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B2B EXCHANGESMary G. Gotschall is a business writer based in Falls Church, Va. Taking business-to-business transactions online promises to save utilities big bucks on everything from wholesale power to hard hats. Just as the internet is transforming the world of consumer retailing (see "Utility.com/Future," July/August 2000 Electric Perspectives), it's also rapidly changing the nature of business-to-business (B2B) transactions. Hundreds of B2B exchanges are already running or under development—many created by electric utilities themselves. This year alone, energy companies will do $30 billion in B2B business, according to Goldman Sachs, which projects that number to hit $266 billion by 2004—a whopping 791 percent increase. Indeed, in the next few years, B2B commerce is projected to dwarf business-to-consumer (B2C) commerce on the web. Gartner Group forecasts that global B2B could hit $4 trillion by 2003, versus less than $400 billion of online sales to consumers. Other major research firms have predicted the B2B market will soar to between $2.7 trillion and $7.3 trillion by 2004, from about $131 billion last year. Why is B2B ultimately so much weightier than B2C? Because there is a compelling business reason for their existence. Whereas a great deal of consumer shopping is discretionary and subject to whim, businesses must buy supplies and services to keep their operations running, and the price they pay for these items has a direct bottom-line impact. Plus, from a technological standpoint, huge advances in Internet infrastructure, business processes, and software are making the B2B marketplace a reality. The new electronic marketplaces cut costs and inefficiencies in the supply chain by creating new ways to buy and sell goods and services. E-markets can aggregate demand, which enables buyers to negotiate for more attractive prices. They improve market liquidity, by allowing numerous buyers and sellers to participate. And they provide extended market reach—buyers and sellers that were once local in operation can now do business at any time, all over the world. E-markets facilitate just-in-time inventory, alleviating the need for vast warehouses to store supplies or materials waiting to be used or sold. Thus, benefits flow to both buyers and sellers. Currently, about 600 companies are in some stage of creating an e-marketplace to capture these benefits, following the example of early leaders like Chemdex, E-Steel, and DirectAg.com, which have already proven successful in their respective industries. Chemdex, for example, created a forum for buyers and sellers of laboratory products in 1997. The company now has more than 100 corporations and educational institutions buying goods from 2,200 suppliers on its site. Pharmaceutical giants like SmithKline Beecham and Bristol-Myers Squibb buy products through Chemdex online, which helped propel the firm's revenues to $8.5 million for the fourth quarter of 1999.
As for the power industry, its complex supply chain—one demanding complex input specifications and just-in-time output, despite highly volatile demand—means electric utilities have more to gain than most industries from B2B e-commerce. Combine the potential of multimillion-dollar savings in transaction costs with the promise of huge productivity gains, and one can see why new B2B exchanges targeted to power companies are being announced almost every day. According to Forrester Research, more than 70 percent of utilities' procurement and energy trading eventually will take place online, representing a market potential of several hundred billion dollars worldwide. Vertical and Horizontal Thus far, most B2B participants in the utility industry operate in the vertical sphere. The horizontal market is a new arena just beginning to be developed. Industry experts argue that there is a place for both business models. Utilities will go to the vertical markets for specialty items, but for day-to-day needs, they will use the horizontal markets. According to Gerald Keenan, who runs PricewaterhouseCoopers' Global Energy and Mining Strategic Mergers and Acquisitions Initiative and the firm's North American energy strategy consulting practice, either type of e-market must offer some of the following characteristics if it is to add value for buyers and sellers:
Piling In On June 1, Enron said that transactions on EnronOnline, its e-commerce site for commodities such as electricity and coal, had already surpassed the $50-billion mark, exceeding the company's estimate of $20-$30 billion for the full calendar year "In less than six months, EnronOnline has grown into the world's largest e-commerce website," said Louise Kitchen, the operation's managing director. In recent months, still more firms have thrown their hats in the ring, going beyond the commodity market. Perhaps the biggest player thus far among electric utilities is Pantellos Corporation — a consortium of 22 companies—which has been created as a vertical market for electronic B2B exchanges, serving electric and gas companies. Pantellos—Greek for "total fulfillment"—will operate as a for-profit exchange for purchasing everything from transformers and wire to turbines and equipment repair services. The members of Pantellos are American Electric Power, Carolina Power & Light, Cinergy, Consolidated Edison, Dominion Resources, DTE Energy, Duke Energy, Edison International, El Paso Energy, Entergy, FirstEnergy, FPL Group, GPU, Ontario Power Generation, PG&E, Public Service Enterprise Group, Reliant Energy, Sempra Energy, Southern Company, TXU, and Unicom. As of June, Pantellos had initiated contact with some 1,500 suppliers to begin forging "mutually beneficial relationships in areas of interest" to all supply chain participants, according to a Pantellos press release. "This will be very good for the industry," said Kevin Butler, manager of corporate development at PG&E. "It will provide a procurement platform that was not there before. Goods and services will be bought and sold in a more efficient manner." The B2B phenomenon is taking hold not just in North America, but overseas, as well. Last May, a group of 12 European utilities—Electrabel (Belgium), Electricit€ de France, Endesa (Spain), Enel (Italy), Iberdrola (Spain), National Grid Company (U.K.), Northern Electric (UK), Nuon (Netherlands), RWE (Germany), ScottishPower (UK), United Utilities (UK), and Vattenfall (Sweden)—announced that it will launch an independent industry procurement exchange. All told, the partners spend more than $28 billion on procurement (excluding labor and fuel) each year. Other partners and participants are expected to join, and trading on the exchange was planned to start in late summer. Regional Hubs "Now there are two strong business models for e-procurement: industry-specific marketplaces and regional hubs," said energyLeader.com founder and CEO Steven A. Mitnick. "Industry-specific marketplaces will focus on a narrow range of products, while regional hubs will serve the broad needs of businesses and nonprofits, including the efficient purchasing of services." Mitnick said that his company wants to partner with a leading utility in major B2B hubs in the United States—these include the New York City metro area, southern California, the Chicago region, and Houston. Under these arrangements, each utility would be the exclusive partner for its regional hub. The hubs will offer a variety of services driving down prices for buyers while lowering marketing costs for sellers and giving them access to new buyers. The hub will trade mostly maintenance, operation, and repair material, according to Ken Cohn, vice president and chief information officer for PEPCO. But the site will also allow participants to buy and sell services, such as temporary labor, programming, and engineering. PEPCO and energyLeader.com will make money through fees and service charges, as well as by selling advertising on the web site. Cohn said the venture is part of PEPCO's move into nonenergy businesses in the wake of deregulation.
One of the hub's features is that it will enable buyers to give preference to local and minority-owned businesses that will be able to showcase their products and services without having to make a major investment in e-procurement on their own. EnergyLeader.com and PEPCO are the first entrants from the utility market with this model. Mitnick says that competitors will join the fray and that they will likely come not just from the utility business but from the banking or phone industries. Nonetheless, he thinks utilities have an advantage when it comes to selling online products and services to hospitals, banks, and other organizations. "Utilities are perfect for doing this—better than banks and phone companies—because there's an interconnectedness between a community and its utility," explained Mitnick. "People think of utilities as a regional institution with a certain service reputation and reliability. Our business model is based on that." Walking the Supplier Line For example, Neikirk said Entergy is under a long-term information technology contract with SAIC. "We're not going to bid that out on an exchange," he said. "The switching costs are too high. We have too much invested in the knowledge and infrastructure." Added Neikirk: "It's very important for the supplier community to know that you'll still need them." And in some instances, the supplier community has the upper hand when it comes to bargaining. "If we all buy office products, it's intuitive that we could all gang up on Staples and get a good price on $80 million of pencils and paper,"said Al Wassler, vice president of purchasing at ConEd. "But if we gang up on GE for gas prices and turbines, GE would say, 'You need us more than we need you.'" The Perils of Infancy "A lot of this is theoretical, at this point," said Jon Arnold, chief information officer at Edison Electric Institute. "Most of these exchanges are not real or 'live' yet, so it remains to be seen how good they are." And, in terms of the large universe of B2B sites, many believe that a shakeout is inevitable. AMR Research, an e-business analysis firm, thinks consolidation in the industry will happen within six months. In a recent study, AMR predicted that the roughly 600 independent trading exchanges (ITEs) on the web—which trade a variety of things in different industries—will shrink to just 50 or 100 by 2001. In the firm's ranking of ITEs, based on how efficient the sites were for buying and selling, as well as how liquid their exchanges were, only two energy firms made it to the top 20: Altra Energy Technologies ranked in first place, as the number-one ITE across all vertical markets, while HoustonStreetExchange ranked seventeenth. Both are in the business of trading wholesale energy online, rather than e-procurement. The criteria for selection included strength of business model and functionality. "The market is moving to embrace and adopt electronic trading," said Altra president and CEO Paul Bourke. "The beauty of this is that it has existed for at least 10 years, since the deregulation of the gas market. Trading was conducted by phone and fax, with all the inherent inefficiencies associated with that." Now, thanks to the Internet, it can be done online. Altra launched its gas online trading product four years ago.
The firm offers an "end-to-end" solution, including Altrade, an independent energy trading exchange, and front-, mid- and back-office transaction management software for managing the physical delivery of energy after trades are consummated. Altra has more than 6,000 users around the world. According to Forrester Research, only 2 percent of natural gas trading and 0.2 percent of electricity trading were conducted online in 1999. But Forrester predicts these figures to increase up to 25 percent and 11 percent, respectively, by 2004. And Other Hurdles Unlike B2C sites, many B2B sites place a number of restrictions on the purchaser, according to industry experts. Purchasers can buy only from certain sellers; they must adhere to spending limits; and the data associated with the purchases is archived. This requires an array of complex technology to carry out. Technology solutions for the customers must be integrated with those of hundreds of thousands of suppliers. Thus, the site must have the capability to monitor buyers' spending habits, alert them when they exceed their limit, and ask executives for approvals on further spending. Neikirk at Entergy thinks technology providers will be in a "mad dash" to solve these issues, and those exchanges that get the right functionality will be the winners. "It won't be elegant to start with," he conceded. "But if a compelling business idea is there, it will get solved." Exchanges that fail to create viable technological solutions will be forced out. Then there are potential antitrust issues. Both the Federal Trade Commission (FTC) and the Justice Department are examining how B2B e-marketplaces affect competition. Several general questions are raised by these arrangements:
These antitrust issues apply to any industry, whether it is doing business online or off. Pantellos and other exchanges have said they have taken care to ensure that their operations offer an open playing field and do not violate any antitrust laws. "We're tapping into the best legal counsel we can get along the way," said Bob Lutz, general manager for energy industry exchanges at GE Global Exchange Services, which handles more than $1 billion in B2B e-commerce transactions annually in several industries, including utilities. To address these issues, in June FTC and the Justice Department hosted a public workshop in Washington (DC) on "Competition Policy in the World of B2B Electronic Marketplaces." (To read a transcript of the proceedings on the FTC website, visit www.ftc.gov.) Wassler at Con Edison pointed out that standardization is another issue—even among commodity items. "Even though utilities are similar, there are amazing differences in what we buy," he commented. "At Con Edison, we have 84,000 items in stock, ranging from a steam generator worth $28 million, down to nuts and bolts. We may have standardization on 3/4-inch nuts, while another utility has 1/2-inch nuts. Those kinds of issues need to be resolved" if utility companies are going to do procurement together online successfully. Get In Now And this does not include the value of two other important components of e-business: influence and information. "Industry leaders aim to move 60 percent to 100 percent of their transactions to the Internet over the next two years," according to the April 2000 AMR Research report on e-commerce. "This aggressive transition by industry leaders will force the remaining Fortune 1000 companies to expedite their adoption of B2B commerce. Companies that do not take an aggressive approach to B2B commerce will lose customers and, ultimately, fail." For the utility industry, the business logic is compelling: Business-to-business electronic commerce is here to stay, and before long, if you're not in e-business, you're going to be out of business.
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A more wide-ranging example is VerticalNet, which owns and operates 57 web sites designed as "vertical trade" communities that provide users with sources of information, interaction, and e-commerce. They are grouped in 14 industry sectors: communications, energy, environment/utilities, financial services, food and packaging, foodservice and hospitality, healthcare, high-tech, industrial, manufacturing (discrete), manufacturing (process), public sector, science, and services. Founded in 1995, this year VerticalNet reported that its first quarter revenues reached $27.5 million, a 172-percent leap over the fourth quarter of 1999.
electronic energy trading, for example, are EnronOnline, HoustonStreet.com, Altra Energy Technologies, Enermetrix, APX, and RedMeteor.com.
