM/FUTURE
The internet introduces new e-business dynamics and opens the possibility of six radically new retailing models.
Utilities venturing into competitive retail markets find retailing is in a time of ferment. A prime cause is the internet, more specifically the new concepts and practices known as e-business. To succeed as retailers of their services, utilities will need to join the quest to define how to market effectively in cyberspace—something many long-time consumer businesses are finding hard to do. And the pressure to master e-business is growing. Optimistic predictions of a year ago are being revised dramatically upward. Forrester Research now estimates that online commerce could account for $3.2 trillion in worldwide corporate revenue by 2003 and projects online energy sales of $266 billion in 2004. Intel's chairman, Andrew Grove, has said that in five years all companies will be internet companies or they will not be companies at all. How can information technology alter world commerce in such a pervasive and rapid manner? The answer in a word—transactions. The internet fundamentally changes the economics of transactions in key industries in ways that benefit both buyers and sellers. The new dynamics of buyer-seller interactions could work fundamental changes in marketing energy and related services in the next decade. Utilities already use the internet for many retailing purposes, but the full impact of e-business on this industry has yet to be felt. Six e-business developments could affect the utility sector in the period 2000-10. These are what-if scenarios rather than predictions—the volatility of the utility industry, the internet, and e-business makes many futures possible. However, our research indicates these what-ifs have enough support to warrant serious attention in a utility's strategic planning. New Entrants Versus the Incumbents Historically it has been hard for new entrants to make significant gains at the expense of incumbents, especially where the incumbents have had the field to themselves for many decades. The advantages of incumbency range from brand prominence, existing infrastructure, and scale economies to customer inertia. However, the new economics of transactions, coupled with the relentless pace of technology change, could provide increased opportunities to challengers. The e-business model provides the invader with a low-cost, versatile platform capable of reaching and serving a large portion of the dominant company's customers. A good website operated by a new entrant, even if it is a small company, can appear as impressive as the website of a far more established rival. If a competitor is unusually nimble and imaginative in putting the internet's capabilities to use, its e-business initiative may pose a far more serious threat than anything incumbents have had to deal with yet. Amazon.com illustrates the point. Its selling costs, inventory costs, and overall transactions costs with the customer are low. Amazon.com has 3.1 million titles available, and sales per employee are at $375,000—almost four times that of Barnes & Noble. Amazon.com has only one sales site versus over 1,000 for Barnes & Noble. As a result, market valuation, relative to Barnes & Noble, is quite high. Moreover, Amazon.com is using the same model to enter the music, electronics, toys, auction, and videotape markets. What about the utility business? Virtually all major electric and gas utilities in developed countries around the world have websites, many of which are well beyond the stage of passively displaying information about the company. In an effort to develop more extensive and personal relationships with customers, utilities are using the internet to provide information, offer education, and facilitate transactions. In many cases their websites are designed to be aesthetically pleasing and convenient to use. Features such as downloadable reports on environmental issues, quizzes, search engines, links to other sites, and online billing and payment are not uncommon. Incumbent utilities must match what new entrants offer on the web, keeping an eye on the internet initiatives of two kinds of retail competitors. The first is the entrant that has a web-site but adheres to a bricks-and-mortar strategy. This could be a start-up or a subsidiary of another incumbent utility. The second is the pure internet challenger. While the pure internet challenger might use conventional means to sign customers up—radio and TV ads, billboards, telemarketing—it relies mainly on the web for marketing, sales, billing, and customer care. And it has minimal physical facilities in the territories in which it competes. An example of the pure internet challenger is Utility.com (www.utility.com), established in early 1999 by idealab!, the new-ventures incubator that also produced CitySearch, eToys, GoTo.com, Free-PC, and Tickets.com. Utility.com is licensed as an electric service provider in California and Nevada and plans to expand soon into seven other states as well as abroad. It provides online enrollment, billing, and account management. It offers online review and one-click payment of all utility bills (gas, water, heating in addition to electricity). In California all the electricity Utility.com offers is green, and it guarantees 10-percent annual savings off the incumbent utility's standard prices. New customers receive a $25 signing bonus. The company also offers advisories on bill-reduction options to customers who agree to the installation of an advanced CellNet meter. Information from the meter allows Utility.com to analyze usage and suggest rate plans that could provide additional savings. Many of Utility.com's offerings arguably could be countered by an incumbent utility or a bricks-and-mortar (that is, non-cyberspace-based) new entrant. But a key element of Utility.com's strategy is its cost structure. In testimony last year before Congress, the company's CEO stated, "Via the internet, utility.com can recruit, sign up, serve, bill, and support customers at costs that are as much as 90 percent lower than traditional utility customer-service costs." Still another threat from the internet flank is a diversification move by an established internet service provider or web merchant. Just as a bricks-and-mortar supermarket, hardware chain, or big-box retailer can add energy to its portfolio of offerings, incumbent utilities have to beware the possibility of competition from, say, an America Online or Yahoo! To be sure, traditional utilities or other dominant companies will also be able to avail themselves of the internet's benefits. They can and do use the web to defend their customer bases. But it would appear that e-business is especially beneficial to challengers by furnishing a cheap but powerful battering ram, and thus its primary impact could be to disrupt rather than reinforce the status quo. There is a way incumbents can play that game, too, of course. Those that can master e-business can make good use of the internet's capabilities to the extent they choose to go on the offensive, adopting the role of invader and using the web to attack the fortresses of other traditional utilities. Web-Based Intermediaries The first kind of intermediary is a shop bot, a software agent that performs automated comparison—shopping on the web. A shop bot supplies a prospective buyer with a report on the offers available from vendors for a specified product or service. The prospective buyer goes to a website and enters stipulated information defining the parameters of the product or service sought, and the site launches a shop bot that moves about the web (or checks the offerings available from vendors registered with that site), searching for deals that meet the buyer's criteria. As testimony to the power of shop bots, some companies have grafted shop bots onto their own sites as a means of maintaining the relationship with the customer, even if on some occasions this means sending business elsewhere. That is, they try to sell a prospective buyer their own product or service, but, if their shop bot turns up an offering that is closer to what the buyer wants than what they can provide, they help the buyer obtain that. DTE Edison America, the competitive retail subsidiary of DTE Energy, offers an early example of how automated comparison shopping might work in the electric and gas electronic marketplace. Consumers and small businesses visiting the company's website at www.theenergyclub.com can enter information about their energy needs and find out which vendor serving their area offers the lowest price—even if it's someone other than DTE Edison America. In a few years, cyberspace could teem with shop bots. Provided with appropriate financial information, a software agent could make the transaction for the customer and arrange for, or even take, delivery of the product. Massachusetts Institute of Technology and IBM researchers have tested software agents that negotiate with other agents in cyberspace to find the best deal. Evaluations can be conducted on multiple dimensions in addition to price—warranty, delivery time, service contracts, return policies, and even buyer reputation. The second kind of intermediary function encompasses auctions and exchanges. In auctions, prospective buyers compete among themselves to win a deal that is better than what they might get through other means. Examples of online consumer auctions are www.ebay.com and www.ubid.com, but online auctions can also accommodate huge transactions of industrial commodities—for example, the sale of tons of steel to major manufacturers. There is little doubt e-markets will be a factor in the electricity and gas businesses. Websites such as www.houston-street.com and www.altranet.com already provide wholesale trading for energy companies. But the auction sites also might come to serve commercial and industrial energy customers. Technology advances could make it progressively feasible for end users to participate in e-markets, even including trades involving complex contingencies and conditions, by furnishing relevant data, analytical tools, and interfaces in easy-to-use formats. In that event customers could go around their utility suppliers and make their own arrangements for procuring electricity and gas. In the reverse auction, the third kind of intermediary function, a customer logs onto a website and announces a desire to purchase a particular good or service. Vendors hoping to win the business then submit bids. Reverse auctions are being used for transactions involving such things as cars, home equity loans, home mortgages, hotel reservations, and plane tickets, and they are now available to gas and electricity end-users. For example, e-ChoiceNet (www.e-choicenet.com) serves California commercial and industrial customers. The site provides a software "wizard" that walks a customer through the process of preparing a request for proposals. Once the RFP is posted, registered suppliers submit bids online. Customers are not required to buy from the low bidder and do not have to reveal their identity until they are ready to close a deal. They can select from standard packages posted at the site. Originally Energy Marketplace, this service was established by Southern California Gas Company (now part of Sempra Energy); Excelergy is currently expanding e-ChoiceNet to serve the entire U.S. market. Enermetrix in Massachusetts offers a retail energy exchange (REX) through which commercial and industrial customers can invite bids on their gas and electricity needs from 50 prequalified bidders. As explained at www.enermetrix.com, utilities and others can license the REX system to serve their customers, as is being done by companies such as SCANA and Unitil. And Energy.com offers a reverse auction known as ebid, found at www.energy.com/ebid-not to be confused with an unrelated site at www.ebid.com. Some of these reverse auctions group customers with like requirements, creating larger packages for suppliers to bid upon. Pooling customer requirements is the core function of buyers groups, the fourth kind of intermediary. Aggregating buyers who don't have the individual purchasing power to qualify for bulk discounts is not a new phenomenon, nor is it confined to the web. But the internet could simplify the process of forming buyers groups and make it possible to assemble especially large numbers of willing buyers. If the buyers club approach were to succeed in the energy sector, it could provide a means for opening up the residential and small business market, since the cost of contacting and recruiting low-volume customers is often cited as a barrier to robust competition. ElectricityChoice.com is an internet buyers club operated by OnlineChoice.com, a start-up that plans to launch more than 40 internet buyers clubs, such as AirlineChoice.com, HomeloanChoice.com, VacationChoice.com, HealthcareChoice.com, and ToyChoice.com. At the website, residential and small commercial customers can register with no obligation. Once a sufficient number of buyers has been built up, OnlineChoice.com breaks the group into segments defined by load type, location, and other factors and invites online bids from suppliers. The bidder offering the best mix of low price and high commission gets the customer list. While the club members are under no obligation to accept, the list delivered to the supplier will presumably yield a high percentage of sales. Another version of the buyers club model operates on a much faster schedule. The buyers' agent identifies the vendor in advance and negotiates an arrangement whereby the price falls by defined decrements as stipulated numbers of buyers are registered. The club formation process lasts only a matter of hours or days, accompanied by publicity on the buyers club website and perhaps elsewhere (for example, on banner ads at major portals). At www.accompany.com, for example, customers can see various products for sale at prices that vary depending upon how many buyers sign up by a certain deadline, along with a status report on how many have committed to that point. Thus a Palm V pocket organizer that typically retails for $449 might be $365 when 26 buyers have signed up, and $320 if 200 join. This model could be tried in the energy context as well. These four types of intermediaries may not be the extent of what energy providers will encounter in the coming decade. Hybrid intermediaries, which combine various traits and structures of the other four models, may also stiffen competition. There are already some solid examples, Energy.com and Essential.com being two of the most prominent. But all intermediaries and hybrids offer some positive aspects to incumbent utilities and other energy suppliers—they help educate customers about new options, and some of them provide new and potentially advantageous means of acquiring customers. On the other hand, they all come between buyer and seller. Further, they tend to encourage customers to shop around whenever possible and to count on winning a lower price when they do. Customers Help Design Products and Services A scenario of this type is hardly farfetched. Customers are becoming so involved in determining so many aspects of goods they purchase that they are stepping into the producer's shoes. For example, a customer buying a personal computer online can participate directly in its manufacture. Each customer can prescribe the computer's configuration prior to placing the order. In a real sense the customer is also a producer—a relationship that allows producers to save time and money in the order process and allows consumers to specify exactly the products they wish to obtain. In a variation on this phenomenon, Amazon.com and other retail outlets allow users to maintain a list of books purchased as well as other books in the customer's library. This allows Amazon.com to make recommendations based on the generic category of reading material and on the preferences of similar readers. In short, readers help Amazon.com make additional transactions by providing key information about their likes and dislikes. Making the shift from the old utility prescription of universality to a new ideal of providing different services in response to customers' wishes calls for adopting different values, behaviors, processes, and systems. For many utilities the adjustment will not be easy. One answer may be for utilities to step up to customization by partnering with companies experienced in fashioning solutions for pertinent market segments. That expertise could compress the utility's learning curve and expand the range of its offerings. To complicate matters, though, certain groups pertinent to the utility business may have more trouble with a shift away from sameness than utilities themselves. Providing different services to different customers can arouse concerns on the part of regulators, legislators, consumer advocates, and others sensitive to anything that might divide society into haves and have-nots. To the extent that customization efforts tend to concentrate on commercial, industrial, and upscale residential customers in large metropolitan centers, concerns may arise as to the implications for downscale customers and customers in remote areas. Given their traditional role and obligations, incumbent utilities are likely to be more vulnerable to this type of objection than their new-entrant competitors. Obviously, this applies with special force to incumbents that are wholly or partly government-owned. Moreover, it is reasonable to project that the problem could be most serious for utilities that serve developing countries and/or other markets with chronically underserved or unserved areas. Their urban customers will demand customized services, and competitors could emphasize tailored solutions as a way of differentiating themselves from the incumbent. But the utilities might not be able to shift their focus entirely to meet such demand because of customers in small towns and on farms contending their needs are more pressing than those of customers who already have adequate service. Government officials and consumer advocates are likely to monitor closely how utilities handle these pressures. Machine-to-Machine Internet Communications The M2M era will see machine-friendly applications become at least as important as people-friendly ones. Numerous examples exist. They include manufacturing shop floors around the world that can relay their status to each other automatically; office climate-control and security surveillance systems that can be managed via the net; and home air-conditioning units that can communicate with the electric company directly. Clearly, these developments will require dramatically different internet network control interfaces in order to provide efficient and secure signaling. But why the internet as a connection device rather than special-purpose private and secure networks? The answer is simple: The low cost of the public network infrastructure and its widespread ubiquity ensures a ready market of innovative applications. Given the existence of the relatively low-cost internet platform, the logic of interconnected control networks in the home starts to make sense. This sets the scene for refrigerators, electricity, lighting, toys, telephones, and cars, all with internet addresses and net connectivity in the home. Industrial and commercial applications involving electricity are likely to be more prevalent in the near term due to the cost savings involved. Automatic meter reading—with usage data sent via wireless internet connections—has been discussed for years, but now the machine world in general is set to make significant progress. Start with the typical "intelligent" office building with lighting, heating/ventilation/air-conditioning systems, fire and life safety systems, elevators, security systems, and electrical requirements. All are being networked in intelligent control systems. Add to this the cost savings when vending machines, copy machines, express mail pickups, and so on can be monitored with wireless telemetry back to headquarters via the internet. Necessary repairs can be scheduled ahead of time (by the machines), and costly trips to restock full vending machines can be avoided. Signs point to a day when the typical office building comes with a central collection node for all building traffic bound for the internet—both human and machine. Of course, security will be a major issue as building managers trust extensive physical assets to internet control. The bottom line? The company's webmaster may well acquire the responsibility for mechanical and electrical systems. Furthermore, public safety applications like remote wireless monitoring of railway crossing gates have lifesaving implications. Add to this remote monitoring of vehicles in transit via both the geographic positioning system and web connectivity that then can be automatically recorded and scheduled in other machines at headquarters. And once shop floor production machines and automatic inventory equipment in different cities connect company plants in different cities, just-in-time delivery and the internet supply chain will take on entirely new dimensions. As appliances, equipment, lighting systems, and other machines come to use the internet to exchange information and automatically adjust their operations based on the data they receive, the next step will be to establish links to pertinent machines and systems in the external world. An example is the possibility of homes and buildings exchanging information with electric and gas systems regarding energy supply and demand. This could permit much finer regulation of energy consumption and production, a capability that would be particularly valuable if emissions restrictions intensify. One implication is that customers choosing among utilities would pay close attention to utility systems and interfaces. Whether a utility's systems are widely compatible and how sophisticated they are would become key criteria for differentiating among rival suppliers. Accordingly, utilities would strive to influence standard-setting and offer maximum connectivity and functionality. If indeed devices increasingly interpose themselves between customer and service provider, it will become increasingly difficult to own the customer. All companies developing an internet presence are striving to be customer-centric, but soon it may be hard to tell who the customer is. If a home- or business-owner delegates to a software agent the task of contracting with a new energy supplier, and if a key aspect of the agent's vendor evaluation concerns the compatibility of the external energy systems with the home or business energy systems, then it becomes difficult to say whether the real customer is the person, the person's software agent, or the person's energy-consuming machines. Traditional retailing techniques would lose much of their relevance. Web-based energy marketers would have to redirect their focus from developing information technology that is people-friendly to developing information technology that is machine-friendly. Cyber-Nightmares A recent report from the U.K. government's Performance and Innovation Unit (PIU), notes that separate 1999 surveys of U.K. and European Union (EU) consumers found that only 7 percent and 5 percent respectively trusted e-commerce. The PIU report also cites a 1999 survey of EU executives showing that 90 percent of them considered trust a critical issue for e-commerce, and 80 percent believed that privacy is a critical issue. Jupiter Communications estimates that privacy concerns could remove $18 billion from the $40 billion e-commerce revenues it projects for 2002. Not all the discomfort stems from buyer-seller dealings. Many customers are also perturbed about third parties that track, store, and sell information about their web travels. Information technology advances are permitting increasingly extensive and precise surveillance. Still more disquieting is the notion of data about web dealings being combined with other personal data, such as information about department-store purchases, home ownership, auto registrations, and so forth. From the economic perspective, the issue is that savings in transaction costs will be lost if customers find it necessary to spend substantial time and effort trying to assure themselves that a website is trustworthy and if vendors invest excessive amounts developing ever more secure systems and procedures. Shysters, crooks, and hackers will not easily be deterred. Further, glitches and mistakes are hard to eradicate in such a rapidly growing and intricate mechanism as the internet. What if these problems were to vex the internet during the coming decade to such an extent that the concerns of many consumers and businesses were magnified rather than assuaged? One possibility is that governments could step in with increasingly rigorous restrictions limiting who can offer goods and services online and under what conditions transactions can take place. This could increase protections but at some cost to the vibrancy of the online marketplace. Technology-based safeguards are another answer. Incentives to improve existing security and privacy technologies will be abundant given the economic consequences if law and order are hard to maintain in cyberspace. Even with legal and technology-based protections customers could demand another layer of security in the form of third-party assurances that websites can be trusted—a seal of approval. Passing muster will become increasingly essential to online vendors if troubles endure and anxieties mount. Numerous programs involving accreditation, attestation, and enforcement are underway or under development. Customers buying energy and related services will face a bewildering array of offerings, names, claims, and business models. Dot.com marketers will face a double burden—the lack of an established reputation and misgivings about online transactions. Customers suspicious of cyberspace who are also put off by the swarms of new energy suppliers are not good prospects for buying electricity and natural gas on the internet. The result could be demand for assurances from entities with specific knowledge of the energy marketplace. Which vendors are honest and reliable? Which have their e-business act together? And who is best-equipped to provide accurate assessments of vendors' integrity? Clearly the role would have to be filled by entities perceived to be qualified and impartial. Some candidates have already stepped forward. In California the Center for Resource Solutions awards a Green-e seal to marketers meeting its criteria for green electricity. In Energy.com's Certified Energy Marketer program, a company must meet particular criteria (regarding telemarketing rules, customer complaints, list selling, and so on) to gain certification and display the seal on its website or elsewhere. To the extent that an online intermediary establishes itself as a trust arbiter, three objectives are achieved—competition is promoted, demand is created for the intermediary's information and services, and the intermediary's own standing as a customer advisor and advocate is enhanced. Each runs counter to the interests of an incumbent utility striving to retain retail customers. Challengers would stand to benefit from the boost to competition, though the intermediary's enhanced status could limit their ability to lock in customers. Other things being equal, anyone marketing energy would prefer to deal with customers directly. If customers are apprehensive, however, endorsements from third parties perceived as knowledgeable and objective regarding the energy business could fill a pressing need. Concerns about letting personal information out into cyberspace hinder all online vendors. Mingled with such fears is the conviction on the part of some customers that they own the information about themselves and their activities, and the mere fact that a company may collect it when hosting a website visit or providing a service does not give the company the right to use or disclose it for other purposes. New technologies for collecting information about customers could promote the development of increasingly sophisticated technologies customers could use to block data collection. Some new energy-related services can be jeopardized by privacy issues. For example, the idea of collecting energy usage data over the internet in order to design tailored offerings would not be viable if customers resisted it for fear the data will be diverted, abused, or sold to third parties. One solution could be contracts through which customers agree to release information in exchange for value. Why, if legal and technological mechanisms give customers the power to withhold information, would they do otherwise? People have different tastes for movies, restaurants, and books; they also have different tastes for privacy. Likewise, if the price is right, people will often agree to something they would normally resist—as is apparent when an airline offers passengers on an overbooked flight money or free tickets to take a later flight. While some vendors dispute the notion that they are barred from any marketing use of data they collect from customers, many might come to accept arrangements through which they gain clear license to the customer's information by virtue of extending an incentive or concession. Faced with resistance to releasing information, companies could develop standard deals whereby prices are discounted or additional services are provided to those who agree to provide information and permit monitoring for marketing purposes. However, this is an area where intermediaries might play an important role. An example appears at www.moneyformail.com. MoneyforMail.com offers consumers payments for furnishing information about themselves and then reading email ads sent by companies whose offers are relevant to their interests. MoneyforMail.com promises not to reveal individual identities to advertisers—it serves as a go-between, distributing ads to participants whose interests fit the profile stipulated by the advertiser. The operations of certain energy-oriented online intermediaries contain elements of this approach. Energy.com's case to prospective advertisers rests on the proposition that ads presented on its website will reach an audience that is self-selected as being energy-aware. For homeowners and small businesses the purported attraction is that they receive information, educational services, discounts, and other benefits in exchange for encountering ads on the site. And customers obtaining their electricity or natural gas service through Essential.com allow it to do their billing and provide them with online account analysis and management services, all of which involves their usage data. With these precedents, and assuming customer sensitivity relating to personal information, energy marketers could find themselves dealing with online intermediaries representing groups of buyers prepared to share certain data only in exchange for preferential pricing or other concessions. Thus if e-business is plagued by chronic problems involving security and privacy, this would stimulate robust markets for trust and personal information. Especially under these circumstances, both vendors and customers could be motivated to pay for confidence when doing business in cyberspace. Compared to other kinds of companies, incumbent utilities may be less affected by concerns about trustworthiness and data rights. Many such companies enjoy strong reputations based on years of reliability and community service. This could stand them in good stead as they make the transition to e-business applications, assuming they are diligent about the security of their websites and of the services they deliver via the internet. With respect to them, customers could see no great need for third-party seals of approval, dispute resolution services, or information-release deals. However, it would be unwise to dismiss the scenario in which utilities and their online ventures are forced to use third parties to vouch for them and to bargain for data access. If e-business were plagued by abuses and lapses, utilities could be tarred by that brush. Similarly, competition could take its toll on their standing, even if their behavior were above reproach—polling done before and after the introduction of retail competition in U.S. markets has revealed declines in the public image of utilities generally. Moreover, incumbents' retail subsidiaries bearing their parents' name may find they do not have an easy time winning acceptance in other geographic markets. Customers in distant places may make no distinction between internet start-ups and retail subsidiaries with venerable names that don't happen to be familiar locally. In any event, utilities must remain alert to developments relating to the integrity of the online marketplace. Decisions made within standards bodies, industry groups, regulatory agencies, legislatures, and courts are likely to influence trust in e-business vendors and channels. Utilities will want to be involved in assuring that the transactions costs associated with achieving a sense of security are properly weighed and balanced. Taxation Becomes Confused It is also true that avoiding normal tax liabilities is one of the attractions of some forms of e-business. Consequently many buyers and sellers would prefer that matters remain unsettled. The tax situation in the energy sector is especially complex. The tax issues created when buyers and sellers in different jurisdictions do business in cyberspace are superimposed on issues associated with the reform of tax policies to fit new conditions arising from regulatory reform and restructuring. In many jurisdictions incumbents are saddled with high taxes that restrain their ability to compete with prices set by rivals not subject to the same levies. In other places it is the new entrants who face taxes incumbents don't pay. Furthermore, modifying tax policy in the energy sector is especially political, since governments have traditionally used bills for monopoly services as vehicles for revenue raising and income redistribution. And change within the energy sector is not uniform—it is proceeding at different rates in different places, with specifics varying from one jurisdiction to the next. With respect to the marketing of energy and related services, the list of perplexing tax issues is long. Think of the tax consequences as e-business, globalization, and liberalization continue over the next decade:
Careful analysis is required to determine whether and how existing tax rules would apply to such transactions and whether developing new policies is necessary. In some cases laws on key issues differ by jurisdiction, raising the additional question of whether movement toward greater uniformity would promote efficiency, needlessly intrude on legitimate governmental discretion, or smother valuable experimentation with different approaches. The geographic location of relevant parties and their property is often a significant factor in determining the taxation of transactions and companies. For example, income taxation of corporations in many countries is based at least in part on the location of the physical facilities the company uses to do business. In the utility business of the next decade location could be an issue for two different reasons. The first is that both companies and transactions could involve activities in multiple locations, making it complicated to determine what liabilities are created in which jurisdictions. The second is that both companies and transactions could seem to lack any location other than cyberspace. If customers use cybercash or other blind electronic payment mechanisms it could be very difficult to determine the location of buyers and sellers. And, though the internet is composed of tangible boxes, wires, and dishes, pinning down how its components relate to conventional taxing criteria can be troublesome. For example, does a web server represent a "permanent establishment"? Some governments define electricity as a service, while others consider it tangible personal property, and still others classify it as an intangible. Which definition applies affects tax liability. Also, the increasing use of data processing in conjunction with energy-related services raises definitional questions. If a web-based energy marketer as part of its service supplies electronic devices, engages in two-way data transmissions, and performs computerized analyses of a customer's energy usage, does this constitute the provision of software and data processing services separate from the energy supply service? If so, this would create additional sales- and use-tax liabilities in some jurisdictions. Many e-business enterprises are "virtual" organizations, composed of multiple companies cooperating according to various kinds of agreements and relationships. For tax purposes strategic partnerships, joint ventures, and agency relationships can all create tax liabilities and filing obligations. Such taxation can be seen as appropriate or as an anachronistic obstacle to promising new organization structures and business models. Generally for utilities, multijurisdictional and international tax issues have been less of an issue than for businesses with a broader reach. Now, however, utility mergers and acquisitions are creating companies with much wider domains, and some of the new entities span countries and even continents. The additional dimension of cyberspace increases the complexity. As utilities expand their geographic scope and move into e-business, questions about their tax liabilities will multiply. Even more so than some other pioneers in globalization and electronic markets, utilities and new alternative suppliers of energy will need to assign priority to tax issues. The Contingent Future When determining what role e-business should play in scenarios regarding the retailing of energy and related services, it is important to appreciate the limitations of today's internet compared to what lies just over the horizon. It is quite possible that by the end of the current decade the web will no longer be so U.S.-dominated, nor will it be reached only via PCs, nor will it choke on moving pictures. As the internet becomes more affordable, accessible, and versatile, its transformational tendencies will grow. Since the costs of buying and selling will drop as these trends intensify, the pace and magnitude of change will increase proportionately. Many of today's ideas about the internet's potential for utilities will undoubtedly prove to be insufficiently imaginative. In fact, thanks to the new economics of transactions, the six potential developments outlined here may be among the least dramatic challenges utilities will face in the early years of the new millennium. |
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© 2008 Edison Electric Institute |
Dwight Allen is the communications and utilities director and Kris Hillstrand is the energy e-business practice leader at Deloitte Research. This article is based on a Deloitte Research report, "Utilities and E-Business." 
