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Achieving financial returns from increasing customer satisfaction.

Every utility focuses on effectively managing infrastructure and capital assets. However, one important balance sheet asset may be overlooked and under-leveraged-the customer.

Most utilities believe that customers are "priority one," with customer satisfaction as a key performance indicator. These utilities define customer satisfaction as critical to competent service delivery. However, utilities that define customers that way go beyond basic customer relationship management (CRM) capabilities. They leverage customer satisfaction as a strategic asset with Wall Street investors and regulatory agencies-positioning customer satisfaction as a portfolio component of strong performance.

Using customer lifetime value as a guide and business process outsourcing as an advantage, utilities can enhance customer profitability without shouldering the cost and risk of internal development. Whether your utility operates in a regulated or competitive environment, customer satisfaction is a strategic asset that provides return on asset (ROA) results.

Influences on Asset Return

In managing infrastructure and capital assets, cost-to-serve reductions and return on investment are key drivers. Investment in new technologies, information technology (IT) integration, and process enhancement is balanced by capital-risk management, commodity hedging, and shareholder return.

However, while operational efficiency is key to protecting margins, cost savings and technology improvements have their limits, with quantum leaps in productivity decreasing over time. Shareholder return may be inhibited by the need for modernization and reliability investment, debt, depressed asset prices, commodity price volatility, and credit ratings.

Additionally, if the Public Utility Holding Company Act (PUHCA) is repealed, utility infrastructure and capital assets may be pressured by renewed merger and acquisition (M&A) activity, foreign investment, and asset buying and selling. Some utilities may go as far as choosing privatization to gain access to capital. (Tucson Electric Power is slated to gain $1.5 billion for operating and capital improvements through privatizing its assets.)

If PUHCA repeal goes through, the traditional cost plus/guaranteed rate of return financial model will give way to more sophisticated Wall Street asset evaluation and financial measurement. It makes sense that strongly performing utilities with high customer satisfaction will have an edge.

Customers as a Balance-Sheet Asset

Achieving financial returns from increasing customer satisfaction, leveraging customer lifetime value for increased profitability, and using customer equity for influence and gain turns customers into a balance-sheet asset.

For instance, being highly rated in customer satisfaction against other utilities plays well with Wall Street investors, as customer satisfaction is often an indicator of strong performance, increased stability, and greater profitability. This operational excellence may influence better credit ratings and a lower cost of capital.

In addition, some state regulatory agencies are tying customer satisfaction to rate-case allowances. "In terms of customer satisfaction, regulators are becoming more aware of defining and tracking business processes within utilities such as credit and collections, call center/Internet interaction, pay arrangements, connects/disconnects, and service restoration," says Jon Brock, chief operating officer of UtiliPoint International, a research-based consulting company that serves the utility and energy industry.

In other jurisdictions, strong customer satisfaction rankings have been a key driver in allowing utilities the freedom to offer optional pricing programs.

Implementing Customer Lifetime Value