Economic Development Partnering

Regulated utilities compete every day. They try to persuade other corporations
to locate operations within the utility’s service area.

Today, all corporations evaluate their global choices, appraising such factors
as taxes, workforce quality, and transportation services. Company executives
with energy-intensive operations also evaluate energy costs and services.

High-tech companies, for example, spend 10 to 15 percent of their operating
budget to power computers, cleanrooms, and laboratory spaces. Just within a
small state like Massachusetts, a pharmaceutical laboratory has a choice between
two biotechnology centers, one in Cambridge served by NSTAR and another in
Worcester served by Massachusetts Electric Co. To attract development, Mass
Electric touts its low distribution rates, energy-efficiency programs, network
reliability, and customer service. The utility also advertises its New Choices
Program, which provides customers contact information on qualified commodity
suppliers.

Economic development competition is increasing. Utilities need to do more to
create a compelling case for businesses to expand within their service territories.

The Case for Economic Development

Why should a distribution monopoly, with a regulated rate of
return, care about customer growth? First, the regulated return
isn’t guaranteed. Public utility regulators may disallow rate increases
when ratepayer costs become too high. To keep rates low, utilities must attract
large commercial and industrial (C&I) customers, spreading utility fixed
costs across more deliveries. New or
expanding businesses also spur secondary growth, increasing
the employment base that supports new residential housing and
small businesses.

The second economic development benefit is higher utility earnings, especially
between rate cases. Why? Greater sales revenues increase the use of the utility’s
capacity. Also, unlike risky investments in non-core utility businesses like
speculative energy trading, economic development investments offer predictable
revenues and earnings growth.

Finally, economic development rates and services keep
utilities competitive, retaining industrial customers seeking to disconnect
from the pipes and wires infrastructure to obtain
better service or lower prices. Economic bypass was especially prevalent
prior to deregulation when corporate
energy managers installed dual fuel systems and constructed on-site co-generation
systems.

Become the Network of Choice

Distribution utilities are network businesses, connecting
fragmented energy buyers and suppliers. As Nicholas Economides
of the Stern School of Business points out in The Economics of Networks, the
economic value of the network increases as more companies – customers
and merchants – transact business
across the network.

To create customer loyalty to the distribution system, utilities
must invite, rather than repel, service providers. With greater variety of
offerings, C&I customers will more likely find services that meet their
operating goals. Distribution utilities cannot provide the full range of services
by themselves. Why? Public utility regulators restrict utilities to offering
only basic rate services, segmented into a few customer classes.

Large C&I customers want customized attention. They expect all vendors,
including distribution utilities, to understand their business needs, offering
new ideas that improve productivity. Some corporate purchasers like General
Motors want commodity purchases tied to spot market prices. Other companies
like Dow Chemical value earnings predictability, seeking hedged prices to control
natural gas feedstock costs. Commercial building owners, however, look for
assistance to finance and install the best available energy-efficiency technologies
to lower building energy use.

To reach tough business buyers with different needs, utilities
must market and operate open networks, becoming magnets for three types of
partner connections: corporate executives and real estate developers; trade
allies like architects, engineers, and developers; and energy service merchants.
Utility executives should think like executives at Amazon.com or Simon Property
Group, the largest
owner of shopping malls. Both companies attract customers because they draw
a large selection of quality merchants, which brings more customers, each reinforcing
the growth of the other. Mall owners
offer a shopping environment that concentrates buyers and sellers to maximize
transactions.

By facilitating transactions, utilities capture system-wide
market information, which they should package into new
distribution services to improve partner experiences and meet customer preferences.

Distinctive Business Cluster Scenarios

Focusing on the economic development of customers and partners requires utilities
to create a bold new marketing position. Many utilities have bits and pieces
of an economic development package, but few utilities create a unified brand
experience that expresses a compelling message to C&I executive decision-makers.

To reposition their companies, utility executives should develop a unique
brand promise targeted to specific business clusters within
their service territory. Each metropolitan region serves a different set
of clustered businesses such as financial services, semiconductors, aerospace,
chemicals, or food processing. Each cluster business shares similar strategic
and operating goals. For example, Detroit’s automobile cluster may want
utility partnerships that provide expertise in power technologies for robotic
welding, automated machine tools, and fuel cells, while New York City’s
financial services cluster requires uninterrupted power with minimal voltage
fluctuations.

The first step toward cluster marketing is learning the business challenges
facing C&I customers through one-on-one executive meetings and focus group
sessions with facility managers. Utility
key account managers should develop the initial survey questions based on prior
customer experiences, identifying customer requirements for budget control,
industrial competitiveness, operating reliability, and environmental goals
(see sidebar, “Sample Customer Research Questions”).

After meeting with customers, the utility should then develop several user-experience
scenarios, one for each business cluster. The user scenario captures the complete
set of preferences for how the customer wants to buy, control, use, and pay
for energy services. For example, real estate investment trusts may want “smart
communications,” such as aggregated electronic bills with drill-down
Web site views of hourly energy use and demand for each building and lessee
sub-meter. To control costs, these building owners may also be willing to pay
for meter information that tracks tenant power use and demand, flagging sub-meter
data that exceeds normal levels or jumps outside of pre-set benchmarks. To
keep their tenants fully informed, owners may also
want to be paged about the estimated duration of power outages after
a hurricane or blizzard.

Help Business Partners Succeed

Utilities should identify the best performing partners, the ones that bring
new customer connections or increase customer satisfaction with the utility’s
network. Successful partners provide the services that best fulfill each scenario
brand promise. Just as many utilities have installed customer information systems
(CIS) to better track and serve customer needs, they should add partner relationship
management (PRM) systems. Why? Utilities should shape the quality of their
network services by supporting their top trade allies, directing resources
like
co-opt advertising funds and key account referrals on a merit basis.
To improve partner effectiveness, utility-specific PRM solutions should:

Capture and Report Customer Satisfaction
Utilities should build trust with customers by hosting customer ratings of
supplier experiences, similar to the eBay and Barnesandnoble.com style ratings.
Small to medium-sized C&I customers benefit by knowing which lighting contractors
or commodity suppliers deliver services on time, on budget, and with accurate
bills. Rating suppliers also creates a Darwinian competition that eliminates
low-quality vendors, leaving only the best vendors connected to the utility’s
business partner ecosystem.

Track Trade Ally Performance Against Utility Goals
Utilities should create scenario-specific balanced scorecards for tracking
contractor results in the PRM system. For a gas utility, metrics for a heating
and plumbing contractor should include the number and types
of gas-fired appliances installed in commercial buildings, adherence to gas
utility safety regulations, timeliness in communicating and meeting construction
milestones, quality of work, certified experience with
each business cluster’s operating needs, and success selling energy-
efficient technologies.

Coordinate Economic Development Marketing
As distribution utilities build closer relationships with high-performing partners,
utility managers should use the partner relationships to create uniquely compelling
total energy cost management, quality,
and reliability packages. By analyzing demand and use profiles for each cluster,
the utility can combine demand-side management
and co-opt advertising budgets with incentives from trade allies to develop
a customized proposal for the business customer’s evaluation team. Using
a PRM exchange, potential general contractors can request bids from qualified
sub-contractors to drive better bargains
in their proposals.

Use B2B Exchanges

Opportunities to create new revenues will emerge as utility executives move
toward a network business model. By evaluating
the information needs of all connected parties, utilities should gain
a unique vantage point to spot efficiency gains across the portfolio
of customer and partner transactions. Utility managers should look for new
ideas that maximize the value of embedded information locked away in corporate
databases or the paper files of customer account managers. Several utilities
already operate online exchanges to facilitate cost-effective communications
between utility schedulers, suppliers, and partners.

Early examples of information exchanges include:

Connecticut Light and Power Offers Online Meter Data Service
Each day, electricity merchants schedule power deliveries to meet their business
customers’ next day, hourly demand profile. If the
next day’s actual demand increases unexpectedly, the power supplier is
forced to buy wholesale spot market supplies at prices that can jump as much
as 10 times higher than their contracted generation prices. To help power marketers
manage costs, Connecticut Light
and Power sells three levels of meter data services: standard silver, gold,
and platinum. With platinum service, marketers can go online
to view and download hourly data by meter, account, or aggregated grouping.
The service also includes 13 months of online historical data, which suppliers
or customers can view graphically or in report format. Using the historical
data, suppliers can input specific customer-load profile data into their forecasting
algorithms, improving their ability to estimate customer loads based on seasonal
and operational conditions.

Union Gas Provides an Online Gas Scheduling Exchange
With its new unbundled gas storage service, Union Gas expected thousands of
daily emails and faxes from its half-million customer accounts seeking to schedule
and balance gas deliveries. To efficiently manage the daily transaction overload,
Union Gas built Unionline, a Web-based service that enables marketers to electronically
nominate daily gas volumes and view scheduling confirmations. An additional
benefit of the service is the online capacity clearinghouse. Using the clearinghouse,
marketers can
swap their excess, upstream gas transportation capacity on one
flow path for needed capacity on a second path. The result? Marketers manage
the costs for holding slices of the utility’s
firm upstream transportation capacity.

SoCalGas Offers an Online Gas Imbalance Trading Exchange
Gas merchants cannot match deliveries exactly to daily customer demands. Why?
Weather and operating-dependent demands are unpredictable. However, across
the portfolio of utility customers, some marketers will hold excess deliveries
and others insufficient deliveries in their imbalance accounts. The system-wide
result is a smaller imbalance. Southern California Gas Co. offers merchants
the opportunity to benefit from its system, enabling the suppliers to post
and trade imbalances on its ENVOY Web site. To exchange an imbalance position,
a trading partner completes an online “trade ad”, listing information
such as the type of trade, the contact information, and volumes to be bought
or sold. Once posted, trading counterparties can then contact the listed gas
supplier, negotiating a satisfactory exchange to eliminate both parties’ imbalances.

By sitting at the center of a network, utilities can help their customers
and suppliers to lower their transaction costs, creating an effective incentive
for their customers to expand within the utility’s service area.