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May 31, 2000

Wall Street Power Play

By Stephen Lacey

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Utility companies re-selling power services online to their customers are discovering a novel way of earning revenues. They are bundling discounted electrical supplies with other consumer services.

That's their best hope of becoming profitable in an industry with razor-thin profit margins, industry analysts say.

The online services, propelled by deregulation in the utility industry two years ago, have attracted venture capital financing.

Despite the razor-thin margins, venture capitalists see an opportunity for profits in utility companies that sell to consumers on the Internet.

"We all wanted to invest more, but there just wasn't enough available in each round," said Larry Phillips, a managing director at Primedia Ventures, which has financed, an online utility based in Albany, Calif. became the first online utility to enter the New York market since deregulation two years ago. Said Phillips, "We have 14 companies in our portfolio. I never want to favor one [over another], but I think has the potential to have the biggest market capitalization of the group."

Deregulatory Changes

Under deregulation, monopolies were forced to set aside a portion of their power supplies for other companies to resell to consumers.

The market potential is huge. Twenty-one states have already deregulated the sale of electricity. Similar legislation is pending in several other states.

About 70 percent of consumers are living in areas that are deregulated or will be deregulated within the next two years, according to Ethan Cohen, a senior utility analyst at the Aberdeen Group, an information technology consultant in Boston.

In the $300 billion electricity marketplace, a nominal adoption of alternative service providers could translate into big bucks for suppliers. The number grows by an estimated $200 billion if electrical service is bundled with telecommunications services. The number grows even more if providers bundle other services supplies such as cable and water., for instance, plans to offer long-distance telephone service and high-speed Internet access in the continental U.S. It plans to expand into other recurring services such as telecommunications, cable and water.

"In our space, you're looking at a recurring revenue stream that is recession proof," said Tim Morris, chief financial officer at The firm recently took in $30 million in second round financing. Morris said recurring revenue is what separates his company from other Internet consumer portals. "We have all the downside of a utility combined with the upside of an Internet company," he added.

With the Internet expected to become an acceptable tool for paying bills, venture capitalists are taking stakes in a myriad of recurring revenue companies. These companies include Inc., a Burlington, Mass.-based provider of bundled, co-branded services. This outfit was in registration for a proposed $86.25 million IPO. In February, took in a $75 million mezzanine financing led by Amerindo Investment Advisors Inc. and EnerTech Capital Partners.

Another company,, a Newton, Mass.-based intermediary between buyers and sellers of electricity, natural gas, oil and propane, secured $15 million on April 25. That came through first round financing led by Gleacher & Co., Ballentine Capital Partners and Sandler Capital Management.