Transcript of the interview follows:
Young: Nate, thanks for joining the ERCG ABC leadership series.
Nate: Absolutely, good to be here.
Young: Let’s introduce, to those who don’t know Energy Frameworks and CORE, a little about the
company: you are the longest software platform built around servicing the ABC market. You have been in
this space over 10 years?
Nate: Yeah I think it is right around 10 years.
Young: So what opportunity did you see then that others didn’t see and why did you enter this space?
Nate: My background was as a software developer; I started that as a kid and I have always had a passion for making software better. I think growing up in the 80s and 90s and seeing just the
terrible software people use — and we thought it was good — but you can see as a programmer the infinite potential of well written software to make people’s lives better … to do things that were mundane so that they can focus on the thinking tasks versus the kind of heavy doing tasks. As I started a consulting firm in 2003, one of my earlier clients was a broker. We were working for the wholesale side of a broker doing some consulting integration of their accounting system with some of their trade capture data … working on commissions and things like that. They said, “We have this little retail group that has kind of started and you know deregulation is about to really pick up and you know they have got some challenges capturing data, tracking data, generating commission and some other things similar to our wholesale group but kind of different, could you check it out?”
So that was our first entree to retail. We built it initially as a project for them, where we actually retained ownership of the work. Three basic things: 1) it would consume data from the TDSP, 2) calculate the price-to-beat based on the tariffs published at the PUC at the time over different dates — so it understood rate codes and a little bit of sophistication there — and 3) then generate a saving analysis based on a competitive quote. Only for fixed price products at that time, only for electricity, and only for the ERCOT market. We started to get in and learn more and more about de-reg … as an entrepreneur, I said “Hey, I think there is a need here that is more than just kind of automating a one-off process for a small firm in a niche market.” I had a lunch with a mutual friend (of the owner of that wholesale firm) who had owned a general agency in the insurance business and he was explaining to me what a general agent is and how they work and I said, “Wow there is a great opportunity here, it has a lot of business parallels between the insurance business and retail energy.”
Very early on, we went to a client said, “Hey, we want to go make a product.” They said, “That is fine but if you are going to go and sell it to other people we don’t want to pay for it.” (Which makes total sense and) I said, “No, I am going to do this on my own dime and take these ideas in the baseline. I would love to have you as a client.” Initially they didn’t come on as a client but a few years after that they did and been a client ever since.
I am not sure that I fully knew what I was getting into, really where retail would go. I think the ERCOT market was different in a lot of ways. After I started, I started going to GCPA meetings. I started staying for the board meetings, I met a lot of people went to a bunch of conferences and just sort of developed a network.
I went to the very early days at TEPA. I wasn’t there at the initial founding, but Dave Wiers and some other guys who had been customers of mine at various different places when they put that together and I knew and still know and still do business with a large part of the founding members of that organization and believe in a lot of what it was conceived to do. The business has changed so much; we have been able to continue to build — so, yeah, 10 years have gone by!
Young: Right, so a lot of growth in the customer base for you guys and, as you mentioned, a lot of change in our marketplace. How would you describe how that ABC landscape has changed and how has Energy Frameworks changed with it? How have you evolved your service offerings to serve those additional needs in the marketplace?
Nate: Well, first off you look at 10 years ago how many brokerages were in the marketplace. There was still a lot of speculation as to who would hold the C&I market share — direct sales or channel sales — and we have seen that play out and we now know the story there, which is: the lion share is indirect.
But in those early days, there was a lot less certainty and also standardization, which still has been slow coming and that is still a big “to do”. (We actually have made a couple runs at trying to establish the data standards, which we think will make everyone’s lives more easy. We are working on another run right now, which we will see how it plays out.) Also, just the lack of continuity between the various different wholesale markets ISO-NE, MISO, NYISO, PJM, ERCOT, CAISO, etc. That has not coalesced, but as new markets have opened up — Pennsylvania, New York to a certain extent, and Ohio, Illinois — we have seen that they can be liquid, that there is headroom, and that you can make money in channel.
That has really been a big change, and we are now not only multi-market, multi-commodity, multi country — we have clients serving retail customers in a dozen+ countries: Europe, Canada, Australia … fully supporting gas. In the early days, it was really just too much. There is so much in this business, and a lot of people under-appreciate the amount of complexity. If you’re a one-man band working matrix pricing at the local drycleaners, you don’t need a lot of technology — you walk around your contracts, and you fill in the price, sign at the bottom, fax it in, and wait for your commission check.
Early on, you had everything from shoe salesmen, to insurance salesmen, to door to door. We have seen a lot of them depart from the Wild West days to where we are now. What we saw that was accurate is this trend around the discipline of larger firms: where they do care about process, they do bring an energy expertise (versus just getting contracts signed). They really are adding value more than just transaction execution. So I think that is a good trend, one that weighs in our favor.
Young: You talk about standardization and accuracy of commissions. CORE has a very compelling story to tell around how you validate and verify commissions and how you help brokers capture potential lost commissions. How does that happen? How do brokers lose track of that information, and how does CORE help brokers make sure that the commissions are accurate?
Nate: Well, I can’t tell you the secret sauce, but let’s frame the problem. The problem, by and large, is it’s still a very manual, Excel spreadsheet driven industry. There is a broad diversity of suppliers. But even large suppliers are largely manual data entry, copy and paste type procedures. You start to peel back the fancy website and look at — how does the deal actually get done? How many systems are involved from a software perspective and a data perspective? How tightly integrated are the systems? Batch exporting, error-prone processes … when you start to decouple all those different links, you’ve got a customer batch system, a support call system, a billing system, and an EDI interchange system. A lot of times they aren’t from the same software vendor and there is just a lot of room for error.
So it’s not an exception that a supplier will miss paying commissions (and I am not saying always on the supplier-benefitting side). I think there is likely as much error in overpayment as underpayment because an error is an error. I don’t think it is intentional error where they are trying to short anyone. I don’t know of any of that going on. People of course will speculate on both sides … but in reality it’s inefficiencies in the marketplace from a technology perspective where there is very little linkage between a broker and a supplier. And, as a result, mistakes are made.
The next thing is contract lifecycle management. There are so many different types of contract operations that happen in a contract lifecycle. Each time there is a change you bring that administrative error percentage into the equation again. It’s a virtual guarantee that there is going to be some error along the way.
As you start to scale and grow, and get in multiple markets, and your diversity of supplier payment starts to grow, and you start to have lots and lots more variability in contract size, products that you are quoting, contract types (blends, conversions, early terms). The ability to administer that starts to get beyond the reach of a broker and their spreadsheet. A lot of shops will have ten sales folks, one administrative type person maybe, and a pricing person. Those people are barely keeping their heads above water between renewals, pricing, commissions, paying out commissions and then getting remittances from suppliers and trying to make sense of all that. At some point you’ve got balls dropped on the broker’s side. You let that run a couple of years, it’s chaos.
Some of the big wins that some of our clients have had — where they have done some auditing work in their book around historical payments — we have some ways to batch that in, so that it lightens the data work load. We have a couple of different reports that look at error in different ways. Reconciliation by itself is hard because you’ve got a known quantity reconciling with an unknown quantity. In most markets the broker doesn’t have monthly actual consumption in time enough to reconcile that on a commissions basis. Now there are exceptions, but by and large no brokers are looking at actual consumption data, re-requesting historical load under their LOA rights to get empirical billing data. You have: this is what the supplier says their consumption looks like, every supplier’s true up is slightly different in terms of how they calculate it against an upfront. And, again, the sophistication as that diversity in the supplier base, the number of commissions, the types of deals, and the number of meters on those deals … it starts to be a geometric-type growth rather than linear, and it can just explode. We have people find, routinely, six-figure back commissions opportunities — where they can go [to the supplier] and, now, empowered with data (as opposed to “I feel like that you guys did me wrong”).
There is a lot of finger pointing out there but I think people get fired up about money. Hey, it is important: “we said we are going to do this business together, and this is how we were going to monetize it together, and it’s important in a partnership that we honor those commitments.” But absent data, it is just a lot of talk and when you can put data to it, it’s “here is what our data is saying to us … can you show us where we are wrong?” I think it is less accusatory, and what we have seen is people tend to get paid, rather than get into an argument. They go, “Oh gee, you know what, let’s take a look. Let us comb through it.” They go, “You know what, we see what happened here. We booked these deals under the old terms, and you guys got some newer terms that never made it into our confirm system.” Stuff like that happens.
Young: That is incredible. This is a great segue then into the next question, so we are talking about broker-supplier communication and how they might break down – especially, vis-a-vis the commission payment. What else are you seeing in that broker-supplier communication? What kind of gap would you say exists today?
Nate: We started on this journey to build CORE in all the different facets: CORE managing the sales process; the accounting reconciliation of the commissioning piece; and looking also at the white label customer portal; and now this “marketplace” idea, an independent marketplace that is more or less cost-free to communicate — what we see as the bottlenecks, or the remaining inefficiencies.
Number one is pricing (it has to be). The two main bodies of that are matrix and custom. An opportunity for doing better in the market is the communication of pricing: the initial, back-and-forth, and final. The whole pricing conversation, the ability to audit that, to have a history, to have more formality. Conversely, the ability to have more of a lightweight informality of a chat, “Hey, here is where we’re at, here is what we are seeing, what is included in that product … Oh, I didn’t realize that … ok, that had this in it … ok, good that has got to be explained to the customer … while you are a little bit higher, I think we can make it work.” That kind of conversation.
A lot of people look at technology and go “Oh, it is going to replace the relationship; the relationship is so critical.” The relationship is critical, and technology is about allowing people to have a relationship and spend the time on that, versus spending it on keying into their spreadsheets and writing Excel macros. That is not relationship building, and it doesn’t help anyone get a transaction done faster for a customer, which is what we are all trying to do. We have a dream of the real-time custom price commercial deal. I think in one sales call you should be able to credit-clear and contract for commercial power and gas in every market. There is no reason … including historical risk management, and I am not talking about by offering an exorbitant price that assumes worst case scenario on all risk axes. I am talking about: real lean pricing should be efficient time-wise. It’s just not there today.
Number two is contracts. The contract forms change, and the PUCs in the various different state governing bodies have something to do with that, in that they mandate changes to standard language. I still think that there is a technology solution there. Suppliers and their own risk management and attorneys, advisors are changing their contract terms, and that volatility creates a scenario where there is a bottleneck around contract requests.
The problem is “Ok, we have a price, the customers is good … Oh! I missed it because I didn’t get the contract to them before they left for the day.” Guess what: we get to go through the whole routine again tomorrow. There are some people starting to automate some of that, and it requires a way for brokers and suppliers to have a more direct technology link-up in order to say, “Hey, the customer is contract-ready on this quote. Execute!” Right? [finger snap] It should be that easy. It should be a button-click, and I should just render a contract, digital sign, done.
It is that easy. It just requires coming together, and the challenge with suppliers is “Well, we have hundreds of brokers relationships.” The problem with brokers is “Well, we have dozens of supplier relationships.” So you get this multiplier of complexity, and so we say “Oh, we can’t ever do anything about it.” We think if there is a central non-market participant that is allowing both parties to hook in (where we are not a party). I think the challenge with the rest of the market is they’re owned by brokers … or suppliers.
The biggest challenge we have with people is trust: “We are going to put all our customer data in there and how do we know you are not going to rip us off?” They have been ripped off before probably by sales guy Jim who was unethical and did some things … so there is a lot of concern out there about security. Not being a market participant is a big factor for us, and I think if there was to be an emergent channel of conversation between the ABC community and the supplier community, it would have to be not owned by a market participant because the conflicts go nuts from there.
Number three is remittance. We talked about commissions and we covered that a little bit, but we think of that collectively as a remittance: it’s an explanation of why you got or didn’t get the wire this month for your commissions. And, Lord! the variability in those, not just supplier to supplier but within a single supplier — they change it every three weeks; it drives the brokers crazy. (I don’t know who is making the calls at the suppliers, but if they are getting technical advice around the data interchange, they are not getting a balanced business perspective of the trade-off of making these changes.) And it is so volatile. We know brokers that won’t deal with suppliers — not because they don’t have great pricing, or even customer service, or even a good relationship with their indirect desk. It’s the headache factor associated with knowing if we got paid right or not or even getting quotes in because they’re always changing.
There are opportunities for standards here. Mature markets develop standards because everybody wins; standards are not built around things that differentiate us. They are built around things that are commodity expenses, shared expenses, shared cost by everyone and we all can cut and reduce cost and increase efficiencies in ways that don’t make us more or less competitive by adopting the standard. They help us all serve all of our customers better over time.
The emergence of these broker portals … some suppliers are kind of pulling back on their idea of, “Ok, we are going to go build this portal and then all the brokers will come to us because we have the best portal.” Fundamentally, brokers identify themselves as market shoppers, and the idea that a marginal productivity boost from having a portal will win favor is a little short-sighted. As everybody starts to build a portal and starts to say “Hey, all your pricing should go through our portal” … well, now as a broker I just have that many more portals to go through and now it takes longer — and talk about removing the personal element! The idea of a technology connection between the broker and the supplier is good. What I don’t think is “everyone has their own portal” is going to win. Everyone can know the story of Hudson and their portal … they were someone who really put it out there and said “Look, we are going all-in on this portal.” It remains to be seen whether that pays out the level of competitive advantage that I think some might see it as.
Young: Clearly some supplier portals are doing very well — you mentioned the Hudson one and the Reliant one is doing pretty well, too. Now the principle that you were covering a few minutes ago, saying that a supplier-led portal has inherent conflicts of interest, and similar conflicts exist from a broker-led portal. I think what you’re suggesting is that the CORE Marketplace, being competitively neutral, is the ideal scenario. My question then would be, why has the supplier-led portal (despite its inherent conflict) why has that been the chosen path for our industry so far? What is preventing services like CORE Marketplace from really taking off? Why are brokers not using it more, why are suppliers not integrating more with these neutral platforms?
Nate: So we are really in beta with CORE Marketplace today. It is an idea that we have had for a long time. We actually have made no announcements about it specifically and all we did at the bottom of pricing requests is say, “Hey, if you would like to deliver quotes directly to this broker, it is already on their screen. So click here to sign up and login.” We have just from that received a couple of thousand quotes doing nothing else. It’s an experiment: is there an appetite for this? is there something where people say, “Hey, can I make a broker’s life easier rather than harder and try to win that way, rather than differentiating with my portal, let me come to them” — rather than saying, “Hey, you come to me.”
You asked why they have been successful. I think it is really a) an awareness and b) there is a critical mass and a network effect to the central model. That drives a lot of this industry: “Oh, Hudson is doing that, Reliant doing that … ok, maybe we need to get on that bandwagon.” There are various other suppliers that are technologically advanced, and we are happy to see that advancement because it just means that they are closer to the ability of direct party-to-party technology level communications. So let the human conversation go on, but let’s save each other the re-key and the error, and when we get down to the contract and commissions, it’s just smooth sailing.
We have dozens of broker relationships. We probably do on average $10-15 million in broker commissions every month (to give you a sense of deal volume that are coursing through CORE on a monthly basis), and that is active clients — that is not any historical volume, and obviously that grows every month.
When we talk to our clients and say, “Hey, if a supplier were to bring their pricing to you, be able to push it to you” … the channels want to have control and not necessarily shop every deal with every supplier and exhaust my good will there and they say, “Hey, Nate, you sent us ten deals and we haven’t had any contracts — what’s the deal? are you just using us to price check?” They want to know that this is a genuine opportunity to compete, and that is fair. What we can do though is (to the supplier) give them back metrics — when you compete and you win, you win by how much — without disclosing any confidential information. We can give market feedback to both sides that says, “When you price with n suppliers, how often do you get a better price than x.” We can say, “When you win for these types of accounts, deals with 2 meters in PJM with high load factors, how much are you lower than the next best price?” So you can actually start to get pricing curve feedback that isn’t, “Hey man, you’re 2 mils out I need you to, you know [laughing],” … it is not a self-interested, subjective, “hey, you are high here.” You have run your curves, and you know that there’s no way people are making money.
There is a lot of suspicion there and we could give authoritative data and feedback that doesn’t comprise any confidence because of our volume. If you’re pricing two deals and I tell you, “Ok, here is where you were” — one deal is in ERCOT and the other is in PJM, there is not a lot of confidence there, like seeing through the veil. It is hard for a new participant that doesn’t have volumes to come in and say that there is any interest there. The supplier thinks “we could go spend the money and do this integration, but there could be nothing for us there.” Whereas we could say, “On aggregate, you are doing this much volume with our clients rights now. Imagine you could grow that by offering a direct quoting mechanism that is in real time.” I think that is a compelling story. So far we have started to have some initial conversations with suppliers and I think there is a lot of opportunity there. So everybody wins.
Young: Let’s think about the future a little bit as we close this out. Is the future of the business, in your eyes, CORE and growing that business or is CORE Marketplace really the way for your company and the industry to evolve?
Nate: I think the industry, like all maturing industries … there are still a lot of exceptional behaviors out there where things are non-standard and people say, “well, there is no standard,” and I think that at some point that is just not true. There is a standard and there may be exceptions, but there is a rule and there start to become rules in how we do business together and that the more companies partner, the more those rules benefit both parties. Whether you talking about contract terms or technology choices, I think that that is a huge opportunity. What we have built today is a retail energy sales and contract management, contract life cycle management platform, and what we found is that we are able to re-package that.
For example, we have a client that is a large corporate consumer national and they hire ABCs as advisors and consultants, but they do their own transactions. So they have some of the same needs as a broker, in tracking contract life cycle and meters, what’s on, what’s off, and who their relationship is with, and when they expire and all of that. And they get the advice from a retained channel adviser, but the actual transactional piece is in-house. So there are so many ways that this business works.
What we have found is that we have all the pieces, and now it is about us offering maybe a more diverse package of services, re-packing them in different ways. For example, a white label broker portal for smaller suppliers that maybe can’t afford but would like to have the ability of having online transactional relationships with brokers, or partnering with some of the commission acceleration 3rd parties that are starting to enter the market. Some new mobile offerings that we will have, some web product offerings that we are working on.
I am very excited about the future. I think that there is a place for an independent marketplace. It remains to be seen if it’s either going to be “one ring to rule them all” or whether there will be multiple, material opportunities like that to emerge.