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Telecom veteran charged up over new role

 

To Donna Jaegers, the decision to take E.J. Butler Jr. off the job he had been doing as one of Paetec’s top managers and put him in charge of U.S. Energy Partners LLC did not quite add up.

Jaegers, a telecommunications analyst with D.A. Davis & Co. in Denver, wondered why Paetec would move its chief operating officer to head a Western New York energy supply company Paetec had just bought for $3 million.

Butler, a Paetec co-founder who was instrumental in moving the Perinton company from a regional startup to a $1.6 billion Fortune 1000 firm, took the helm of a firm with $20 million in revenue and four employees.

To Butler, whose titles since February, when Paetec acquired U.S. Energy Partners, have been president and CEO of Paetec Energy and U.S. Energy Partners, the move makes perfect sense.

For Paetec, he says, U.S. Energy Partners represents a golden opportunity. It is a chance to build a new, national business as an electricity and gas supplier and an energy adviser, an arena none of Paetec’s telecom competitors are looking at. It also is an area Butler and Paetec chairman and CEO Arunas Chesonis believe has nearly unlimited potential.

The fact that no other telecom firms are looking at a similar move underscores the breadth of opportunity awaiting Paetec, Butler says.

"Look," says Butler, as if explaining something that seems to him an almost too obvious illustration of how wide open the market is, "I’ve been chief operating officer of Paetec for six years and I’ve never heard from an energy supplier."

When another analyst asked why Butler was taken from COO to head U.S. Energy Partners during an earnings conference call last month, Chesonis said he expected the energy division to grow to national prominence and possibly eclipse Paetec’s voice and data business.

If you expect results like that, Chesonis said, "you put your top people on it."

Chesonis’ interest in linking telecom and energy dates to the early 1990s, when he and Butler worked for Rochester-based ACC Corp. Chesonis became intrigued by the energy market after meeting Charlie Waters, a former Dallas Cowboys player and Denver Broncos defensive coordinator who had started a power marketing company called the Energy Transfer Group LLC in Texas.

Chesonis proposed an energy-related division to the ACC board. The board found the idea interesting but decided it would be too distracting for Chesonis, the company’s president, to be involved in a non-telecom business.

After ACC was sold to Teleport Communications Group Inc., which was in short order acquired by AT&T Corp., Chesonis, Butler and six other ACC alumni started Paetec. The idea of linking energy and telecom still looked attractive to Chesonis in 1998, Butler says, but building Paetec’s business as a local exchange carrier and supplier of data services took precedence.

It was Butler who in 2007 found a way for Paetec to get into the energy business. Tom Vacanti, a next door neighbor in the Buffalo suburban hamlet of Snyder-where Butler lives and has commuted some 80 miles to Paetec-was a longtime telecom industry veteran.

Vacanti and a fellow telecom veteran, Ken Rowen, with whom Butler also was acquainted, had both been bruised in the 2001 telecom meltdown when companies they worked at had filed bankruptcies.

In late 2003, Rowen and Vacanti started a telecom services brokerage, deciding to take on energy sales as a second line of business. Within six months, the pair was dumbfounded to find that they were selling more electricity contracts than telecom services. Some four years later, they had 400 energy accounts.

"We expected energy to be just a door opener," Rowen says. "But it became compelling."

In 2007, Paetec bought Vacanti’s and Rowen’s brokerage. One of the brokerage’s main suppliers was an energy service company that had been started by former National Fuel Gas Co. executive Robert Kreppel of U.S. Energy Partners. Butler opened negotiations with Kreppel in fall 2009. Paetec’s all-cash $3 million acquisition of the ESCO closed this spring.

Vacanti and Rowen now work for U.S. Energy Partners under Butler. Kreppel no longer has a financial stake in the ESCO but has a consulting arrangement with Paetec, which he plans to maintain indefinitely.

Growth plan

Butler’s and Chesonis’ plan for U.S. Energy Partners is ambitious. It is to grow the Western New York energy supply firm into a national player as a supplier of electricity and an energy-management consultant-and someday, perhaps, as a force in alternative energy.

Much of how that might take place is vaguely formulated. But Butler sees that lack of specificity as the flexibility needed by a nimble startup.

The plan to grow U.S. Energy Partners, he says, is not unlike the plan Paetec followed: "Compete as a seller of a commodity service and look for opportunities. We’re going to sit back for the next 10 years and see which way the wind blows," he says.

With that last phrase, Butler admits to a punning reference to the possibility of U.S. Energy Partners’ eventual involvement as a serious supplier of wind-generated electricity.

Involvement as a supplier of alternative energy is something that "absolutely could be a possibility," he says.

Although U.S. energy markets are not yet fully deregulated, Butler, like Chesonis, sees them as rife with untapped opportunities.

Just as telecom deregulation eventually created market incentives that resulted in the development of cell phones, video streaming and other technologies, Butler believes, energy deregulation will spur alternative energy technologies. Such promise is unrealized, he concedes, but the market is just beginning to come into its own.

Energy service companies have been around since states started deregulating their gas and electricity markets in the late 1990s. They are rough analogues of telecom’s deregulated competitive local exchange carriers such as Paetec.

It is largely in this similarity-the ability to pick and choose customers without the burden of having to be suppliers of last resort-that Butler sees an avenue for Paetec to succeed in the energy business.

Unlike CLECs, which concentrate on commercial accounts, ESCOs supply residential and business accounts. Residential, or retail, customers account for most of U.S. Energy Partners’ clientele. But commercial accounts bring in some 60 percent of revenues, Butler says.

Already skilled at selling voice and data services to Paetec’s business customers, the company’s sales force would easily be able to add energy and energy-related services to Paetec’s product suite, he says.

Selling energy to Paetec’s existing customer base should get easier as more electricity goes to power voice and data services, Butler says. Among the prized Fortune 1000 market segment, the companies the telecom industry refers to as enterprise customers, voice and data purchasing decisions largely have migrated from purchasing managers to chief information officers, he adds.

As voice and data begin to gobble up most of the power that companies buy, CIOs, the company officers Paetec salespeople already most frequently deal with, will take over power purchasing decisions.

Chesonis believes that getting into the energy business early will give Paetec a leg up in the market against giants like AT&T Inc. and Verizon Communications Inc. that now control all but a few points of the U.S. telecom market’s share and account for most of the enterprise business.

Chesonis says he thinks it will be at least five years before AT&T, Verizon and the other baby bells start to look at getting into the energy business. If he and Butler are right about where the market is headed, Paetec could have a healthy lead in energy supply.

Unlike the telecom and airline industries, which were deregulated nationally by, respectively, the courts in the 1980s and Congress in 1978, energy industry deregulation has been a state-by-state decision.

New York and 13 other states, 12 of which are in the Northeast, are fully deregulated. Several others, mostly in the West and Northwest, have partly deregulated. Vast swaths of the nation in the Midwest and Southeast as well as Alaska and Hawaii have kept a regulated monopoly model and are not contemplating deregulation.

A big reason for energy deregulation’s relatively slow advance is Enron Corp., the former Texas-based ESCO that exploded into national prominence in the late ’90s only to implode and disappear in an accounting scandal.

"(The Enron flap) made some large customers more wary of contracting with ESCOs, particularly in arrangements that involved bundling of commodity and value-added services, including energy efficiency," states a 2007 survey of the U.S. ESCO industry put out by the Ernest Orlando Lawrence Berkeley National Laboratory.

In 2007, the survey states, U.S. ESCOs’ growth rate had fallen from 20 percent in the 1990s to 3 percent. Some regulated utilities that had started ESCOs to gain a foothold in newly deregulated markets were backing away from the business.

While the rollout of the ESCO industry has been uneven nationally, Kreppel says, New York’s energy deregulation ride has been relatively smooth. Its deregulation design called for utilities to shed their generating plants, becoming responsible only for power and natural gas transmission. Power produced by privately owned generating plants goes into a pool controlled by a non-profit system operator, which doles it out to ESCOs and utilities, the ultimate sellers of power to end users.

Other deregulated states have incorporated many of the same elements, but some such as Pennsylvania and California hobbled market competition by keeping too tight a rein on prices, while New York regulators left enough room for a healthy market to develop.

Kreppel agrees with Butler’s and Chesonis’ analysis of the energy market, believing more states will move to models like that of New York, creating new opportunities. He had been watching the market closely, thinking about expanding U.S. Energy Partners into new markets, when Butler first approached him last year.

A big part of the reason he decided to go through with the acquisition, Kreppel says, was that "I saw all this opportunity but didn’t have the money to act on it. With the backing of a company with Paetec’s resources, U.S. Energy Partners could move."

His positive impression of Butler as an entrepreneur helped seal the deal in his mind, Kreppel adds, pointing out his consultancy deal ties much of his future income to U.S. Energy Partners’ financial performance.

"If I didn’t think E.J. could pull it off, I wouldn’t have gone through with the deal," Kreppel says.

Buffalo native

Butler is 49 years old and of medium height and a compact build. He speaks quickly and economically, exuding a sense of energy closely contained.

He plays hockey twice a week, skating with some younger and some older players in a league segregated by level of play rather than age. He describes his level of play as midlevel. He was not good enough to make his high school team, which competed against top-level Canadian schools.

Butler is the second youngest of seven siblings in a large Irish Catholic family. He grew up in a middle- and working-class neighborhood in North Buffalo. His father, Edward James Butler Sr., owned a paint factory that did a good regional business in Western New York.

Like his father, who did poorly in course work at Dartmouth College and never earned a degree, Butler did not finish college. Bored by course work, the younger Butler dropped out of SUNY Buffalo after three years.

"My father advised me to drop out," Butler says. "I think he thought I would go back, but I never did. I wasn’t that good of a student. Things outside of college interested me more."

Though he has not earned a degree, Butler has taken night courses at SUNY Buffalo. In a telecom management course he took with Rowen, Butler aced the material.

Before college, Butler had attended

Nichols School, a private academy for well-off high achievers near Buffalo’s Delaware Park. After two years, his father, seeing Butler as an inattentive student, took him out and put him in a Catholic school.

"My father pulled me aside one day and pointed out that he was spending more to keep me in Nichols than he was spending to put both of my sisters through college in state schools," Butler recalls.

As did his father, Butler says, he regrets not having earned a degree for much the same reason as did his father: It sets a poor example for his children, "gives them the idea that an education isn’t important."

After dropping out of college, Butler went to work as a sports promoter. He worked for William H. Quick Promotions, which had a contract with the Eastern League AA baseball organization. Free tickets to major league games were a perquisite of the job, a feature that initially had Butler thinking that he had found his true calling in life.

There was no work and consequently no salary in the off season, however, so Butler took what he thought would be a temporary job for Allnet Communications Services Inc., a company that then was selling discount long-distance services that customers could access by dialing in a code.

Butler met his wife, Karen, when he interviewed her for a job as his boss’ secretary at Allnet. They began dating after Butler left the company and were married in 1991. They have a 17-year-old daughter and an 8-year-old son. In the summer, the family spends time at a beach house in Fort Erie, the Ontario, Canada, city that sits at the mouth of the Niagara River a short drive across the Peace Bridge.

Career path

Butler spent three and one-half years at Allnet before moving to MCI Corp. In 1988, he was recruited to ACC. Ten years later, Chesonis wooed Butler to Paetec.

Initially, Chesonis wanted Butler to develop the CLEC’s West Coast business. But after spending a few weeks in California, Butler decided he did not want to live there.

"The housing prices were too high," Butler says. "I told Arunas I didn’t want to live in California and I figured that would be the end of it."

Chesonis was determined to have Butler, however. And when Butler turned down the West Coast job, the CEO put Butler in charge of Paetec’s wholesale division.

Eventually, Butler says, "I evolved into the COO."

In keeping with his avowed intention to see how the wind blows before committing U.S. Energy Partners to an overly definite course of action, Butler is non-committal about exactly how or when he plans to start expanding U.S. Energy Partners beyond its current Western New York footprint.

The energy company has secured permits to act as an energy broker in all 14 deregulated states and plans to seek certification as an ESCO in those states, Butler says. He is looking closely at Pennsylvania as its first non-New York venture but is not ready to make decisions past that yet.

Butler does not find it bothersome that regulated states in the Midwest and Southeast comprise much of Paetec’s geographical territory and do not appear to plan on deregulating in the near future.

The deregulated Northeast is Paetec’s strongest single market, he says. Texas, where Paetec believes it has good market opportunities in Dallas-Fort Worth and Houston, also is deregulated. And California, another market where Paetec believes it can prosper, is about to try full deregulation again.

Even if the remaining states do not move to open their markets, U.S. Energy Partners could have opportunities to sell energy management tools and services, Butler says.

Besides his confidence in Butler’s ability to do the job of growing U.S. Energy Partners into a national player, Chesonis says, he agreed to let Butler out of his COO duties because E.J’s a pretty entrepreneurial guy and after some 30 years in telecom, he’s ripe for a change.

"It’s not that being a COO isn’t fun, but it’s a grind. Energy is wide open, it’s a new frontier. It’s the Wild West. Now he can use his 30 years’ experience to create value."

5/28/10 (c) 2010 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or e-mail rbj@rbj.net.

E.J. Butler Jr.

  • Title: President and CEO of Paetec Energy and U.S. Energy Partners LLC
  • Education: Attended SUNY Buffalo, 1978-1981
  • Family: Wife, Karen; daughter, Madison, 17; son, Drew, 8
  • Home: Snyder, Erie County
  • Interests: Plays hockey in an amateur league twice a week; spending time with family
  • Quote: "I’ve been chief operating officer of Paetec for six years and I’ve never heard from an energy supplier."

 

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