Utility 2.0

Deck: 

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 CO2 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, the California Global Warming Solutions Act of 2006, are estimated to increase customer rates drastically by 2020. Rising concerns about climate change, and the higher prices that result, will force customers to increase their interest and involvement in utility affairs.

For example, in the United States, 234 electric utilities offer demand-response programs today, most of which are triggered during an emergency. But with the adoption of automated metering, dynamic retail pricing soon will become a mass-market phenomenon. The success of time-of-use (TOU) pricing and critical-peak pricing requires customers to have access to information about their load and usage patterns, and the ability to make choices about those patterns.

Utilities will use the web as a platform to engage customers in TOU pricing and DR programs, providing an opportunity to create value through that customer engagement. Customers are wide awake and hungry to participate—and utilities will take advantage of this to remain relevant in the new digital era.

The purpose of this effort isn’t to “wikify” utility customer service, but to leverage the ubiquitous nature of the Internet so utilities can listen to their customers and take advantage of the Internet as an information system via Web 2.0 technology (See Figure 1).

DART

Prahalad and Ramaswamy proposed DART—dialogue, access, risk assessment, and transparency—as the building blocks of value co-creation. 1 Following are a few examples of how these building blocks shape up for electric utilities, using the Internet as the medium.

Dialogue: Today’s utility websites typically are designed primarily for account holders to view and pay their bills, even though consumers outnumber the account holders by a factor of four.

To help increase awareness of critical issues facing the electricity industry, and of special programs run by utilities, an interactive medium using blogs, forums, networking and polls will allow consumers to build thematic communities and share their ideas and opinions. Such open dialogue also will help boost environmental awareness and improve brand loyalty and value.

Additionally, this platform can help employers attract the younger generation of workers who will be needed to replace a strained and shrinking labor force. 2 A company’s Web presence translates into brand perception among Generation Xers and Millennials 3—the young masses who particularly value openness and continuous feedback.

Access: Most utilities today have basic customer-service functions built into their self-service websites. However, higher levels of access further can enhance the ability to reduce customers’ calls to contact centers, and also improve customer satisfaction. For example, self-service Web tools can provide access to usage history, appliance power ratings, and temperature trends to enable users to analyze high bills and select optimum service plans.

If dynamic retail pricing becomes a common reality, participants in these tariffs will need access to real-time usage information to trigger responses to price signals. In addition to notifying customers of their usage, Web 2.0 applications can host tools for customers to analyze their load-shape patterns. They also can hold information to educate prospective participants and work as a promotional tool.

If the utility’s Web site enables customers to log information about problems such as a falling tree, a gas leak or a street-light dysfunction, then customers actually work as virtual SCADA by feeding information into the outage management system. If the website is GIS (geographic information system) enabled, customers in real time can view current problem areas and crew locations.

Risk Assessment: By promoting end-use efficiency and conservation, 4 utilities can hedge against customer risk tolerance for rising and volatile energy prices. Many states provide incentive mechanisms for utilities to recover the costs of demand side management (DSM) and energy efficiency investments. But the success of these programs largely depends on consumer awareness, and the Internet can help as an effective promotion and educational tool.

The ENERGY STAR Change a Light, Change the World Campaign is a good example of how the Web can be leveraged to engage and educate consumers in environmental risk-reduction goals. The campaign takes pledges from electricity customers to replace their incandescent light bulbs with more energy-efficient and environmentally-friendly compact fluorescent lamps (CFL). To date, the campaign has received pledges from more than 1.7 million individuals that could save about 3 billion pounds of greenhouse gas emissions. 5

Such applications of Internet communication not only allow the utility to promote its energy efficiency programs, but also to learn about the interests and concerns of consumers. Such feedback might help the company’s enterprise risk management strategies by supporting and validating its business plans and government-relations efforts.

Transparency: Understanding customers’ needs also is paramount for improving corporate social responsibility and sustainability performance. The Internet can allow customers to participate in determining the criteria for special purpose programs, such as eligibility, targeting, discounts and coverage. 6 Democratization through Internet use can influence critical regulatory rulemakings around low-income programs and various other social tariffs. Stakeholder engagement is a key measure of social responsibility and sustainability, and nothing can match the Internet as a platform to engage stakeholders, especially when most of them also are customers.

Combining DART Building Blocks

Competitive advantage in today’s market demands a shift in management focus, from product profitability to customer lifetime value (LTV). Traditional CRM works almost unilaterally, but higher customer loyalty and retention—which eventually increases LTV—requires a more bi-directional relationship. Transparency, combined with access to customer-focused tools and services, helps to develop this relationship.

By unifying data from multiple sources, the Internet can address the customer’s specific concerns. Am I on the best service plan for my usage pattern? How can I adjust my consumption pattern to reduce my bill? Why has my bill gone higher compared to last month? A Web interface can host tools to generate interactive customer reports, perform trend analyses, provide benchmarks and enable “what-if” analysis.

Furthermore, the Internet has made virtual communities a phenomenon in the 21st century. Combining dialogue and access not only generates awareness, it also creates thematic communities virtually working for utilities on issues and programs. For example, subscribers to demand-response, renewable-energy, and energy-efficiency programs might discuss their opinions, experiences and realized benefits in community forums, and assist the utility in strengthening campaigns. Consumers interested in such topics as climate change and community service can have their own discussion rooms. The Web site might provide video and image hosting features so consumers can share photos related to their personal energy solutions. Information on smart metering and TOU pricing, tagged with customers’ comments, would enrich communication and help utilities find opportunities to enhance service quality.

Transparency and risk assessment jointly can help develop electricity consumers’ trust in areas such as environmental footprint, capital investment and related rate impacts. Increasingly customers will ask specific questions about utility resource strategies. What’s the utility’s projected generation fuel mix over the next ten years? What’s the role of distributed resources, and how are consumers affected? How is the utility hedging against energy price risks with short- and long-term power-purchase contracts, and what are the cost impacts? What specific initiatives is the utility undertaking to reduce greenhouse gas emissions? How are transmission-line projects related to the utility’s resource strategy and climate footprint?

This information often is public, but an interactive Web presence can help the company ensure it reaches key stakeholders.

Engaging consumers in discussions through blogs and forums can reveal their sentiments around specific issues, and enable utilities to respond to them. An online poll can indicate how much ratepayers would be willing to pay for greener energy.

Taking this interaction a step further, utility Web sites can help to combine the essence of risk assessment and dialogue to leverage consumers’ opinions for influencing various policy making criteria. Participation in the forums and the polls not only will provide input to the policymakers, but will develop a more aware community with a better understanding of rationale behind public policies.

Web Revolution

Increasing consumer awareness and involvement in their utility service could turn “going green” into a social revolution. Sophisticated tools for Web interaction could bring about the tipping point—and utilities stand to gain or lose depending on how they engage consumers during this transition.

Penetration of the Internet in North America is about 70 percent. The Amazons and MINI Coopers of the world continuously are raising the bar of customer expectations in terms of online experiences. To live up to these higher standards, utilities will leverage the social networking capabilities of the Internet.

From an operations standpoint, as the marketplace becomes more customer-focused and customers’ bills become more sophisticated, utility contact centers likely will face increasing burdens. Enhanced self-service functions, which go hand-in-hand with Web 2.0 features, provided with advanced user-friendly design, will help customers resolve more issues themselves instead of calling the contact center—and ultimately will lead more consumers to become co-creators of value.

Social commerce is a concept not only to be exploited by consumer product retailers and dot-com companies such as Yahoo!, but ultimately will become a strategic path to success for the 21st century utility industry.

 

Endnotes:

1. “Co-creating unique value with customers,” C.K. Prahalad, Venkatram Ramaswamy, Strategy and Leadership, 2004.

2. Current Issues in Economics & Finance, Vol. 7, Number 6, June 2001.

3. Carol Hymowitz, “Managers Find Ways To Get Generations To Close Culture Gaps,” Wall Street Journal, July 9, 2007.

4. http://docs.cpuc.ca.gov/published/Report/51102.htm

5. http://www.energystar.gov/index.cfm?fuseaction=globalwarming.showPledgeHome

6. William Baker, “Social Mix,” Utility Week, Vol. 25, Issue 19.