October 30, 2012

Should Telcos Sell Electricity?


Frontier Communications Corporation has lent its name to "FTR Energy Services," as part of a marketing agreement with Crius Energy. That doesn't mean Frontier Communications is "getting into the business of retailing energy services."

It means Frontier is lending its name and marketing muscle, presumably, to a third party affiliate that will sell "clean energy" including electricity and natural gas to customers. 

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FTR Energy Services is a wholly-owned subsidiary of Crius Energy and will launch in select markets in November 2012. The company will initially provide 100-percent "green electricity" to customers in New York and Ohio, and clean-burning natural gas to customers in Indiana.

The move does naturally raise the question of whether telcos or cable companies should sell electricity on a retail basis to end users. It isn’t a new idea, as regulators have been moving to unbundle power generation, distribution and sales for a couple of decades.

The idea of adding power sales to the rest of a telco’s service offerings likewise is not a new idea. So far, not much actual retail activity has resulted, though.

At least initially, there are attractions. Regulators have been looking at unbundling of electricity sales for a couple of decades, at least. The idea has been to spur competition by allowing third parties to source electricity from power generators, use existing distribution networks and then sell directly to retail customers.

In some markets, third party sales already are a reality. So for a telco or cable company, the possibility of adding one more service to a bundle is there. Gross revenue is relatively large, as well.

Average monthly consumer electricity bills are higher than they once were, reaching perhaps $110 a month, on average. For a service provider looking at average monthly consumer bills in the same range, the lure of selling electricity might seem attractive.

There are issues, though. But assume a potential retailer legally can sell electricity at retail. Assume that provider can buy wholesale at about a 10-percent discount to retail prices. Then assume the consumer’s retail price is set at about five percent less than current retail.

That provides about a five-percent gross margin to work with. So far, that hasn’t proven to be a viable long-term business model.

Beyond that, many consumers might not consider a five percent savings terribly compelling as an incentive to switch.

Annual churn rates of 25 percent are another issue, essentially meaning there is 100 percent turnover of the customer base every four years.  

A reasonable person might well argue that a more prudent course would be to sell consumption monitoring services to power utilities, rather than selling electricity to end users, as that is a more-logical service, with far less marketing cost.




Edited by Rich Steeves



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