The College of Business

Power to the People

Cass Larson*

In recent years deregulation has created upheavals in several major industries, including banking, telecommunications, airline, and natural gas. Soon it will be the turn of the electric utility industry. As deregulation moves closer to reality, companies in the business of generating, transmitting, or distributing power are becoming more focused on the customer.

Monopolies have little incentive to learn about customers’ needs. The skill sets needed by competitors will change greatly as customer focus becomes a key success factor in the electric power industry. Culture and mindset change will ensue as experienced outsiders are brought in, and employees are trained to put customers first. The mere threat of deregulation and customer choice has had beneficial effects up and down the supply chain, as each customer in the chain now has more bargaining power and the industry attempts to build customer loyalty. Each newly deregulated industry has demonstrated that customer loyalty does not exist, but can only be earned with better products and service. There is, however, an inertia to maintain the status quo and stay with the current supplier, which helps slow the migration of customers to competitors.

In the era of open access, customers will not independently choose a generator, transmitter, and distributor; instead they will choose a marketer that can control any, all, or none of the physical electric power supply chain. The marketing efforts of former monopolies will become akin to those of firms in other industries, such as telemarketing, mass mailing, and incentive programs. Specialized companies that are simply marketing fronts will be created. They will specialize in strategies for attracting new customers and retaining current customers. For the entire supply chain behind the marketer that produces the commodity margin control becomes key, and cost reduction efforts have been in full swing for a decade in preparation for competition.

Segmentation of customers will be a key success factor in increasing revenues. Current research into maximizing profit with advanced statistical modeling and decision theory is beginning to get the attention of utilities who can soon segment and charge customers without regulation or external justification. Careful revenue management can help squeeze revenues out of all types of customers by charging ‘just the right amount’. The utilities will be open to customer-developed ideas on pricing structures that may be quite new to the utility.

Not all customers become more important to suppliers. When monopoly power exists, all current customers constitute a rate base. However, without cross-subsidization, the least desirable customers may find that competition has not reduced their electricity bill. The harder-to-serve small customers will no longer be subsidized by the system-beneficial large customers. In some states where rates are low, electric power rates will rise under competition, especially for rural, residential and small commercial customers as a leveling effect takes place across the country.

While electricity is a commodity, it is still possible to differentiate based on such factors as power quality or ‘green’ power preference. Many of these demand-side marketing efforts are underway now in states with open access. However, it has been shown that only a small amount of the total electric use will respond to such attempted differentiation of electric power. In the United Kingdom, after deregulation, it became quickly apparent that criteria for choosing electricity were price-based and that non-residential buyers viewed it as a commodity. Companies can create new value for customers and shareholders by packaging prices and bundling services in value added ways.

Scott W. Gebhardt, President and CEO of Pacific Gas and Electric (PG&E) Corporation’s retail energy services company has said: "Think about what happened in telecommunications. Only 20 years ago we didn't have call-waiting, call-forwarding, voicemail, cell phones, modems, and even answering machines were a rarity. I think we'll see a similar evolution in energy, with all sorts of interesting new products."

The era of power to the people has arrived!

* Cass Larson is a cost and price analyst for a large utility. He received his MBA from the College of Business Administration, Tennessee Technological University in 1998. He is also a former Mayberry graduate assistant. The opinions expressed here are his own.