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."
Selling Power "Door to Door"
For consumers, new players like Liberty Power represent hope for lower energy costs, a rising concern at a time of spiking fuel prices. Mr. Peña points out how industries like airlines and telecommunications have lowered their prices under deregulation. "In airlines, the public has saved billions of dollars on ticket prices; in telecom, you can get phones almost for free. … You will see the same thing in the electricity sector as more states turn to deregulation," Mr. Peña predicts.
Liberty Power began selling in 2002 in New York City, where high electricity costs squeezed small businesses. The company's sales staff knocked on the doors of professional offices, restaurants, and bodegas with a message of cheap electricity.
In time Liberty won contracts with large customers such as New York Life and Lowe's. For corporations and government agencies, the company's Hispanic ownership offers a selling point. "Almost all the big companies have made a commitment to diversity spending, and now they can buy electricity [from a minority supplier]," says Mr. Peña. According to the company's EOY application, it is "uniquely positioned as the only national electric provider that is Hispanic-owned."
Cost & Capital
So far, Liberty has kept its costs low through operational efficiencies. The company started with four partners in 2001 and currently has only 37 employees, plus hundreds of telemarketers supplied by outside contractors. But at this point in the company's growth cycle, the cost of capital looms as an issue.
Wholesale electricity trades in units of 25 megawatts, enough power for 25,000 homes or small businesses. A 25-megawatt supply for one month costs roughly $1 million, so the numbers can grow big quickly during times of fast growth. The cost of capital relates directly to price and profitability for a power broker like Liberty.
In its search for capital, Liberty was one of the companies that presented their cases to potential investors at the Hispanic Business CEO Roundtable on Capital Markets, held in conjunction with the EOY Awards Gala November 10 in Beverly Hills. "I was impressed by the feedback from investors at the Hispanic Business EOY event," Mr. Hernandez says. "Right now we are actively pursuing those contacts."
To date, the company's financing has come from the founding partners' savings, plus contributions from family and friends. This bootstrap approach worked only because the company obtained large credit commitments from power suppliers.
Although venture capitalists and long-term investors such as Mr. Peña at Vestar have continuing exchanges with the company, no equity investments have been finalized, according to Mr. Hernandez. "We have talked to strategic and financial investors, and they have been impressed by our management team," says Mr. Daire. "We are strong in the finance area, strong in energy, and strong in sales and marketing. … [The investors] are buying an instant management team."
And, unlike many entrepreneurs, Mr. Hernandez has a major carrot to dangle before private investors: a profitable exit strategy.
Based on 2005 revenues of approximately $100 million, he plans to reach $2 billion within the next five years and then take the company public or sell it to a major player in the industry. Given the high profile of energy costs, and the trends toward deregulation at the state level, the strategy makes sense from a market perspective. On the financial side, Mr. Hernandez quotes the wisdom of super-investor Warren Buffett: "We continue to look for large energy-related assets."
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