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Know Thy Customer

Fortnightly Magazine - November 1 1995

here we will focus on California's computer equipment industry. California is the leader in deregulating electric utilities, and the computer

equipment industry is at the cutting edge of technology. This makes trends in electricity consumption by the computer equipment industry of particular interest to IOUs in the state (and neighboring states) as well as to nonutility generators and independent power producers.

Table 1 shows only those counties where the industry is present. In 1994, the computer equipment industry spent $85 million on electricity. As expected, Santa Clara County ("Silicon Valley") accounted for over one-half of the total. The industry's expenditure on electricity is expected to grow at an annual rate of 5.27 percent over the next five years, reaching $116 million by 2000.

Table 2 shows electricity sales computed from rates obtained for each IOU and municipal utility from EEI, FERC Form 1, the California Public Utilities Commission, and several other sources. Though sales to the computer equipment industry declined from 1990 through 1993, they picked up thereafter and are expected to grow at an annual rate of 2.77 percent over the next five years.

Figure 1 (see next page) highlights some of the information from Table 2. Such maps are used by marketing and sales departments in other industries as an effective visual tool to target areas for their goods and services. The maps can identify geographic areas of high growth by customer segment, helping strategic planners focus their resources to realize the maximum gain for their effort.

The information compiled above contains the information a utility needs to devise an offensive or defensive strategy for market share in a competitive environment. Using the empirical framework this intelligence provides, utilities can identify and evaluate customers who might move to another electricity provider, as well as industries with high margins and geographic concentration of load.

Geographic load concentration indicates the possibility of regional and/or industry buyers' coalitions. Regional and industry coalitions are common in the deregulated gas market. We can expect similar coalitions to emerge in the electricity market as well, especially among commercial customers. For example, a coalition of businesses in a large shopping mall or an office building could aggregate enough load to qualify for retail wheeling. Such concentrations, therefore, constitute an important piece of information for strategic planners and market researchers.

Given estimates on electricity sales and a utility's and rival company's rates, it is a relatively straightforward exercise to compute the marginal cost or benefit a customer may derive by switching its electricity supplier. The input-output table enables exact dollar estimates of the savings an individual company or a coalition of customers can expect. Table 3 presents a partial analysis of the competitive situation of Utility 1 vis- -vis four other utilities.2

The first column in Table 3 is the estimated purchase of electricity by the corresponding row industry in 1993. Based on 1993 rate information, stratified by customer class and size for Utility 1 and Utility 2, the second column computes the electricity cost savings (-) or increase (+) an industry would experience by choosing Utility 1 over