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2008 CEO Forum: Conservation Compact

Utilities test new models to encourage investments in efficiency and conservation.

Fortnightly Magazine - June 2008

cost comes down even though we have a modest rate increase.

Competition, Texas Style

While other states were rolling back their retail restructuring policies, Texas removed the last vestiges of its old regulatory structure. The results so far suggest the state’s approach has brought spirited competition and innovation among market players.

As CEO of one of the biggest incumbent players, Reliant Energy’s Mark Jacobs has high hopes for competition in Texas. If it works as he expects, the entire country could be speaking with a Texas accent within a decade or so.

Fortnightly: In releasing your financial report for 2007, you stated that “we shifted from a repositioning strategy to a distinctive, value creation strategy which capitalizes on our strong foundation.” What does that mean?

Jacobs: The key element is trying to rebuild the business model around the customer. That may sound fairly simple, and in virtually every other industry that is how the business is built—around delivering value to customers. But it’s not the case in the power industry. The customer has been the long forgotten party in this industry, and there’s a significant opportunity to reshape our business around customers.

Imagine if you went to the grocery store and nothing had a price on it. Then you went to check out and they wouldn’t tell you the price. Then you went home and used what you bought, and 45 days later there’s a bill in the mailbox for that shopping trip.

That’s how we sell our product in this industry. In my view that’s an incredibly poor way to sell your product. I can’t think of another product or service that I buy in such a poor manner, and I can’t come up with a good reason why people should buy power that way.

We’re out to change the way people buy and value and use electricity.

There are four key elements to making this work. Number 1 is transparency, and what that means is enabling customers to know how much they’re using when they use it, not after the fact. Number 2 is disaggregation. That’s a fancy term for being able to break down for the consumer all the various uses of electricity, in an itemized bill. How much is the cooling or heating component costing? How much are you spending for lighting or major appliances?

The third element is control, making it easy for consumers to make clear and conscious decisions, such as being able to decide up front, for example, if you want your home at 72 degrees in July it will cost you $100, and at 74 degrees it will cost you $85. You can pick as a consumer how much you want to exchange for how much comfort you get. Consumers should have a choice, how much they want to spend for the value they get.

Fourth is time-of-use pricing. In general, we sell our product at a blended rate across all hours of the year. It’s like a hotel on the beach that charges the same room rate every night of the year. Everyone