ERCG continues its ABC leadership interview series with Jared Patterson, Director of Energy Services at Rapid Power Management. We sat down with Jared and discussed several topics, including --
ERCG: Rapid Power Management (RPM) started in 2002, just as the Texas market was opening up to retail competition. Tell us a little bit about the journey from new entrant to a mature company with stable revenues capable of supporting nearly a dozen employees.
Jared Patterson: At the beginning of deregulation, RPM’s founder, JD Dodson, found a niche in the marketplace as a customer advocate. There weren’t many companies focused on the customer’s needs, but more so on the delivery, supply and dollars behind the deal. As the utilities laid off customer service engineers and as more REPs entered the market, the customer needed someone to help them make sense of it all. From the very beginning, we learned that combining energy procurement with demand-side services provided the most robust value in tune with our clients’ needs.
That original mindset has evolved to where our clients view us as the Energy
Management Department of their company. In-house, we can handle everything from energy procurement and predominant use studies to power factor correction and LED lighting retrofits. Truly
partnering with our clients to reduce their overall cost has led to very low customer turnover and a large number of customer referrals.
As opposed to other business models, we’ve grown slowly and organically over the years. Our reputation, our brand and our culture are very important to us, so we’ve shied away from hiring large numbers quickly. As a result, every member of our team is highly educated and highly capable. Behind the scenes, we’ve invested heavily in the technology we use to serve our clients. This allows us to provide rapid, yet accurate service with lower overhead costs. Our goals are less financially driven and more about building a great company with a valuable offering to our clients.
ERCG: From a broker perspective, how competitive is the Texas market compared to 5, 10, or 15 years ago? What strategies are in your toolkit for dealing with changes in the market?
JP: The Texas market is as competitive as it has ever been. Despite some consolidation, there are a very large number of brokers and REPs and our clients receive multiple calls each week from competitors. The Texas market is also more mature, meaning that larger consumers are smarter about the partners they choose.
Since 2008, the decline in natural gas prices has allowed a number of ABCs to grow their businesses without a solid value proposition to the client – just a lower price. As the market rebounds in the future, I expect many of those ABCs to either expand their service offerings or exit the marketplace. Either way, RPM is well positioned to compete in an up-market or to grow strategically by acquisition.
ERCG: For many customers, the transmission and distribution (T&D) charges can be more than 50% of the electricity bill. Since traditional electricity procurement covers the energy supply portion only, how do you think about services that help a customer reduce their entire bill?
JP: There are typically three components to any electricity bill, 1) Energy Supply, 2) Delivery and 3) Taxes. RPM has strategically positioned itself to reduce all three components for our clients. The best example of this is power factor correction.
Power factor is a ratio of how effectively power is being consumed, which utilities measure at the meter. If the ratio is too low, many utilities charge a penalty. Keep in mind that the penalty is on the delivery side of the bill, simply passed through by the REP. Though retail rates have decreased dramatically since 2008, delivery rates have increased dramatically during the same time period.
RPM designed and sold its first power factor correction unit in 2003, a year before the penalty hit the Oncor service territory. Since then, we've completed thousands of installations from the eastern US to Hawaii. Since the power factor penalty is per utility, and is not related to deregulation, it’s not uncommon to see us serving clients within regulated utilities.
Our experience, combined with a performance guarantee on every project, has allowed us to build significant trust in the marketplace and a long list of satisfied clients throughout the country.
ERCG: What qualities do you look for in an ideal supplier partner?
Our ideal REP is financially stable, trustworthy and an educated partner with very competitive pricing and who makes it easy to transact. It’s also important that REPs keep us informed of any changes or client-based incentives so that we can fully educate the client about all of their options. Education and open communication cannot be overstated as a critical component to our relationship with the REP community. Relationships make this industry work.
One of our core values is “professionalism is a way of life.” Therefore, we make every attempt to be impartial during the bid process. Our clients deserve and expect an unbiased recommendation. RPM doesn’t participate in the giveaways or contests which some suppliers offer. Any excess financial award given to RPM is typically turned around to charity, typically Wounded Warrior Project or an Angle Tree family during the Christmas season.
ERCG: Sometimes, we hear of ABCs that place a high volume of business with certain suppliers even though they have negative experiences with these suppliers. What is the relationship between incumbency, price, and other contract terms?
JP: Two of our core values are “that’s why we have rapid in the name” and “strive for excellence.” We try to live those out daily, so it’s frustrating if a supplier isn’t doing the same. Quite honestly, it makes all of us look bad. Luckily, there are a number of good and reputable REPs in the marketplace.
In terms of renewals, we offer an unbiased bidding process so that our clients can make decisions freely about who they want to contract with for power. Incumbents are generally included in this process and are almost always discussed with the client. At the end of the day, price is king and if there is a significant difference between the incumbent and another provider the customer will move.
Next to price, key contract provisions are critical in the decision-making process. With a hefty percentage of our clients in the manufacturing space, the decision may come down to a usage bandwidth provision or other contract clause.
ERCG: Broker M&A activity is picking up again. Recent deals would indicate that outside or parallel industries (real estate, investment, oil firms) are seeing value in the power broker business. Why do you think there is so much interest in broker M&A? What are the risks to aggressive M&A activity?
Broker M&A is attractive right now because of the low barrier to enter the marketplace and the assumed long term residual cash flow of the business. I believe you’ll see more M&A movement as prices rise, particularly from ABCs who don’t offer companion services to their client base. There will be a hard stop on growth if all you have to offer a prospect is a lower rate.
There are some significant challenges to M&A on the ABC side. First, there are many ABCs who don’t adhere to the TEPA “best practices” on commission limits. RPM does adhere and has a ceiling of what we’ll collect as a commission. Further, we don’t place value on income above that threshold.
Second, so many brokers are paid a combination of up-front, partially up-front and residual payments from the REPs. I don’t support the up-front payment model and believe it encourages bad behavior in the marketplace. If the relationship manager to the client exits during the acquisition, and the previous shop has been paid their commission up-front, what is the financial value of that contract?
There are certainly advantages to growth by M&A. However, our reputation, our brand and our culture are so critical to our success and the wrong fit could jeopardize our standing in the marketplace.
ERCG: On the RPM website, you list numerous partner organizations such as BOMA, IFMA, IEC and, of course, TEPA. What are some of the ways you benefit from these carefully chosen partnerships?
JP: One of our core values is “good will means many things.” We strongly believe in giving back to the community and to the industry through direct relationships with charitable organizations like Meals on Wheels or through industry groups like TEPA or BOMA. Partner organizations also help broaden our audience to live out our mission statement, which is “Educating our clients to make smarter energy decisions.” Our best partner groups give us the opportunity to teach and share the knowledge we’ve gained having served clients since the inception of deregulation in Texas.
For more information, contact Young Kim, Principal at ERCG
Phone: (617) 903-0877
ERCG sat down with Mark Nuzzo and Tom Kowenhoven of Energy PriceBook - click below for the interview.