Transforming the Customer Relationship: What Electric Utilities Must Do To Survive the 21st Century

Investor owned and consumer owned electric utilities need to address a new challenge in the next decade or they may become mediocre, obsolete, servant infrastructure to businesses who will take their customers away from them. The transformation of the electric customer is a new phenomenon and electric utility board of directors and executive management cannot wait to respond, but must proactively take this challenge head on.

The Challenge: Changing the Customer Relationship and Customer Behavior

The next big challenge for electric utilities is to change their relationship with their customers and change customer behavior, so electric utilities can keep their customers, their business and survive. This is about survival, not new lines of business. It is about changing electric consumers from passive "so what, the lights come on" consumers to actively engaged customers who want to use energy wisely. Customer energy literacy, in a new customer paradigm, should be a top priority.

Electric customer communications need radical change and modernizing. To survive and flourish, electric utilities must become "consumer coaches" as well as power providers, and for some customers they must become like "personal trainers", motivating customers to pick and adhere to individualized energy plans and packages.

Electric utilities must become proactive communicators with their customers, developing multiple communication channels to interact with and serve electric consumers, by way of the Internet, the Web, texting, mobile devices, smart phones and Twitter (and even more communication channels to come). Hand-held wireless devices are going to become the link to electric consumers for everything we do as utilities. Long gone will be the meter reader and customer service representative as we know them today. What used to be a poles, wires and power business, is about to become an energy communications-customer relations industry.

Electric utilities don't want to come late to the game in crucial modern technologies like mobile, search, media and tablets. There has emerged in our society a seamless fusion of hardware, software, social networking, online shopping, data access and new forms of cyber-based social interaction. And, these new technologies have been embraced by all consumers, in all generations, for seemingly every kind of transaction or interaction. Electric service is next in the queue for these technologies.

Why change the traditional utility-customer relationship?

Forces are at hand that are changing the focus of the electric utility business. National politics will ultimately force electric utilities to radically change how they produce power. By legislation or regulation, utilities will be forced to dial back or even shut down coal fired power plants, and as a result, 40% or more of the power produced in America will have to come from some other power generation. In just a few years, many states will have a renewable energy requirement and there may be a national standard as well. To combat global warming, electric utilities will have to buy a certain amount of renewable power every year or suffer huge "climate change fines". Electric customers, when asked, think it's great to turn to renewables for power, but when told they will pay much higher electric rates, the excitement quickly fades. Auto manufacturers will ultimately make an electric vehicle that everyone will want, and electric utilities will be forced to make costly distribution system changes that those auto makers and electric car buyers will not be willing to pay for. Electric rates will zoom upward and unprepared utilities will have lots of explaining to do.

Telecommunications companies and internet providers are poised to sell mobile communication applications that will promise electric consumers lots of savings and do cool things around their homes and apartments, and electric utilities will get the blame if savings and things don't work as advertised. They will set up "home energy store fronts" on line and go after electric customers with a vengeance. Home solar and wind generators will be hawked like chamois sales at the State Fair. People will be told that if they hook up solar panels on the roof, all their electric needs will be taken care of and they can sell back excess power to their utility; they will make money on generating electricity at home. These new home generators won't want to hear that the utility doesn't need the excess power and doesn't want to take it or pay for it. State legislatures, Congress and regulators will make electric utilities involuntary facilitators of all this new business at cost-the utility's cost, and that will have to be passed onto electric customers.

Congress or federal regulators (like the EPA) at some point will mandate global targets for reduction in green house-gas emissions; whether utilities or customers believe it is necessary or not, this is no longer a seriously debated issue. And, studies have shown that, while the global targets are daunting, if everyone participated on an individual basis in conserving energy (for example, raising the temperature when the air conditioning kicks in or lowering the thermostat in the winter), there would be significant reductions in pollutants in the air from power plants who don't have to run as often. Research shows that individuals have control of about 50% of the energy they consume; the rest is embedded in the energy it took to produce the things we buy and use. Electric utilities are said to be responsible for about 40% of the green house-gas pollution going into the air today; the rest is primarily automobile pollution. Electric utility power plants are targeted by the regulators and legislators, and electric utilities cannot dodge this big bullet coming their way.

Another potential national legislative mandate on the horizon is the "energy efficiency resource standard", where government will tell every seller of electricity to meet a percentage of its sales growth with energy efficiency savings rather than sales. Nineteen states, and some individual utilities on a voluntary basis, have some form of this in place already. This standard requires electric utilities to do whatever they must do to get customers to buy less electricity to meet savings targets.

The best hope for electric utilities is to change their old relationship with their customers and change customer behavior at the same time.

What is this new relationship? How does it get created? What customer behavior must change for utilities to survive? How can the customer-utility paradigm change?

When asked, many electric utilities today will say defensively "We have a fine relationship with our customers, thank you very much." But they don't actually. Most customers don't even know who their electric provider is or where the power comes from; a consumer owned utility, a privately owned utility or a cooperative? Most customers don't care; and that is the biggest problem we face. Most electric consumers just flip a switch and pay a bill. That is all about to change. They are about to be bombarded with internet applications that not only promote home energy savings, but marketers will use that premise to capture other profitable services to consumers as well. Home energy audits, performance evaluations and energy usage monitoring will be combined with access to shopping for "energy saving" devices, appliances and computers and data that also will be linked to lots of totally unrelated things and applications to buy over the Internet.

What will be lost is the old utility-customer relationship. Left unchecked or unchallenged, electric utilities won't have direct-customers anymore; Internet, media and telecommunications companies will have the electric customer relationship as just one aspect of their relationship with their customer. The thousands of electric utilities operating today across America will be viewed as the old backbone, backwater infrastructure, like the roads, sewers and water pipes that are just there to be used up, and need to be fixed on occasion. And, electric utilities will have to be there to fix everything at their cost, so Internet companies and energy service marketers can make a profit on the relationship they used to have with their customers.

Not only do electric utilities have to act now and pre-empt the invasion of these marketers and internet giants on their customer turf, they need to take on the things that these companies will offer up, or find ways to partner up with these marketers, to survive. And, electric utilities will have to be proactive in Congress, state legislatures and regulatory agencies, like FERC and EPA, to watch their backsides, showing these federal and state officials that electric utilities can do all these things being promised and do them better.

Turning Customers Green

At the same time, electric utilities must uncover and capture the secret to turning their customers "green" as they must turn off their greenhouse gas spewing power plants, convince customers to conserve and at the same time willingly pay more for electricity that doesn't seem to be any different than it was before. The road to making electric consumers "greener" is not just about putting smart meters in their homes or inundating them with energy conservation brochures; it is about getting into the psyche of the consumer and permanently changing behavior. Traditional energy conservation campaigns are based on the idea that the more information people have about energy savings, the more they will save. That works to a certain extent, but is not the panacea, and for some consumers does not work at all. Dangling financial incentives in front of customers, through rebates and credits, works for some consumers, but not all. New customer strategies must be added to the old mix.

The most successful and powerful way to permanently change behavior is to change social norms. When people find out that their neighbors are more successful than they are, at anything, they want to know more and want to meet or beat them. Home energy reports, being produced by companies like O Power, comparing home energy usage with neighbors or business peers, have been very effective in changing energy usage (they send out smiley faces for good consumers, frowning faces for energy hogs). Peer pressure can be very effective. And, for those energy couch potatoes who don't care what the neighbors or statistically similar couch potatoes do, they will probably need financial incentives to inspire significant energy consumption reduction.

Psychologists study the power of "modeling behavior" on modern human beings in all kinds of settings; and so should electric utilities. Electric utilities must explore new ways to get consumer types (competitive, indifferent, zealots and persuadable types) to become habitual energy conservationists and still love their local utility. To survive as an industry in the future, an electric utility must change enough of its customer base to model energy conservation behavior in more ways than just changing a few incandescent bulbs to compact fluorescents or trade in an old energy hog refrigerator. How we use electric energy everyday in every way, at home, on the road, in the office, in someone else's home, on vacation, everywhere, must change to meet the kind of national goals that will be set to clean up the air and to reduce dependence on, coal and other carbon based fuel for energy. Laws and regulations will change. Habits have to change.

Are electric utilities responsible for people's habits? Yes, to a certain degree, they are. For 100 years, electric utilities have promoted using as much electricity as one wanted. In the sixties, electric utilities promoted the "all electric home". Now electric utilities will be responsible for getting people to conserve (or pay a very high price to keep the same level of electric gluttony) and buy energy efficient appliances. This won't be easy as consumers are inundated with electricity fueled devices, everywhere, all day long, connected to them continuously, feeding their need for social interaction, business interaction, every kind of consumption and entertainment through multiple media connections and displays. There is more need for electric power now, not less. The electricity business is not going away. But, like it or not, the politicians and regulators will turn to electric utilities to change consumer behavior, or pay a lot more for power and the right to operate a utility if utilities don't get on board.

Technology is Not the Panacea

A lot is being written and hyped about how Smart Meters and Smart Grids in America will be the solution to all these energy conservation and climate change problems. They are not the panacea, but they will help. Consumer behavior does not change simply by installing devices in the home; it is more complex than that. New approaches to change behavior must be designed; utilities need to offer up and promote electricity consumption packages tailored to individual needs. Behavioral changes have to be a part of the use of these new devices in the home and business. Smart Meters and the Smart Grid must accommodate a portfolio of customer choices, new energy conservation programs, individualization of customer energy needs and desires and there will have to be a lot of advanced testing of all of these things to see if they can facilitate significant change in customer energy usage behavior.

The Economists Have Taken Over

Talk to an economist about consumer behavior and she will say that it is all about supply and demand, and allowing markets the opportunity to work, whether it is selling bananas or electricity. What about conservation? Getting people not to buy things or services does seem counter intuitive to simple economic principles. And, there are a lot of economists out there, and particularly in the federal government and state agencies, who believe that the key to reducing energy consumption in America (and eliminating the need to build new polluting power plants) is to allow marketers to sell back to utilities contracts they make with consumers "not to use electricity when power is expensive to buy" (called demand-response contracts). Economic principles are not always the solution to changing behavior in a sustainable way. Behavioral economics is an art, not a science, and needs to be tempered by how human beings react in different economic times, good and bad. Electric utilities need to speak up and challenge arbitrary economic theories with real studies of consumer behavior.

Renewable Energy is Great, But Big New Transmission Lines, Not in My Back Yard!

A big piece of the utility-customer relationship is the external image the utility presents to the public. It can be good, neutral or bad, and can quickly become real bad. The electric consumer does not live in a shell; power plants and particularly power lines are all around us. And, in order to produce and generate an enormous amount of new renewable power, to replace a big chunk of carbon based power production, it will take a huge amount of new construction of new transmission lines across American going from places where there will be solar and wind generators to the big load centers-our cities.

These new electric power transmission needs of electric utilities will stir up anger, frustration and protest by lots of folks who will have new transmission towers and lines built at or near where they live like never before. Electric utilities will have to deal with significant "NIMBY-Not in My Backyard" protesters as renewable energy gets really going and built in America. This is another part of the customer relationship that electric utilities must deal with and it won't be fun. There have been very few significant new transmission lines built in the last two decades in this country. A lot is being planned. Are electric utilities ready for the new NIMBYs who are all connected up with internet chat rooms and experienced at hooking up with other groups to stop these projects from going forward? A lot more advanced outreach and communication with affected customers and others will be required.

What About My Utility Records-Is Anything Confidential Anymore?

Electric customers in America have enjoyed confidentiality for a century; nobody can get my consumption records without my consent. All of that is going to change. Added to the new customer relationship paradigm is a whole host of concerns about privacy of customer consumption and financial records; how will utilities deal with that in the future as Internet companies and energy service marketers demand customer information? Technological innovation will allow all sorts of access to data for customers and utilities and new ways to communicate with each other; this all has tremendous future commercial value outside of the traditional customer-utility relationship. Will utilities take advantage of these opportunities or be forced to sell customer data to third party marketers? This could all result in a lot of abuse of consumers and consumer backlash. Electric utilities today need to speak out and protect customers.

Rates and Bills Have To Change

Electric consumers pay bills, all kinds of them; but electric utilities are focused on rates, cost recovery and profits (for investor owned utilities). The consumer today is not interested in multiple rates and charges and how they pay for their share of the cost of service, nor are they interested in trying to decipher a bill that has line after line of incomprehensible acronyms and numbers. They might be interested in choosing from a portfolio of services designed in part to encourage conservation. But they will have to learn and understand how this all will work in the future and the utility must prepare them for it; this has not been the practice in the electric utility business.

Bills and billing are going to change radically for electric utilities. There will be federal and state legislative and regulatory initiatives that will force utilities to offer time of use rates, rates to charge electric vehicles at home, work or on the road, credits or payments back to electric customers who produce their own electricity with solar panels (PV) or wind, fuel cells or biogas systems (called "net metering"), demand response credits for not using electricity during peak power use periods and other forms of charges and credits for new services to be dreamed up in the future. Charging customers for a portfolio of services related to electricity or add-ons will get complicated, and utilities won't want to get in a situation where they are not recovering the actual cost of these services to different "kinds of electric customers". Customized energy service plans are coming.

The New Era of Hyper-Federal Regulation of Electric Utilities

The energy business flirted with deregulation over the last few decades. Wholesale electric power production and sale is deregulated, but deregulation at the consumer-retail level was a gigantic failure, particularly in California and the West. The result is a mess and there has been a move to re-regulate things in the electric business from the federal level, things that local and regional utilities did very well voluntarily in the past, without mandates. There are two archetypes in the electric energy and utility business today: traditional electric power providers and energy profiteers. Federal law seems to promote both in ways that are seemingly inconsistent. And, policy makers at the federal level are using new powers, from recent changes in the law, to mandate how electric utilities do everything-how they run generators and transmission lines through thousands of new reliability regulations and how utilities operate their systems down to the neighborhood substation.

Next will be federal and state regulation of the customer relationship-what utilities must tell their customers, what they must offer, etc., taking away local choice and flexibility. This is a dangerous and present threat, and electric utilities need to get politically activity to stop the mandates coming down from inside the Belt Way or in the state legislature. Most of the energy and Internet marketers who want to capture and permanently take away the old utility-customer relationship are in the halls of Congress everyday lobbying for more federal mandates that help their business goals. It has nothing to do with what is good for consumers or the environment or reliability.

Getting SMUD Customers Engaged

The Sacramento Municipal Utility District (SMUD) has new programs to "coach" its customers to get more involved in their energy decisions. In a pilot program, launched in 2008, SMUD sent 35,000 home energy reports to customers detailing their energy use for a year compared to customers in similarly sized and aged homes and suggested actions they could take to reduce their electric usage; people got competitive and more engaged with the utility. These reports netted an overall 2.2% reduction in annual savings for these customers. On the Web, you can make SMUD a "friend" on Facebook and learn all about ways to save energy; and you can Twitter SMUD with questions about services or energy.

In 2009, SMUD management and Board members held 108 local community meetings around the service territory to explain changes to rates and what customers could do to save energy. SMUD employees go out to neighborhoods door to door handing out compact fluorescent lights (CFLs) and energy saving information. Over two million CFLS are now in homes in Sacramento through SMUD programs. SMUD has added to its web site an individual carbon calculator and an on-line program that allows customers to purchase carbon offsets through SMUD programs, like dairy digester energy production. Over the course of the next year, every one of SMUD's 660,000 customers will get a Smart Meter and pilot programs will begin testing time of use rates and other potential energy efficiency ideas.

These challenges are daunting, but the electric utilities I know, like SMUD, are up for the task. It will require new energy, new commitment and new customer relationships, all of which will be needed for electric utilities to survive in the 21st century.