establish the status of a trusted partner with our customers. Because we come to them and we say we are going to do this for you, and deliver X value to you, and every quarter our sales people actually drop by and visit face to face every one of our customers and actually give them a quarterly check and sit across the table and say “Here’s the value we promised to you and now we are delivering it.” It’s a very tangible way to distribute the value we provide, and at the same time to find out what else we can do for them. Very quickly we become a trusted partner and they turn to us and say “Can you help me with this problem, analyzing this opportunity that I see?” As more and more customers were coming to us with this request, we decided to bolster this side of our business, because if we don’t provide these services somebody else will.
X: What kind of services were they asking for most often?
DB: A lot of times it was energy procurement, where they are in a deregulated market and they can choose where they buy their commodity electricity. A lot of times they would come to us and say “Can you help me evaluate whether I should look at these competitive supply opportunities.” You mentioned the acquisition we made in September, MDEnergy, which is a great player in this space. What they do is basically administer online auctions or paper RFPs [requests for proposals] on behalf of our customers and bring all the competitive suppliers to the table and help our customers negotiate the best contract possible with competitive suppliers. Once we secure the contract we actually get paid by the competitive supplier. It’s a finder’s fee, a commission that we get on a recurring basis over the life of the contract.
X: I know part of your purview is regulatory affairs and I wanted to get your quick download about what the challenges are there. I know that you guys late last year ran into some trouble trying to fast-track an application in California to set up a demand response network there.
DB: I would say less that we tried to have a fast track application, than that we followed what the California commission said we should do, which was an advice letter process.
X: And then they decided to deny that application.
DB: They decided that this was something that should be vetted through a full-on review process, because it was more from their perspective generation than it was demand response.
X: So what lessons are you learning from that kind of experience so far? Is this still a new enough idea to public utility commissions that they are still figuring out what they think about this as they go along?
DB: It’s partly that. In California there are specific dockets and proceedings open right now to really quantify the value of demand response. There is still a lot of work that needs to go into the proper and best baseline methodology. They are absolutely still getting comfortable with this.
But more than anything, the takeaways from 2007 were the strong tailwinds that we have in terms of coal-fired plants all over the country getting rejected based on environmental concerns and emissions concerns. Growth in demand continues to skyrocket. Demand response is getting more and more positive attention than ever before in terms of being a real solution to address our problems. So there is definitely some review processes that have cropped up and rightly so, these are big decisions that the utility commissions are making. But I’d say overall we are seeing a lot of tailwinds and public utility commissions are trying to learn proactively about demand response.
California has something called their loading order. Basically the state public utility commission has said that demand response and energy efficiency are at the top of our loading order. What that means is that before a utility can look at building any kind of generating capacity they need to thoroughly vet the opportunity for first doing energy efficiency and demand response. That puts a priority on demand response and efficiency, first and foremost.
X: But even if you’re at the top of the loading order, it sounds like you are still having to go through the same process of regulatory review.
DB: Absolutely. This is the ratepayers’ money and the public utility commissions are tasked with the responsibility to make sure that the what they are buying with ratepayer money is a reliable resource. The electric power industry is heavily regulated, there is no getting around that. So we as a company have invested heavily in terms of our regulatory affairs efforts and really are a pioneer and a thought leader in the industry, and are doing a lot to elevate and grow the market and put forward the best practices in terms of things like baseline methodologies.
X: I’ve got a number of back-burner stories where I’m continually collecting examples as I go along, and one is about the unexpected frustrations that green energy producers run into when they actually go out and try to site facilities. They have to interact with the very same regulatory system that was put in place to regulate very polluting industries, and having to deal with the same layers of bureaucracy and years of hearings and permitting in some cases. I wrote about a recent case in Maine of a company that had to spend five years getting permits for a wind farm. It seems a little ironic. Obviously the review process is there primarily for public accountability and so that ratepayer money is well spent. On the other hand, do you ever get frustrated?
DB: It’s a great question. The thing that is so attractive about our business model is that we don’t have siting issues. Unlike a wind farm or even photovoltaic arrays we don’t need physical land. We are leveraging the latent potential of C&I customers that are already doing business. Our business is about bringing the information technologies and the control capabilities that we have to take advantage of this latent resource and bring it to market. The most significant challenge usually for generators is the siting issue. They need to procure viable land and go through the whole permitting process. But everything we do is behind the meter. We are working to reduce demand, so we don’t have the most significant regulatory hurdles that a wind farm might face.
X: But you are treated by public utility commissions contracting for power as if you were building a new peaking plant.
DB: Contractually, we have a regulatory process to go through, but we haven’t been too frustrated. We haven’t seen massive delays or years-long processes to get our contracts approved.
X: I was looking at your third-quarter results for 2007, and it looked like expenses went up quite a bit relative to the same period for 2006. Do you anticipate a period where, because of your expansion, expenses will be higher than revenues for a while?
DB: We don’t give any guidance about those sorts of operating details. But it’s part and parcel of our employee growth. We’ve doubled our head count in the last year. That’s why you’ve seen the growth in expenses—it tracks very much linearly with the number of employees.
X: What kind of milestones should we be on the lookout for in 2008?
DB: More of the same. You are going to see us, hopefully, continue on the trajectory we are on. There will be more megawatts under management as we sign new contracts and open up new service territories. That will be a big milestone to look for—building beachheads in new geographies.
