How to be local and a big dog too: using sales territory agreements to compete in the new environment.

• Author: Martin, Edward

1. INTRODUCTION

   Retail wheeling presents threats and opportunities to distribution cooperatives. On one hand, co-ops face the threat of losing revenue when customers choose alternative power suppliers. On the other hand, they will have enhanced opportunities to sell energy and other services to current customers and to consumers not physically connected to their lines. To take advantage of these opportunities, and to compensate for losses that may result from retail wheeling, cooperatives must implement new programs in marketing, sales, and customer billing. In particular, cooperatives should consider entering into sales territory agreements with their G&Ts as a way to compete in the new environment. This paper discusses how cooperatives can begin these initiatives.

2. ASSESSING THE RISKS FROM RETAIL WHEELING

   Prior to assessing the opportunities that cooperatives could have under retail wheeling, it is important to identify the risks. According to most (if not all) retail wheeling proposals, distribution cooperatives will become regulated entities primarily responsible for providing energy access to consumers to whom they are physically connected. This is commonly called the "lineco" function.

   Under any retail wheeling scenario, both distribution cooperatives and G&Ts face significant risks. G&Ts face the challenge of producing competitively priced power; if it is not competitively priced, consumers will choose other suppliers. In addition, distribution co-ops face at least two risks:

   1. The risk of losing margins earned on the energy component of the bill.

   2. The likelihood that there will be a more intense focus by consumers, regulators, and competitors on the "distribution adder" component of the bill.

   These risks are now recognized by most industry leaders. But some distribution coop leaders conclude from their analysis of industry restructuring that their co-ops will be only linecos, that their only responsibility will be to provide energy access to those to whom they are physically connected. If cooperative leaders draw this conclusion, they may be subject to several additional risks that are not as commonly recognized as those above.

   If distribution co-ops perceive themselves only as linecos, they will have little incentive to seek new loads not physically connected to their lines. Such co-ops might focus only on construction, maintenance, metering, and billing, with little justification to support community-building or economic development, or to provide member services beyond dealing with basic customer complaints. Such lineco co-ops would have dramatically decreased revenues, and a decreased reason to even call themselves cooperatives, if by "cooperatives" we mean organizations that have a special concern for the needs of consumers that goes beyond a pure profit motive.

   A further risk faced by lineco co-ops is that they could lose whatever sales and marketing capabilities they now possess that would enable them to successfully offer additional services to consumers in the future. Sales and marketing are not part of the lineco function. If co-ops eliminate their sales and marketing capabilities today, they may be precluded from offering such "servco" services as electrician service, home security, propane, natural gas, or Internet access in the future.

   The research conducted as part of the Touchstone Energy[SM] branding initiative supports this perspective. Our consumers value us because we are local businesses capable of responding flexibly to local needs. Our consumers know they have a voice and that voice can guide us when we become involved in community building activities or economic development or when we seek to offer additional services.

   Thus, distribution cooperative linecos face a number of risks even greater than those faced by other utilities in a retail wheeling environment:

   * The risk of having no mechanism that enables them to market to new consumers not physically connected to their lines.

   * The risk of a sell-out to larger neighboring utilities that will offer to provide energy access services more cheaply.

   * The risk of being unable to respond to future opportunities to offer additional energy-related services desired by consumers.

   * The risk of being unable to market non-energy related products and services desired by consumers.

   * The risk of losing their special relationship with consumers and local communities.

   * The risk of losing their special appeal as cooperatives that can act as good corporate citizens. Ultimately, linecos could come to be perceived as just quasi-governmental agencies that build and maintain power lines in much the same way that state and county agencies build and maintain roads.

3. RETAIL WHEELING AND COMPETITION BETWEEN CO-OPS

   Retail wheeling is now emerging in only some states, and few of us know how different the new environment may be. But the change from a regulated monopolistic structure to one characterized by customer choice and market competition will likely change many of the ways in which we must act.

   Historically, cooperatives have had service territories assigned by the state. With few exceptions, competition among utilities was limited to the selection of a physical location by a new load. Once the customer chose the location, there was no competition.

   Retail wheeling will fundamentally change this equation. Assuming that the relevant legal framework is in place, cooperatives will be able to compete to serve any consumer, just as other cooperatives and other utilities will be free to compete for their...