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Utility 2.0

Web technologies are transforming the utility-customer relationship.

Fortnightly Magazine - August 2008

In their book, The Future of Competition: Co-Creating Unique Value with Customers , management gurus C.K. Prahalad and Venkat Ramaswamy describe a dramatic change in the way companies interact with their customers. “The most basic change has been a shift in the role of the consumer—from isolated to connected, from unaware to informed, from passive to active. Increasingly, consumers engage in the process of both defining and creating value.”

One technology in particular is driving this shift: Web 2.0.

Examples abound: Secondlife, Lego, IKEA, Fiat, Cisco, Red Hat—we needn’t look far to find a co-creator of value through Web 2.0. After a significant drop in market value in one year, Dell launched Ideastorm, an on-line community where Dell can listen to its customers’ ideas and implement the best ones. Suddenly, firms of all kinds are embracing this philosophy and attempting to create new methods for gaining competitive advantages. The concept is resource based and involves reaching out to customers and prospective employees, who have the potential to become brand ambassadors.

How might this idea of value co-creation apply to U.S. electric utilities? At first glance, the idea might seem to be a stretch for companies in a regulated infrastructure industry, selling a non-differentiated commodity to customers traditionally defined as “ratepayers” rather than consumers. But in the context of changes now happening in the industry—involving technical, regulatory and market factors—value co-creation for utilities will not remain a matter of choice, but likely will become a mandatory endeavor to avoid negatively affecting shareholder returns.

Engaging Customers

The opportunities from value co-creation span the complete value chain—from generation to retail services. Regulatory commissions all over the United States are considering incentive frameworks that drive utilities to devise better strategies around distributed resources, demand response and energy efficiency—for which customer participation is a fundamental pre-requisite. Yet utility customers are concerned mostly about their rates and outages; they don’t yet realize the industry is going through a transformational shift. Nevertheless, changes made to PURPA in the Energy Policy Act of 2005 (EPAct) outlined new standards for utilities involving fuel diversity, net metering, advanced metering and real-time pricing (RTP), fossil-generation efficiency and distributed-generation interconnection. These changes were expanded in the Energy Independence and Security Act of 2007, with additional policy developments now happening at both state and federal levels.

This policy trend aims to enable customers to control their own utility costs, and collectively they’re causing a behavioral shift. Participation by utility customers is critical for profitable sustainability of related programs.

At the same time, climate change concerns are becoming a burden for utilities and their customers. Electricity generation accounts for 41 percent of total CO 2 emissions, and electric transmission and distribution contributes to 10 percent of the overall HFC, PFC, and SF6 emissions. As legislators and regulators impose limits on greenhouse gas emissions, utility service costs will increase. Utility efforts to comply with California’s AB 32,

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