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April 14, 2011

Cover Story

Energizing the Industry: The Power of Direct Selling Business Models

by Rosie Blankenship


Click here to order the Direct Selling News issue in which this article appeared.


Direct Selling News • April CoverJust the phrase “energy deregulation” is enough to make the average consumer’s head spin. In the simplest terms, for energy customers it means a choice in energy providers. Usually, though, consumers are filled with questions about this process: How is this possible? If I switch, will my lights stay on? Who will take care of me in a power outage? How many bills will I have to pay? Why not just stay with my same, reliable company?

In the end, all of these unanswered questions and fear of the unknown often mean consumers stick with the status quo.

For direct selling companies, though, “energy deregulation” means big business.

Whether it’s the growing number of new potential customers as more states deregulate their energy markets, the climbing percentage of consumers switching providers or the skyrocketing growth rates direct sales energy companies are witnessing, the numbers make sense.

Direct Selling Energy Companies

Company (Parent)

Entry Year

Markets Served

Ignite (Stream Energy)

2005

Headquarters in Dallas, Texas.
Service in Texas, Georgia, Pennsylvania and Maryland, with plans to expand to several additional states.

Ambit Energy

2006

Headquarters in Dallas, Texas.
Service in Texas, New York, Illinois, Maryland and Pennsylvania.

Viridian Energy

2009

Headquarters in Norwalk, Connecticut.
Service in Connecticut, New York, Pennsylvania, Maryland, and New Jersey, with plans to add Massachusetts and Illinois.

Utility Choice International (UCI)

2009

Headquarters in Chagrin Falls, Ohio.
Service in Georgia, Kentucky, Maryland, Michigan, New Jersey, New York, Ohio and Pennsylvania.

Dynastar Ventures†

2009

Headquarters in Louisville, Kentucky.
Service in New York, Pennsylvania and Texas.

Momentis (Just Energy)

2010

Headquarters in both Toronto, Ontario and Dallas, Texas.
Service in Illinois, Indiana, Ohio, New York, California and Ontario, Canada.

North American Power

2010

Headquarters in South Norwalk, Connecticut.
Service in Connecticut, Pennsylvania and Maryland, with plans to open in New York and New Jersey this spring and expand to Ohio and Illinois by the end of the year.

ACN*

2010

Headquarters in Concord, North Carolina.
Service in New York and Canada, with plans to expand to Pennsylvania and Maryland in the spring and 11 other states later in the year.

Ampegy (Spark Energy)

2011

Headquarters in Houston, Texas.
Service will launch later this year in California, Illinois, Maryland, New York, Pennsylvania, Connecticut and Texas.

Independence Energy

2011

Headquarters in Philadelphia, Pennsylvania.
Service will launch later this year in New Jersey, New York and Illinois.

† Purchased My Affordable Energy in 2011
* Originally entered the energy market in 2001; left in 2003; returned in 2010

A Brief History of Energy Deregulation

Legitimate success in the energy industry wasn’t always possible.

In the mid-1990s, California attempted to lead the charge by partially deregulating the energy market. However, by 2000, energy wholesalers—the most notorious of which was Enron—had begun exploiting deficiencies in the system to manipulate the energy market for their benefit. Enron was ultimately revealed to be encouraging power suppliers to shut down plants, contributing to the need for rolling blackouts and wildly raising the price of electricity. Their actions led to the bankruptcy of California’s largest energy supplier, Pacific Gas and Electric Company, and the near bankruptcy of Southern California Edison, as well as a financial crisis that cost the state as much as $45 billion, by some estimates. Despite the setbacks in California, other states still were interested in energy deregulation.

Much like the deregulation of the telecommunications industry, deregulation proponents say providing retail competition in energy will benefit consumers with lower prices. The telecommunications industry was relatively unchanged for almost 100 years. Then, in the 1980s, Ma Bell was declared a monopoly and broken up by a federal mandate, and the 1996 Telecommunications Act further provided for competition in the communications industry. Deregulation happened, and a few decades later, we are holding wireless computers in our hand.

The same advances in choices, technology and price competition are hoped for with the deregulation of energy.

But how does it work?

AcEnergycording to the Texas-based Power to Choose website, there are three parts to the creation and distribution of energy: generation (the power plants or producers), transmission and distribution (often called the “poles and wires” company) and retail sales. (Texas led the way in energy deregulation following the California disaster and chose to separate the industry into these three parts. Other states have emulated this model.) The power plants create the power, the poles and wires companies get it to your home and maintain the wires to do that, and the retail companies sell you the electricity, handle customer service and bill you.

What has been opened up for competition is the retail portion of this process. And that’s where direct sales companies come in.

Energy

Direct Sales Enters the Picture

There are multiple models for the direct sales side of the energy business. Several of the direct sales companies interviewed for this article are licensed energy providers who take ownership of the customer relationship. So, when someone becomes an energy customer, they deal directly with that company and the company is responsible for purchasing energy to account for the customer’s usage. Another explanation is that the companies buy energy at wholesale prices and resell it to customers. Other companies are resellers for energy companies, so the energy company provides the customer service relationship after the sale. Still others are divisions of energy provider companies.

Ignite, the wholly owned subsidiary of Stream Energy, is the acknowledged market leader. Stream is a retail energy provider and Ignite is the network marketing distribution channel. Stream only sells energy through their independent distributors.

Ambit Energy is also a retail energy provider that made headlines last year when it was named Inc. 500’s fastest-growing company.

Viridian Energy is a retail energy provider that originally pursued door-to-door sales, but then switched to a direct sales approach in September 2009. Additionally, Viridian purchases Renewable Energy Certifications (RECs) to back at least 20 percent of their energy supply, in support of their commitment to green energy.

ACN Inc., which provides telecommunications and essential services including phone service (such as mobile and digital phone service with video phones) as well as satellite TV, and home security, was the first direct sales company to enter energy sales in California 10 years ago.

According to Robert Stevanovski, Co-Founder and Chairman of ACN, the company decided to stop offering energy when the crisis started. ACN, which serves 23 countries and saw revenue of $553 million in 2010, is now back in the energy business; it launched energy services (provided through the company Planet Energy) in Canada in 2010 and then New York in February of this year, and plans to enter the Pennsylvania and Maryland markets in the spring and 11 other markets later this year.

Other players in the direct selling energy market include Momentis, the network marketing arm of Just Energy; North American Power; Dynastar Ventures; UCI Energy Services, the service arm of Invado International; Ampegy, the direct selling arm of Spark Energy; and Independence Energy.

All of these companies sell electricity and also sell natural gas or are planning to enter natural gas markets. More than half of U.S. states are deregulated either in natural gas, electricity or both.

Ignite and Ambit have experienced tremendous growth since entering the market. In its first year, 2005, Ignite posted $70 million in gross revenue. In 2010 revenue exceeded $900 million. Ignite expects to be a billion-dollar company in 2011.

Ambit, launched in 2006, saw revenue grow from $325 million in 2009 to $415 million in 2010. Chris Chambless, the Co-Founder and Chief Marketing Officer for Ambit, says that in 2010, “We added more customers than in the previous two years combined.” He expects the company will show revenue “in the neighborhood of $700 million in 2011 and we are fairly confident that we will go over a billion in 2012.”

Even a relative newcomer to the industry, Viridian Energy, is posting confident numbers. They launched for service in July 2009 in Connecticut and moved into direct sales in September of that year. At launch, they had 250 customers, but have acquired 150,000 as of this March.

Michael Fallquist, Founder and CEO of Viridian, said the company went from $2 million in revenue to $50 million in 2010. He said the growth is well above expectations. “It’s the marriage of a strong product with a great channel in network marketing and direct selling,” he says.

Why the Growth?

Many direct sales energy companies are seeing amazing growth due to what most of the executives describe as a natural fit between explaining deregulation and direct sales. Direct sales companies have learned they might have exactly what it takes to get customers to take note of the benefits of deregulation.

Rob Snyder, Co-Founder and Chairman of Stream Energy (marketed as the Ignite brand), was managing his family’s Dallas-based private equity firm, Snyder Capital, when he heard about deregulation in 2004. He was approached with a deregulated-related business idea from a friend. The conversation made him mad at himself.

“We were two years into the deregulation of the industry and I was only hearing it for the first time,” he says. “I had no idea Texas had deregulated its electricity market.” He started researching the topic and learned “there were 15 or 20 retailers willing to sell me electricity at 20 percent below what I was paying.” He launched Stream/Ignite not long after.

Like Snyder, many of the founders of the top companies had no direct sales and network marketing experience when they began thinking about entering the retail energy market, although they wisely brought in experts in the industry. But in considering the complexities of deregulation and customer distrust of switching providers, they all saw direct sales as a viable business model.

Fallquist was COO at Commerce Energy, which, as he says, “was in every other sales channel except direct sales.” The company eventually was sold to Ambit. “I was so impressed with them—their business model, their management team. They seemed to have something figured out fundamentally in this industry,” he says.

He took an intense look at direct sales and “everything made sense from a direct selling perspective.” He says his own lack of understanding about direct sales was an initial challenge for the company, but “it’s something I have come to love so much. … There is no more powerful channel on the planet, in my opinion.” 

“I think there is some degree of education needed, especially in some of these markets where deregulation is a fairly new phenomenon,” Chambless says. “A lot of people have just been conditioned not to have a choice. You have an opportunity in a direct sales model to go out and educate people.”

Being able to communicate face-to-face with consumers allows independent distributors the opportunity to demonstrate how they can save money. “There is nothing complex about it,” Chambless says. “We already know you use the product. Can we save you money?”

Whether the growth of direct sales companies has long-term sustainability is something yet to be seen. However, the growth of these companies is grabbing the attention of Wall Street. Jaime Welch, Managing Director of Credit Suisse in the investment banking division, is paying attention—as are others.

“What we have seen is tremendous growth,” Welch says. “Right now, the question is: How big can it be?”

He describes his firm as being watchful of retail energy companies and particularly impressed by the success of the direct sales model. “This is all about people—people referring people.”

Benefits for Customers and Distributors

The direct sales industry has seen major growth in retail energy because it is an attractive product.

Doug Witt, Managing Director of Marketing for Ignite, says independent distributors see the great opportunity. “There is instant appeal because it is a service and not a product. A lot of people do not want to push or sell products. With energy, they instantly see an opportunity,” he says. “We find we attract a lot of people who have never been in network marketing.”

The fact that energy is not just a service, but an essential service for all consumers means independent distributors are really doing less selling and more educating about options.

“The huge advantage of networking a life-essential service is that energy is a monthly recurring budget item for everybody,” Witt says. “Since it is a product that has a monthly recurring billing associated with it, it creates a monthly, recurring income. Where a lot of product-based categories have a monthly recurring income, it’s only as long as the customer chooses to use that product. With energy, they are going to pay an energy bill every month, regardless.”

Viridian positioned itself as a green energy provider, with their 20 percent commitment to renewable energy. Geographically, their business is currently focused in the northeastern states, where network marketing is not as common, meaning an initial salesforce was harder to recruit. “Finding people up here has been tricky,” Fallquist says. “But we have overcome that handicap.”

However, Fallquist feels the independent distributors who ultimately joined Viridian also were attracted to the minimum green standard. “I didn’t realize it would create such an emotional bond with our associates,” he says. “It’s about feeling good about what people are selling, at the end of the day.”

What the Future Holds

Credit Suisse’s Welch brings up an interesting perspective as an investment banker on whether current success is based on current economic conditions. Energy retailing has a troubled past.

So he considers and watches the economic impact on direct sales successes. He thinks high unemployment has led to people being interested in these opportunities—the opportunity to save on an essential bill and the opportunity to make money as independent distributors. “People can make really good money at this,” he says, but questions, “How much of this would be as it is if there was a lot lower unemployment?”

Yet, even with his questions and continued observations of direct sales energy retailers, he thinks they will continue to see growth.

“I think it will be successful. I just question about whether you will see a nationwide application with this—maybe in 10 years. We just don’t really know,” he says. “It’s just a new model.”

One challenge is that not all U.S. markets are open for business. However, with the positive example of Texas, and now with other large markets such as New York and Pennsylvania showing the same positive changes, it seems it’s only a matter of time before more markets open up.

“The fit is perfect,” Fallquist says. “This is really a category that, as more companies get into it, is driving innovation for the consumer. Ultimately, that is going to be a win for the consumer, a win for the associates and, in our case, a win for the environment. It’s a fast-moving industry and it will continue to grow more as more people come into the space and the space matures.”