Crank Up the Kilowatts

Deregulation, restructuring and a huge market make for plenty of outsourcing opportunities in the oil, gas and electric industries.

Its almost a perfect storm." Thats how William Smith, manager of market-driven load management at Electric Power Research Institute (EPRI), a nonprofit energy research group in Palo Alto, Calif., describes Californias energy crisis.

Thanks to a confluence of misguided decisions—many of them related to deregulation—that triggered the Golden States current crisis, that analogy is apt. Those decisions are now the focus of much finger-pointing among incumbent and former legislators, bankrupt electric utilities, incensed citizen groups and what many say are profiteering energy companies.

The result is chaos. "It could be chaotic for the next three to five years," says Peter Weigand, chairman and CEO of Skipping Stone Inc., an energy industry consultancy based in Philadelphia. "And with chaos comes opportunity."

Early Power Play Weigand isnt referring just to California. The energy industry has for several years been providing opportunities for consulting firms, systems integrators, hardware and software makers as well as entrepreneurs launching energy technology startups. First came Y2K, which forced blanket upgrades to systems and software. Then deregulation hit. It pushed the dominant players in each market to relinquish some of their vertically integrated businesses—generation, transmission, distribution—thus creating dozens of players where previously there had been only a few. "The target became much larger," says Weigand.

That fostered an industry of consultancies like Skipping Stone, companies founded by former energy executives like Weigand who once worked for Metallgesellschaft, now MG Technologies AG, and Koch Industries Inc.

Skipping Stone has three divisions: a professional-services group that provides industry consulting to utilities, energy generation firms and energy retailers; a technology group that develops software and systems for clients; and a division that runs a B2B data and logistics exchange for the gas pipeline industry. The exchange is known as

The energy industry also attracted the Big Five consultancies, which, according to Weigand, "have been hiring as fast as they can to go after this vertical."

Take PricewaterhouseCoopers (PWC). The company has several practices that target the energy industry but none as big as its Business Process Outsourcing (BPO) division, which just over a year ago landed a 10-year, $1.1 billion contract with BP Amoco to operate the oil companys SAP application suite in the United States. PWC has similar deals with BP Amoco in Europe and South America.

"Outsourcing of the back office is still a relatively new industry, but the energy industry has taken the lead because theyre used to joint ventures and theyre used to outsourcing things like exploration," says Tom Eubanks, partner and head of PWCs BPO operations in Houston. "Theyre in a commodity business and have to look at the cost side of the equation a lot more."

Although PWCs BPO work is booming—another large contract, this one with Kerr-McGee L.P. Corp., was announced last month—the consultancy looks to create a new business as a clearinghouse for the exploration industry. Eubanks says oil wells are usually drilled by several companies that form a joint venture to share the risk. "Each one is doing the same accounting on the cost element," says Eubanks. "There is some redundancy to do that,and what we see is, over time, all or some parts of that could be done once," through an exchange, or clearinghouse, operated by PWC.

PWC already has launched one new energy-related exchange called PetroCore, which targets the exploration and production business. And the consultancy is working with other exchanges, including Trade-Ranger, a petrochemical marketplace, and Pantellos, a utilities marketplace that has named PWC a preferred implementation consultant.

Besides Trade-Ranger and Pantellos, theres at least a dozen other marketplaces, including the massive EnronOnline, the global energy-trading site run by energy conglomerate Enron Corp. According to Enron, EnronOnline last year, in its first full year of operation, conducted 548,000 transactions totaling $366 billion.

ASPs Plug In Application service providers are also popping up. Excelergy Corp., for example, a developer of half a dozen software applications for billing, customer care and data management, works with partners for about half of its sales and hopes to up that to 70 percent of sales, says Jay Sherry, VP of global marketing for the Lexington, Mass., company. Excelergy works with Cap Gemini Ernst & Young, PWC, and a growing list of ASPs, including Alliance Data Systems, EC Power, and US Power Solutions. Energy companies are accustomed to outsourcing, says Sherry, "and if you need to get to market quickly and dont want to staff the operation yourself, you have to use an ASP."

What also may happen quickly is the launch of new businesses to address the immediate problem of the crisis in California, which likely will worsen this summer and is already infecting neighboring states. "A lot of new technologies will be born out of this problem," says Skipping Stones Weigand.

That includes what Weigand and others call distributed generation, in which a power source such as a generator or fuel cell is dedicated to one business or neighborhood to assure power.

"The biggest data centers need their own power plant," says EPRIs Smith. The existing power grid, he says, "is being challenged in ways its never been challenged before." In what Smith calls midrange plans, or within the next few years, more generation facilities and improved transmission is needed. And in the short term, says Smith, the only solution is conservation. Thats why EPRI this summer plans to launch a load-management service that will notify businesses—by pager, cell phone, e-mail—when they most need to reduce power consumption.

"The power grid was built for lightbulbs and motors," says Smith. "Now we live in a digital society."

Whatever the case, keep some batteries handy.