ERCG continues its ABC leadership interview series with Jeff Shoaf, Senior Vice President of Amerex Energy Services. We sat down with Jeff and discussed several topics, including --
ERCG: Before taking the helm of Amerex Energy Services (AES), you worked at suppliers that successfully served a range of small business to very large C&I customers. You've also seen the retail energy industry move from a direct sales model to conducting most of their sales through ABCs. If you were to start a retail supplier today, what would you prioritize in order to grow the book profitably?
Jeff: From a sales perspective, I would definitely start with a focus on the indirect sales channel to acquire clients. That channel offers the benefit of a smaller number of concentrated relationships, which if developed and nurtured will lead to many client opportunities with a multiplying effect. While I believe there will always be clients who choose to procure energy directly from suppliers, in my opinion those relationships take much longer to develop, and a supplier must have a multi-year track record of serving clients before those customers, which tend to be larger and more sophisticated, would entertain buying from them. This model has been followed by many successful suppliers, and we have seen a handful slowly dip their toes into the direct sales area after establishing that track record. In terms of supply and risk management, I think it’s important to align sales targets, meaning both client sizes and geographies, with the internal skill sets and capabilities. I think too many suppliers take an approach that they want to serve all types of clients, rather than deciding to focus on the larger more complex clients, or the smaller simpler clients. I would advocate for targeting the types of clients that the organization is suited to serve based on appropriate load forecasting, pricing, risk management, etc. Also I would focus on a smaller set of markets/states/utilities, specific ISOs rather than trying to jump into most or all deregulated areas quickly. A supplier needs to be able to supply one or two markets really well rather serving all markets poorly. And on the back end, customer service makes a huge impact. This begins with enrolling and switching clients timely, billing them accurately, resolving calls expeditiously, handling broker payments timely and correctly and encompasses all client interactions.
ERCG: How did Amerex get started and what were some key milestones in the growth of the business? What are a couple benefits of being part of a larger organization?
Jeff: Amerex has operated in wholesale energy markets since 1978 (brokering power and power basis, natural gas basis and options, emissions allowance credits and renewable energy credits), and made the decision to expand its energy brokerage expertise to end use clients in 2004, shortly after the Texas market deregulated. Amerex was acquired by GFI Group, Inc. in 2006, which transitioned us from a private partnership to part of one of the largest publicly traded over-the-counter wholesale brokerages. AES further expanded in 2009 with the acquisition of Competitive Energy Texas (CETX) out of Houston, in 2011 with the acquisition of Energy Choice Solutions (ECS) in Pennsylvania, and in 2015 with the acquisition of ABA Energy Partners in Ohio. Most recently, GFI became a wholly-owned indirect subsidiary of BGC Partners, Inc. (NASDAQ: BGCP), which is widely recognized as one of the leading full-service wholesale inter-dealer brokers in the world under the leadership of Howard Lutnick, Chairman and CEO of BGC and Cantor Fitzgerald. Being part of a large wholesale energy brokerage allows us to provide market intelligence and wholesale energy price data most energy brokers and consultants either cannot or would not have to spend significant money and time to acquire. Being part of a large multinational organization bolsters our credibility in the market, especially with larger clients, and provides us access to capital and internal resources smaller firms may not enjoy.
ERCG: What qualities do you look for in an ideal supplier partner?
Jeff: First, for Amerex to even consider a supplier they must meet the basic cornerstones, which I refer to as the three Ps: Price, Product and Performance. Even though suppliers hate to hear it, we deal in commodities and their pricing must be competitive. That doesn’t mean they need to always be the lowest priced supplier, but they should be generally competitive over a period of time. All suppliers go through cycles when they’re not competitive, but the successful ones figure out what’s wrong when they’re not winning contracts and correct it. On the product front, we do not simply sell fixed prices to all of our clients. We have a large portfolio of managed accounts whereby we are constantly monitoring energy market prices looking for opportunities to assist our clients capture lower prices. We need suppliers that can not only provide those products, but also support them from an operational perspective by being available for those price triggers and providing fair market-based price quotes. Our clients rely on us to validate all prices, whether for new contracts or for intra-contract hedges. By performance I’m referring to the basics of enrolling, switching, billing and servicing clients. We need to have reasonable comfort that if we recommend a supplier to one of our clients, the supplier will perform so we don’t end up delivering problems to our client.
Beyond those cornerstones, what separates the average suppliers from the excellent suppliers to Amerex are the qualitative aspects of the relationship, which basically boil down to being easy to work with and treating us with respect as a partner. We need responsiveness and accuracy with prices and contracts. We need to have questions answered quickly and issues resolved timely. Another big one is managing their internal sales teams so they’re not allowed to attempt to circumvent our client relationships. Most of the larger suppliers have figured this out and we rarely, if ever, have issues. However it still amazes me that there are suppliers who still have a distrust of brokers and consultants, which comes through in how they structure and manage their business. These qualitative factors come into play when we determine which suppliers to invite to provide quotes for our clients, and there are some we just avoid when we believe it will be too difficult or create issues that can be avoided otherwise. On the other hand the suppliers that fit those characteristics of the “ideal supplier partner” tend to see most of our client bids.
ERCG: We've heard suppliers say that Amerex is a market leader in terms of knowledge and skill. Why do you think they say this, and what are some examples of deals where you have demonstrated your expertise?
Jeff: We truly appreciate, and pride ourselves on that reputation. I feel suppliers say that due to their experience with us over time, and the track record of innovation and sophistication we’ve demonstrated, along with our passion for digging into the details to create value for our clients. First and foremost we have some incredibly bright people on our team, who possess not only general energy market expertise, but also have a strong grasp of wholesale power markets, natural gas markets, retail energy price components, and understand the differences across different ISO and utilities. Some of us like myself have worked for energy suppliers, while others have worked for power utilities, natural gas utilities, trading companies and other energy consultants. We typically look to hire people with energy experience and expertise. In addition, I feel most suppliers appreciate we have access to wholesale pricing most other brokers do not, so when we push back on their pricing, or provide feedback they’d rather not hear, they know it’s based on real data. We routinely help suppliers try to figure out when their pricing isn’t competitive, and I also believe we differ from most brokers in that we’ll also alert suppliers when we feel their pricing is too low and they may have missed something. Rather than taking advantage of an error, we’d rather be a partner to the supplier so they don’t have a negative financial impact, or end up creating a negative surprise for our client down the road.
We love large complex transactions, as they really allow us to flex our brainpower. Our long-term transactions with some very large universities, most notably Baylor University, have been documented and recognized for their creativity and highly customized and structured approaches. We’ve structured and executed heat rate electricity agreements, where the power price is indexed to natural gas prices, in a half a dozen states, including a large transaction of almost 1 TWh in New York which allowed our client to purchase power for under 3 cents/kWh in 2015. We developed some creative structures for natural gas contracts to react to the price run-ups following the polar vortices, which allowed our clients to lock in fixed prices for portions of their contracts but capture subsequent price decreases to lock in additional positions. We’ve consulted to multi-site retailers on the economic attributes of renewable purchase opportunities, resulting in recommendations to either purchase or not purchase wind and solar power. Most recently, we assisted the City of Houston structure and negotiate a 20-year solar power purchase agreement, which required a tremendous amount of modeling and analyzing solar production estimates, load estimates, forward price curves and contract language.
ERCG: AES offers energy services in US and Canadian markets, even those that are regulated. What is the most frequently requested service in regulated markets and why? Do your customers in regulated areas express a strong interest in retail competition?
Jeff: The predominant service we provide in regulated markets is data management, including invoice audits, invoice payments, budgeting and reporting. We occasionally assist in tariff analysis and verification also. Other one-off projects we’ve handled are working with companies to bring in natural gas pipelines to reduce reliance on diesel or other fuels, increasing reliability and decreasing costs. We recently helped a very large industrial negotiate with its local co-op to identify better ways to purchase energy, also ultimately driving down costs.
Sitting where I sit, I can’t honestly say I hear a groundswell of support for deregulation directly from clients. However I do believe most companies appreciate having a choice and having access to competitive markets. Looking across competitive markets now, most notably ERCOT and PJM, I believe it is obvious that competitive markets and forces have driven down the cost of energy, even though regulatory forces have allowed capacity pricing to offset some of those savings for customers in PJM.
ERCG: What are your thoughts on some of the technology innovations we've been seeing in the ABC space, from broker e-commerce platforms to back-office software as a service (SaaS) providers?
Jeff: Suppliers are increasingly providing access to data and tools to help their ABC channel partners. We rely on large amounts of data, from client usage information to client billing data to our payment information, and the faster and more automated we can access that the better. Too much information is still delivered over email, which typically wastes time and is just inefficient.
In the ABC space, we are definitely seeing a large increase in vendors looking to provide systems to automate processes. Again, our industry is still overly reliant on email and Excel to deliver our services to our clients. I foresee a shift towards further automation in the areas of data collection, requests for pricing from suppliers, collections reconciliations and customer service. Some larger companies may choose to build this in-house, but there is a growing contingent of companies looking to provide this as an outsourced solution.
One area that has already grown a lot in the last year or two is the broker of the broker model, which I’m admittedly not a fan of. Some of these models allow individuals or companies with little to no experience, expertise or even capability to become a broker overnight. The vendor holds the licensing and registration where applicable, contracts for supplier agreements, and provides pricing, contracts and collections on behalf of the broker. Brokers utilizing these platforms are invisible to suppliers and to regulatory authorities in the states where licensing is required. I personally feel more regulatory oversight would be good for our industry. I think it is reasonable to expect any aggregator, broker or consultant to meet some minimum baselines of market acumen, experience, financial viability and ethics in order to provide advisory services to businesses. Advisors and brokers in the personal finance, insurance and real estate industries, just to name a few, must meet certain requirements and adhere to certain standards, so why shouldn’t we if we’re all providing expertise and working on behalf of our clients?
For more information, contact Young Kim, Principal at ERCG
Phone: (617) 903-0877
ERCG sat down with leaders of dozens of ABC firms to get their insights on the market and how to build a successful business