Economic Development Partnering by Chris Trayhorn, Publisher of mThink Blue Book, March 11, 2004 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. Filed under: White Papers Tagged under: Utilities About the Author Chris Trayhorn, Publisher of mThink Blue Book Chris Trayhorn is the Chairman of the Performance Marketing Industry Blue Ribbon Panel and the CEO of mThink.com, a leading online and content marketing agency. He has founded four successful marketing companies in London and San Francisco in the last 15 years, and is currently the founder and publisher of Revenue+Performance magazine, the magazine of the performance marketing industry since 2002.