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YouTube, iPhone Apps, Kindle and the Utility Franchise
This choice most likely will not come at a savings to consumers, for as we have seen with all technologies from telephony to games to the Internet, costs per household and per person rise even if the unit prices drop. These choices will also come at a huge potential cost to the traditional utility franchise system -- or a huge opportunity depending on how it is approached.
And, while the utility business attempts to react to consumer demands, the very underpinning of its operations (the meter), the cash register and billing mechanism will be under fire like never before. Those utilities that can manage the processes and develop new business models may prosper, but the change management and investments that will be required mean that the traditional rate making and investment models will also have to be altered.
Let us also remember that we, as utilities, are
Consider today's business model even in so-called deregulated states. We communicate by bill stuffer or maybe email; we bill once a month on our timeline; we may or may not accept credit cards; we purchase or plan for electricity based on yesterday's information and tomorrow's predicted weather; we offer price differentials so small that it fails to impact customer behavior; we attempt to saddle consumers with greater and greater pass through burdens. While we remain smug in our belief that all the customer cares about is a low bill, the rest of the world is shifting under the utility's feet.
- A web search of "iPhone apps" yields 130,000,000 results including the Lights Out app that calculates savings for switching to compact fluorescents and the X10 Commander app that allows control of home appliances and electronic devices through an iPhone. Keep in mind the iPhone and other smart phones have already disintermediated the need for the key fob to open and remotely start your car (Viper SmartStart) and eliminated the need for GPS devices (Sygic), cook books (Easy Cooking) and levels (iHandyLevel).
- YouTube, celebrating its 4th anniversary this year has changed the way consumers grab information. Everyone is a director; everyone is a critic, and our worlds have been compressed into downloads of information. There are 448,000 YouTube videos on electricity, 33,800 on energy efficiency, and fewer than 1,000 when "electric utility" is searched. Even then, 98 percent have nothing to do with electric utilities but cover areas such as explosions, fires, going green and electric vehicles. A few utilities -- Ameren, PNM, PG&E Redding, Anaheim and Lakeland -- can be found, but none really focus on the customer experience and services provided.
- Amazon now sells 48 "e-books" for every 100 "physical" books with an amazing 1/3 of its revenue being tied to the Kindle. As if print versions of newspapers do not have enough trouble, the advent of instant newspaper and magazine downloads changes customer expectations. And, as an aside there are 44 e-books on the electric utility business.
While physicist Nils Bohr correctly stated that, "Prediction is very difficult, especially if it's about the future," here are five areas in which utilities should be prepared for this new world.
1. Ready your billing system now to be as flexible and smart as that of Amazon, Cabelas or E*TRADE. The very same billing mechanism you will need for plug-in hybrid electric vehicles (PHEVs) will mean that consumers will want to send the electrons they generate with their solar panels in Arizona to their children in New Jersey -- and you will have to bill them for it.
2. Develop, deploy and use real time information for grid management, and build on the extensive communications you already have in place to communicate and manage customer premises and devices.
3. The only thing you have protecting your franchise is your service, reliability and relationships with your customers. Do not be fooled into believing that your franchise is safe whether you are the largest IOU or smallest municipal entity. This is not about deregulation; it is about disintermediation and the customer-driven electric revolution.
4. Be proactive in the use of technology. Implement tools such as conservation voltage regulation before it is mandated. PHEVs, storage and personal renewable options will impact your system in ways we cannot yet imagine.
5. Figure out how your utility will make money in this new environment. Your business model is changing, and history will provide no protection.
Comments
Mark,
What a nice article. I've been commenting to articles on this website for months on some of these issues.
Your biggest statement in my opinion is "Figure out how your utility will make money in this new environment. Your business model is changing, and history will provide no protection."
I've been preaching for months here that there is massive opportunity for utility companies to morph their business models into making money in other ways besides simply providing electrical energy on demand.
Our CATV and telephone companies have been for many years, in fact decades now, making money by selling basic services to residential customers, plus optional added services like pay-per-view TV, internet access, call display and voicemail, etc. etc. Above all, many also make money leasing and selling the consumer in-home boxes that enable these optional services. Their businesses are characterized by strong customer support help lines and installers prepared to make house calls within hours notice. There are also untold numbers of retail stores selling the same consumer boxes too in many cases.
Electric utility companies could theoretically do the same for selling consumers home energy management and energy auditing services, and commercialize the in-home gadgets consumers are likely to want and need. A utility company will have intimate access to comprehensive real-time metering information for each and every customer 24/7 with the new smart meters and their AMI networks, They will have the luxury of a direct marketing pipeline through their billing systems to every customer, hence there is far less need to bear media advertizing costs. What an incredible opportunity to compete directly with Home Depots and Best Buys.
The only roadblock is the current regulatory regimes our utility companies are forced to work under. They are generally not permitted to sell specific products or services to individual customers without paying for it by applying to regulators for rate increases.
Regulator reforms are badly needed to enable this kind of vision for utility business models.
Toronto Hydro has their entire customer base of well over 1 million customers on smart meters now, and being the first large utility to do so in Ontario they have already transitioned a large portion of them to Time-Of-Use billing. And, would you believe Toronto Hydro since the beginning of 2010 is playing radio commercials on the local Toronto airwaves to promote load shifting with all consumers. The radio ads routinely are heard playing during the morning and evening rush hours telling consumers that winter TOU electricity rates are currently at their highest level "on-peak", and we can all save some money by shifting things like our dishwashers and laundry machines to later in the evening hours or to weekends when rates are lowest.
My point is Toronto Hydro has money to buy radio ad time but none to provide customers with new technology tools.
I was particularly interested in one of your earliest comments "This choice most likely will not come at a savings to consumers, for as we have seen with all technologies from telephony to games to the Internet, costs per household and per person rise even if the unit prices drop." At today's annual presentation to the financial community by Tom Kuhn and David Owens of EEI, I asked about what they saw relative to potential customer backlash to increases in rates brought about by capital spending on smart grid/meters; renewables at high costs, despite subsidies, (when including required transmission and back up generation); and other necessary capex for transmission and distribution plus potential spend on nuclear and/or clean coal. The response was that they expect regulators to be fair, but I am concerned about the amounts needed for proper returns on equity which provide coverage of interest shrges on debt. Current economic times do not augur well for obtainig significant rate increases in my opinion.
Carl,
"Current economic times do not augur well for obtaining significant rate increases in my opinion." This is an understatement surely given the sad tens of millions of US people currently without jobs.
Some predict that rate increases are bound to happen given all the grid developments for generation, transmission, and smart grid initiatives, where it is not unthinkable that within 5 or 10 years we could see electricity bills double or triple. Just think about what impact this will have on America's already uncompetitive manufacturing industries, and the untold numbers of small businesses whose costs will skyrocket. The local restaurant or machine shop or auto repair garage or dry cleaner shop I'm sure use substantial amounts of electrical energy every day with bills that are a major part of their business costs. Needless to say many of them would likely be forced to close.
Mark. An excellent article. Should be required reading for every utility executive. If you'd had more space, I would also have liked to see you address a) the likely future effects of eg. Sergey Brin and Larry Page, multi-billionaire co-founders of Google / "Don't be evil" motto / b) the likely future effects on utilities of further dramatic economic difference, with a much larger percentage of the popuilation entirely unable to afford to pay any utility bill, or to maintain a residence on which to owe it.
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