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Major Switch: Energy Utilities Power Up For Direct Competition by Shawn Holiday

It is the last great monopoly. As invisible as air, as common as sunlight, energy has a mystical power on society, one that can only be harnessed by the sanctioned few. Until now.

The deregulation forces that restructured financial markets, telecommunications and airlines have already transformed energy utilities with market demands, consolidation and legislation in many states. Begun in 1992, wholesale deregulation has brought the energy industry into the full embrace of capitalism, presenting the world with one of the last great frontiers in direct marketing.

As energy companies face red meat competition, they are learning concepts like brand loyalty, identifying the most profitable customers, over coming price concerns and even customer retention. In a world that was once as predictable as the sun, energy companies must now play by the same rules as everyone else and be prepared to light the bulb rather than curse the darkness.

"They are moving fast and furious into the deregulated market," says Holly Paulus, national account executive for AccuData America (www.accudata.com). "In regulated uncompetitive marketplaces, energy companies' customers have always been looked at as rate payers. You didn't have to do much with marketing and customer loyalty programs to retain them. But now, they have to truly think of their customers as assets – assets that have a choice in where to put their dollars."

Alternating Current

Like those industries before it, deregulation of utilities has had some rough patches. San Diego is on the front lines of deregulation, but customers saw their rates spike some 250 percent; the California Public Utilities Commission had to offer $100 million in rebates.

This summer's heat brought rolling blackouts as the nation's power grid approaches its capacity. While energy is traded like pork futures, fuel cell technology threatens to create another quantum shift in just a few years.

So energy companies not only have to change gears, they have to do it while running at full speed. Jeffrey Barron, research associate and managing editor of Financial Times Energy's Boulder office www.ftenergy.com has been assisting utilities with how to make the switch to a free market. His recent report "How to Reach the Gold: Managing and Mining Data to find the Established Small Business," illustrates how many of them are still at the early stages of the transition.

"Most of the companies I've spoken to, they've just found a data consultant," says Barron. "Some will probably wait."

After years of navigating through clear skies, utilities are largely in the dark about the hidden assets their customers represent. They are also skeptical about marketing a commodity that customers have never given much thought to, never shopped around for, and never conceived of having negotiating power over. Those customers will soon be thinking a lot about their energy and utility companies are recognizing the power in their customer. So why spend resources in surveying customers who only know you as a monthly bill?

"For simply understanding what type of power quality issues are coming into play," says Barron. "At the most rudimentary level, you can see who your most profitable customers are."

Those high margins offer room enough for incentives while identifying new customer targets beyond the traditional industrial users, hospitals and supermarkets that utilities have focused on. According to MAISY (www.maisy.com) a direct marketing firm, commercial customers using more than 1 million kWh/year account for about 16 percent of the total US market for electricity, representing more than $30 billion in electricity sales. The task at hand now is to identify services and start upselling items beyond energy audits and water heater blankets.

"The energy industry hasn't taken that step yet," admits Barron. "The question they're grappling with is, "Where can we take that step?"

Other major industries know first hand what deregulation brings

For years, people thought telephone service offered nothing more than a dial tone and dependable rate. Now there is voice-mail, three-way calling, and Internet access. The airlines have frequent flier programs and are partnering with numerous companies to offer a staggering amount of incentives.

Some energy companies have already started to identify load factors that help them program usage more effectively, are offering more aggressive energy conservation programs and are exploring alternative sources as each region tries to find the right mix that satisfies the most customers.

Data strategies for energy

In fact, many companies are gleaning valuable information about their customers without having to stuff a single flier into the monthly bill. Data analysis techniques help cherry pick the most desirable customers while eliminating those with the highest bypass potential. Using external data sources, energy companies can learn volumes about their customers before anyone else. However, the El Dorado of specialized data analysis procedures still has origins from a regulatory environment, meaning certain controls will be in place to protect privacy. New partnerships in the energy field are learning that all that glitters is not gold.

"They're down the hall but they can't always use the information," comments Barron.

Telecommunication and financial companies had to deal with the depositing of sensitive information into a deregulated market and can provide valuable models for energy companies. Another cue to take is using the existing corporate image as a recognizable and dependable face in an era of rapid change.

"Energy companies can be quite conservative," explains Barron. "In some ways, that's their attraction. That will turn into a strength when you take that stability and figure out how to market that persona."

Bright Ideas

"There's a stability factor--they need to work around that now," says Paulus of AccuData.

She's been working with energy companies on devising packages with other utilities that have been through deregulation. Bundling of energy, phone and cable doesn't end on the pole as these old acquaintances make new partnerships. Telecommunications has made a science out of switchover potential so that clear indicators can be made about the loyalty quotient of a utility's customers. As annual "contracts" are starting to be offered to residential customers, there is much standardizing, cleaning and appending to be done with existing rolls.

"They have everybody. You would think they know everything but they have very basic information on file. They don't always have usage matched up with the residential record," says Paulus. "It's amazing that we can start at ground zero for something that's been around for so long."

Utilities are learning to create separate marketing databases. With various profiling formulas and data analysis, Paulus can create predictive models that aren't dependent on sensitive information and group the most promising customers for a number of services, products or packages. Customer loyalty and brand transfer are still new concepts to an industry whose predictability has been hard-wired, but the reality is somebody else is now going to offer them power and it'll be over their lines. It's one of those unique times in the history of capitalism where not only can someone eat your lunch, they'll use your desk for it.

Some energy companies took the initiative when natural gas started eating away at market share. A favorite target was the grocery store which had regional ownership and steady energy consumption. Bob Gansler, a researcher with the Heating, Ventilation, Air Conditioning and Refrigeration Center at the University of Wisconsin--Madison, recalls training utility executives as far back as 1996 about the specific energy and refrigeration needs of this important customer.

"They knew that deregulation was imminent," says Gansler. "They knew they were facing competition from natural gas. They wanted to be able to deal with their customers when the time came."

Those that laid the ground work have hit the ground running. Utilities learned about refrigeration techniques, storage regulations, and the phase out of CFCs in an effort to speak intelligently with their best customers.

Others have been hampered by the natural caution that comes with running a regulated monopoly. Over the past few years, utilities throughout the country have wiped customer service departments as they focus more on generating power and streamline billing. When everything from tree-trimming to load control transponders are contracted out, the utility gets further away from its customer base and becomes just another logo on the envelope.

"Some of the utilities we used to work for didn't have any customer service reps in the field," says Gansler. "They don't seem to have the intimate contact they used to."

His seminar is used to show how knowledge about air conditioning provides a gateway into dependable customer, where service contracts combined with energy bills can provide strong incentives for savings. A real partnership is formed, everyone is familiar with each other and price is no longer the only thing to talk about.

There are plenty of tips to be found, including a "web expo" by the Northwest Energy Efficiency Council (www.worldwebexpo.com/energyexpo/index). The 3rd International Energy Marketing and Customer Service Conference and Expo Atlanta, GA, just wrapped up October 26, showing that customer and marketing driven energy companies are in the race. As utilities enter this brave new world, their treasure of customers and data will be the focus of much attention and money. Those who know their customers and service them well, will be the ones who can keep the lights on.