Rate hikes and the all important anchor
- Dec 19, 2022 10:07 am GMT
2022 has been a horrible year for We Energies’ customer relations. The Wisconsin utility has been in hot water since they requested a new rate hike a couple months ago that was more than double that of their initial proposal. As you’d expect, there has been backlash. Community advocacy groups have gotten involved, one of them trying to become an intervenor in the rate case, and the local press has published a number of pieces scrutinizing the utility. A couple weeks ago, however, Wisconsin utility regulators approved moderated rate increases, giving We Energies hope of shuffling out of the public eye. But rest assured, the utility’s reputation has been damaged, and it will be a hard wound to mend.
As I watched the We Energies drama unfold, I couldn’t help thinking that the big problem wasn’t the extra money customers were being asked to pay, but that their expectations were anchored to a much more modest initial rate hike. If the utility had requested such a big rate hike to begin with, lamenting the whole thing publicly and explaining the unretractable reasons for higher prices, would there have been such a vitriolic backlash?
What I’m getting at is a basic principle of negotiation commonly referred to as the anchor. I first learned about the concept in the book ‘Never Split the Difference’, a negotiation book written by ex-FBI lead hostage negotiator Christopher Voss.
According to Voss, an anchor is the idea of introducing a specific piece of information early in the negotiation process in order to influence the other party's perception of what is fair or reasonable.
Voss argues that the first piece of information presented in a negotiation, can have a powerful influence on the direction and outcome of the negotiation. He advises negotiators to use anchors strategically in order to gain an advantage in the negotiation. For example, if you are selling a car, you might start by presenting a high anchor price in order to set the baseline for the negotiation and make the final sale price seem more reasonable.
According to Voss, there are several ways to effectively use anchors in negotiations. One technique is to present an anchor that is slightly higher than what you are hoping to achieve, in order to give yourself room to negotiate down. Another technique is to present an anchor that is very high or very low, in order to create a sense of urgency or to shock the other party.
Voss also emphasizes the importance of being aware of the anchor effect and avoiding being swayed by the other party's anchors. He advises negotiators to consider the context of the negotiation and to be prepared to adjust their anchors as needed in order to achieve their goals.
This concept seems particularly important in rate hike negotiations. As we’ve seen in the We Energies case, the consequence of anchoring a customer base to too low of a hike is quite serious. Emotionally, and us humans are emotional beings, not rational ones, it will be hard to win back the aggrieved customers. Every rate case from now and into the near future will be scrutinized by the press and the customer base alike.
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