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How customer satisfaction drives returns on equity for regulated electric utilities.
The business model for the electric utility industry might appear backwards, compared with models used by traditional businesses today. Utilities often spend money first, and then recoup it later if they can demonstrate trust and explain the need for expenditures to the Public Utilities Commission. If the utility does a good job, its rate case outcome might be positive. It takes a savvy utility leader to know when to apply resources, allocate funds, and develop successful customer service programs to drive operating margins, return on equity and shareholder value.
How do utilities know if it’s all working? Customer satisfaction is a key indicator. It’s an important variable, and leading utilities are constantly aware of how customers perceive them. Customer satisfaction affects a utility’s credit rating, profit, return on equity (ROE), and shareholder value.
During the past decade, J.D. Power and Associates and Standard & Poor’s have examined the relationship between customer satisfaction and key financial metrics in the electric utility industry, such as profitability and credit ratings. During the same period, the number of electric rate cases has steadily increased. Due to this increase, J.D. Power has undertaken an examination of the relationship between customer satisfaction and ROE in the industry. Similar to profitability and credit ratings, customer satisfaction has a notable impact on ROE for regulated electric utilities. Regulated utilities need to understand their level of customer satisfaction and what drives it. Knowing how to increase customer satisfaction is important and can play a critical role to help improve ROE.
When the customer satisfaction results of regulated electric utilities are categorized into quartiles, results show that higher levels of satisfaction one year prior to a rate case are associated with higher ROE. On average, a 10-point increase in customer satisfaction, based on the 1,000-point index scale utilized by J.D. Power and Associates, correlates with a 0.04 percent increase in ROE. More notable is the finding of a 0.50 percent increase in ROE among utilities in the top quartile of customer satisfaction one year prior to a rate case, compared with utilities in the bottom quartile of satisfaction during the same time frame. This 0.50 percent increase, applied to an equity base of $1 billion, equates to a $5 million annualized increase in earnings available to shareholders. Moreover, utilities in the top quartile also receive rate increases closer to the amounts requested than do utilities in the bottom quartile (see Figure 1) .
The main implication of these findings is that investing in the customer experience might yield rewards as significant as investing in tangible assets, such as power plants, transmission lines, and distribution infrastructure. Striking the right balance between increasing customer rates and improving system reliability and customer service is something utilities take very seriously when approaching a rate request proceeding.
To consider the relationship between customer satisfaction and rate case outcomes, two senior-level executives from two electric utilities shared their views, approach and successes with J.D.