[BETA] Fortnightly

New business opportunities, improved internal communications, and energy information services: three solid reasons electric utilities should form a telecommunications strategy (if they haven't already). Yet, while these motivations are compelling, none really demands utility participation. The overwhelming impetus is the strategic advantage that telecommunications can bring to the utility's core energy business.

Imagine the shape of the electric industry in a completely deregulated environment. Electricity, the most homogenous of products, will find differentiation only in price. Transmission and distribution systems will be open to all entrants at the same fee, and host utilities will have no inherent advantage. Anyone with a communications link to the retail customer will be able to purchase electricity at wholesale rates and resell it. The cable TV company, the telephone company, the cellular phone company, and the carrier offering personal communication services would all be able to resell electricity. Moreover, the forces at work in efficient markets will invite competition from new entrants and technologies not yet on the radar screen.

A telecommunications strategy will enable an electric utility to gather important information about customer preference and choice. Customer-specific market research will offer the single most effective tool for managing price. An industry that institutionalized pricing by service class must now learn to de-average and excel at mass customization (em to sell a standardized commodity to mass markets with a customized approach. A communications path to the customer will permit utilities to collect primary market research, ultimately enabling them to develop targeted marketing programs that focus resources and energies on the most profitable market segments.

Consider the long-distance telecommunications business after the Modification of Final Judgment (MFJ), which broke up the AT&T monopoly in 1984. AT&T had been the sole provider of long-distance services, but MCI and Sprint arrived quickly on the scene. Today there are 12 significant facilities-based long-distance carriers, 650 minor long-distance carriers, and 1,292 service resellers.1 Service resellers make little or no investment in plant and equipment. They purchase wholesale capacity, repackage it with unique service and pricing options, and resell to retail customers.

Winning on Two Fronts

A telecommunications strategy helps the electric utility communicate with its retail customer (em to combine intelligence with energy to achieve an advantage. Linking intelligence with energy will enable utilities to win the battle for market share on two fronts: in managing price and retaining customers.

The battle for market share will be fought first in the dimension of price. Utilities that are first to recognize this fact will stand ready to maximize profit. Price is the most effective means of managing profit. And having the right pricing strategy is the most efficient way to maximize profit. Indeed, for a company with average economics, price makes up the most important component of the profitability mix.2

A 1% improvement in:

Price Variable Cost Volume Fixed Cost

Boosts operating profit by:

7.8% 11.1% 3.3% 2.3%

Pricing cuts both ways, however. A 1-percent decrease in price can erode profits by 11.1 percent. Utilities that attempt to prepare for competition through across-the-board price reductions of 10, 15, or even 25 percent