[BETA] Fortnightly

Nearly 40 utilities now offer an appliance services program. Most take a similar approach: They cover appliances such as gas and water heaters, offer repair service only (no preventive maintenance), and charge a modest price ($50 to $60 per year). Bill inserts often carry the load for service promotion. Utility field personnel perform any necessary repair work.

Many of these programs have done very well in penetrating the market, often reaching 20 percent or more of residential heating customers within 8 to 10 years. This degree of market penetration reveals a strong latent demand for the service. In fact, the residential customer views the utility as a preferred provider.

Nevertheless, profitability may remain troubling. Some observers believe that many programs do not earn a profit on a full-cost basis. This concern should prompt utilities to examine a few key areas before entering the appliance service business.Local Contractor Resistance

Resistance from local contractors always looms when utilities enter the appliance business. Invariably, the local contractor community views utility involvement in service contracts as an infringement on its "territory" and unfair competition. Although many contractors have petitioned regulators and legislators, alleging cross-subsidization and unfair competition, no case has forced a utility to withdraw from the business. But the costs have proved substantial for both sides.

Utilities should distinguish service contracts from appliance sales when gauging contractor resistance. Service and repair contracts may actually benefit private contractors. Very few contractors offer service contracts, so most utility programs actually generate more major repair and equipment sales business for the contractors. But service contracts also carry the implied threat of future utility entry into equipment sales-which, for the contractor, targets the principal money-making segment of the business. In reality, however, utilities have been offering service contracts for 30 years; none has ever expanded into equipment sales from service contracts.

Several utilities have defanged the issue of contractor resistance by working in partnership with a selected group of local contractors. Each party does what it does best: The utility handles marketing, billing, accounting, and quality control. The contractors perform the actual field repair work. The two parties split the revenues using formulas that reflect product costs. In this "win-win" arrangement, the participating contractors receive a steady flow of new revenue (most unusual in their business) and position themselves to take over major repair work or equipment sales after the service contract runs out. The utility gains field capability without investing in the equipment, parts, inventory, or training it would need for its own staff.Product and Pricing

Most utility appliance service contract plans include only repair service, with coverage limited to space and water heating equipment. The standard repair contract sells for $50 to $60 per year-an appealing price to a large market. Nevertheless, many customers place greater value on service and are wiling to pay a higher price.

Offering repair service coupled with preventive maintenance offers several advantages. First, the preventive maintenance/repair combination ensures a better product for the customer by reducing emergency calls. Second, an annual preventive maintenance call marks a tangible, visible service that should aid