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It’s no surprise that customer satisfaction is increasingly important to retail electric utilities. Satisfying customers was important during the old days of utility regulation, when utility customers had little if any choice concerning their electricity supplier. It’s even more important today, when customers can invest in equipment to bypass the grid in whole or in part, and it will inevitably be more pronounced in the future, when distributed generation options become more widespread and affordable.

The Brattle Group’s recent research on customer satisfaction, based largely on an empirical analysis, studied the relationships across a data set that included: measures of customer satisfaction, indicators of electric system reliability, and utility cost structures as well as system characteristic and demographic variables. This analysis confirmed some of the views that have been widely held by utility managers, but which were based more on a sense of conventional wisdom than backed up by the data. It provided a few surprises as well, which are important to take into account as utilities brace for mounting competition in retail markets and develop strategies to enhance satisfaction among their customers.

Defining Satisfaction

Customer satisfaction largely depends on whether a company’s products or services fulfill a customer’s expectations— i.e., whether it meets, exceeds, or falls short. Quantifying customer satisfaction involves accumulating specific customer perceptions, measured through surveys—typically using a 5- or 10-point scale, ranging from “extremely dissatisfied” to “extremely satisfied”—that are presented at various levels of aggregation. ¹

Figure 1 - Summary of Variables Included In Empirical Analysis

It’s fairly common practice for companies to survey customers in order to understand how customers perceive the service they receive; it’s even more widespread in recent years with the evolution of Internet and app-based survey instruments. Surveys frequently pay significant attention to non-price dimensions, especially in price-competitive environments—such as airlines and retail banking—as companies look for ways to differentiate themselves against competitors.

Historically, electric utilities haven’t been directly subject to price competition for electric products due to geographic franchise arrangements—although cross-fuel competition in many areas could be quite fierce. It could be argued that, with nowhere else to turn, customers had few alternatives to their local utility, thereby reducing the importance to utility management of satisfied customers. However, even the most short-sighted utility managers recognized that satisfying customers was important and that it needed to be included as an element of business strategy. For one reason, state regulatory commissions typically required utilities under their jurisdiction to conduct customer satisfaction surveys—which were taken into account in rate and other proceedings. For another, bond and equity analysts also looked at current and projected rates, as well as other customer issues when rating investments in electric utilities.

Currently, the threat of losing customers due to increased competition and potential bypass of the electric distribution system through distributed generation is driving electric utilities’ interest in customer satisfaction. Investment in utility infrastructure is projected to increase as growth