David Hernandez sells electricity – a product that everyone uses but few people understand. The CEO of Liberty Power created an electric power "brokerage firm" that has been able to provide low-cost energy at a time of increasing fuel prices. The result: Liberty reported revenue growth of 216 percent between 2002 and 2004, in line with a stellar business-building strategy that helped Mr. Hernandez win the 2005 Hispanic Business Magazine EOY Award.
"Our vision is to become the ultimate low-cost reliable power supplier," Mr. Hernandez says. "In the next two years, we want to reach revenues of $1 billion. In this industry that's not unusual – we compete with companies with $5 billion in revenues. So in order to compete, you need scale. That's why we're looking to grow fast."
Until the last decade, the electricity sector belonged exclusively to local utility monopolies. In the early 1990s, Congress opened transmission lines across state lines, allowing utilities to sell their excess capacity to each other. Then a 1998 law allowed states to deregulate the retail side of the business so independent companies like Liberty could sell power directly to businesses and consumers.
Liberty buys power from the same generators as the utility, then sends it over the local utility's wires (for a fee) to the final consumer. At this point the company operates in New York, Texas, and Maryland. But Mr. Hernandez says that currently 16 states have open competition, representing a total electricity market worth $170 billion.
Knowledge of Power-Trading is Power
While Liberty doesn't own electricity generating plants or transmission wires, the company has a competitive advantage in its knowledge of how to trade wholesale power. "It is highly complex, and they [Liberty] have a team with expertise in buying and selling power – in particular, a complicated knowledge of hedging," explains Federico Peña, former U.S. Secretary of Energy and now a director at Vestar Capital Partners in Denver.
"There are significant barriers to entry [in the industry], and most of them have to do with understanding the market," comments Mr. Hernandez, a former employee of Enron. "It's quite technical and complicated, but that's the value-added we bring to the table."
Liberty's brain trust consists of five professionals in its risk management department who write contracts, says COO Alberto Daire. From a marketing perspective, the company's competitive advantage rests in the ability to customize its product for small and medium-size enterprises, offering everything from month-to-month contracts to long-term commitments. "We have been able to tailor down products to smaller customers," says Mr. Daire, "giving the smaller customers something similar to a [large] national account. If the smaller customer goes to a large utility, they won't get that product."
The EOY judges also gave high marks to Liberty's flexible problem-solving. In the EOY application, Mr. Hernandez explained how a customer who experienced a 200 percent jump in electricity costs wanted to lower energy costs but also utilize green power. As a solution, Liberty extended the term of the contract to lower the immediate cost, and promised to supply green power when the price fell below a certain threshold. "I was impressed with the way they were innovative," says William Crookston, professor of entrepreneurship at the University of Southern California's Marshall School of Business and one of the EOY judges. "It makes good sense in a fluctuating market."
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