Future Utility Success: Top 10 Best Practices
Originally published May 8, 2013
The utility industry is in a period of dramatic transformation with no end in sight. Utility boards and management are increasingly challenged with cutting back or tightening budgets, filling gaps in their leadership and workforce due to retirements, making infrastructure upgrades, staying up with beneficial new technology and market opportunities, and addressing new regulatory mandates and concerns from the public and ratepayers. Moreover, to offer competitive rates, utilities must be increasingly efficient. These challenges offer a tremendous opportunity to reinvigorate organizations to prosper and thrive.
To leverage these winds of change without being overcome, utility management and their governing boards should consider these Top 10 Best Practices and make plans to ensure that the utility is facing its challenges head on.
Become an Agent for Change
The utility business is fundamentally changing. The model of generating electricity in a large plant, delivering it to homes and businesses on poles and wires and then communicating with customers once a month through a billing statement is not sustainable. Changes in environmental regulations, customer interest in renewable energy and the need to take advantage of technological developments are requiring electric utilities to rethink not only how they create and distribute power, but also to reassess the ideal relationship with their customers.
Interactions with customers are undergoing a transformation largely driven by new technology. Historically, utilities have had limited communications with their customers, and customers have thought about their utility provider only in the event of an outage or when their bill arrived. Although this limited communication was adequate in the past, many customer service experts believe it is no longer enough – and that a more personalized approach is necessary.
Several external factors create opportunities for utilities to personalize their communications with customers, such as the availability of individual communication and interaction preferences or more energy usage information via smart grid technology. Customer acceptance of new energy technologies and real-time energy data could foster cooperation in energy solutions such as home energy management systems that contribute to the financial and sustainability success of customers, the utility, and their communities.
It is critical for utility executives to monitor industry trends and developments to inform their planning so they know how and when to act. The utility’s leadership should share this responsibility but the manager responsible for strategic planning may be an appropriate lead. Equally important is embracing change when it makes sense for your organization.
Understand Your Customers
Utilities should understand who their customers are, what they want, and what they are willing to pay both now and in the future. Customers are focusing on energy because of environmental concerns and cost increases, and this focus presents an opportunity for utilities to serve customers with more targeted products and services. Smart grid technology provides more insight into energy usage, but data need to be combined with increased stakeholder engagement and marketing research so utilities can understand their customer market segments and offer more alternatives like payment options, dynamic, green or electric vehicle pricing, and demand response options.
Take the telecommunications industry as an example. Consumers understand time-based rates as they apply to cell phone plans. Better utility communications can move customers to that same understanding of electricity pricing. Innovation in the telecommunications sector started with new technologies and moved to a solutions focus with offerings that address customer needs. As part of this process, telecommunications companies segmented markets based on customer demographics, needs, values and price sensitivity. Similar techniques can be applied within the utility industry to ascertain the services customer segments want and what price.
Engage with Your Customers
For utilities, customer satisfaction typically begins with achieving the basics: accurate meter reads, correct bills, reliable power and service that is timely and beneficial. Smart grid technology can allow customers to manage their energy use more actively and thus keep their bills low despite rising power costs. However, utilities must improve communications with customers and educate them on the benefits of modifying their behavior. Without a change in the way customers use electricity, customers and utilities will enjoy limited benefits from the smart grid and the conservation or demand response pricing incentives associated with it.
Utilities should upgrade their customer relationship processes and systems in order to integrate new communications and customer service processes. Increasingly, these solutions are cloud-based at a more affordable price. Offering multiple communication channels to interact with customers may allow utilities to better manage customer needs. Customers expect organizations to provide easy, quick options for interaction, including the ability to contact their utility using multiple channels, such as the utility website, email, phone and smart phones. Energy efficiency calculators and other tools should be closely tied with customer service channels.
Social media can also be an effective communications tool. In an article, “Putting Social Media to Work”, published Sept. 12, 2011, Bain & Co. reported that a survey of more than 3,000 consumers “found that customers who engage with companies over social media spend 20 to 40 percent more money with those companies than other customers.” Compared to some industries, electric utilities have been slow to adopt social media. However, the 2012 E Source Utility Social Media Survey announced the top 10 utilities using social media with the top-rated Avista Utilities hosting a blog and maintaining a Facebook, Twitter and YouTube presence, showing that utilities are beginning to leverage a variety of social media tools.
Adopt Technology Best Practices
Utilities need to meet customers’ needs cost-effectively—using technology appropriately is the path to achieve this. Over the next five to 10 years, the entire electric utility industry will invest in a range of new technologies to reduce cost and meet public, ratepayer, and regulatory expectations. To stay competitive, utilities should carefully evaluate the following opportunities:
- Scale-up adoption of information and communication technologies, such as outage notification systems, to improve customer service and reduce costs.
- Create a smart grid to make use of computer, sensor, automation, control and communications technologies.
- Achieve increased penetration of renewable and alternative energy technologies, including meeting aggressive renewable portfolio standards mandated in state legislation.
- Maintain electric power grid reliability when integrating sources of renewable generation with traditional generation technologies.
- Improve energy efficiency in delivery and use with new building codes and green building policies, including zero-net-energy goals.
- Enable the public to use plug-in electric vehicles to reduce oil consumption and cut carbon emissions.
To realize these opportunities, utilities should conduct needs and cost-benefit assessments to determine the benefits, timing, and conditions that should be present to adopt additional technology. By partnering with other nearby utilities or a utility association, utilities may be able to minimize the costs of assessing the benefits and possibly of adopting the technologies.
Align Strategy and Governance to Customer Needs
A deep understanding of customers and how to meet their needs should be embodied in every aspect of a utility, including its strategic vision, organizational and governance structure, resource planning and acquisition strategy, operations, engineering, and customer service. Some utilities make providing exceptional service their overall vision and then align key measures, such as responsive and reliable service to the vision. Many utilities use strategy maps to illustrate this alignment and then use a “balanced score card” approach to monitor, measure and report progress.
Communicate Your Strategy to Customers
A more personalized customer service approach can also influence how utilities interact with their customers regarding the utility’s vision, organizational strategy, programs and accomplishments. Some utilities are using the changing utility environment as an opportunity to develop a new brand image that focuses on the role the utility can play in improving and facilitating customers’ lives—departing from a transactional relationship to one in which the utility is perceived as a leader who truly cares about the community.
For example, Sacramento Municipal Utility District (SMUD) in California initiated a re-branding effort in 2010 with the objective of building customer loyalty. The effort included researching and developing a new brand platform, comprehensive internal employee brand launch, external customer/community brand launch and multi-media campaigns. The utility’s intent is to build personal, trusting and mutually beneficial relationships with customers; provide intentional and optimized customer experiences throughout all touch-points; and lead the industry in customer experience best-practice strategy and execution.
SMUD’s rebranding is underway with a customer communication campaign. SMUD’s next steps are investments in implementing the strategy by launching and strengthening new programs, services and channels to enhance customer engagement.
Focus on Risk Management
In addition to an increased customer focus, utilities need to take action internally. Utilities should build their organization’s risk management function to understand and manage procurement, physical, compliance and other risks. Utilities need to understand what events would be crippling if not prevented or managed.
Personnel and commodities (fuel, power market exposure and supplies/equipment) are two significant costs for any utility. Both need to be accounted for and managed properly to ensure that the utility’s fiscal bottom line and rates are not impacted negatively by any unexpected cost variations.
Basic salaries for personnel generally can be forecasted and managed, but pension obligations and health care costs can impact the bottom line if not accounted for. Utilities should monitor the fiscal health of the pension fund that it contributes to on behalf of its employees and have a plan if that fund is undercapitalized. For health care, utilities should investigate expected benefits increases and possibly consider steps to minimize increased benefit costs.
Utilities are also subject to many commodity price swings. Fuel, particularly natural gas, can have significant annual cost swings. Over the last several years the industry has seen natural gas markets range from less than $3 per million British thermal unit (MMBtu) to more than $14 per MMBtu. Exposure to wholesale energy markets can also contain wide variations in prices. Having policies, programs and procedures to manage these risks is critically important. Utilities can also be affected by price swings of raw materials, such as steel, aluminum and copper. Having an effective equipment-buying policy that grants discretion to purchasing agents to buy excess units when commodity prices are low may be prudent.
The variation in many cost items has resulted in numerous utilities increasing their financial reserve levels (some significantly) to cover financial uncertainties. For some time now, the credit rating companies have promoted this practice and cited it as a reason for affirming or upgrading utilities’ bond ratings.
Retain and Recruit the Next Generation of Leadership
The U.S. Power and Energy Engineering Workforce Collaborative and the North American Electrical Reliability Corp. (NERC) predicted what most utilities already know—the industry is losing talent at an alarming rate. Both organizations have reported that between 2009 and 2014 more than 40 percent of utility electrical engineers may retire or leave for other reasons. Compounding the problem, the pipeline for new engineers is decreasing as the number of college programs and professors in these fields declines. Competing for talent with non-utility employers is another concern. These trends could not make it more clear to utilities that retaining and training mid-level engineers to be the next generation of leadership is critical.
Invest in Asset Management
Classical models of asset management focus on meeting forecasted needs in a timely manner to ensure safe, reliable and economic supply. While noble in outlook, this approach inadvertently resulted in a posture of engaging in system repairs and upgrades at the last minute and, in general, reactively responding to asset failures.
In contrast, modern utilities should adopt an alternative, more customer-centric approach that takes into account the impact that asset management has on financial returns. Some utilities now see asset management as a facilitator of customer relationships and financial returns. Upgrades to transmission and distribution systems are a means to improve reliability, especially when coupled with the advent of smart grid technologies. This, in turn, positively affects customers’ perceptions of their utility supply chain and reduces the frequency and duration of outages. Such effects can be quantified in system reliability indices and translated into loss of income.
Be Visible in the Job Market
While estimates vary greatly, over the next five years the United States is projected to produce more than 1 million energy-related jobs. Capital-intensive projects like building new power plants create construction jobs, but create fewer permanent jobs per unit of energy than solar installation and energy efficiency retrofit jobs. Energy efficiency investments that cut the amount of money spent on energy can actually have an added bonus in that consumers can use the money saved on other types of consumption, which can lead to job creation in other sectors. Utilities can play a key role in job creation in both direct and indirect ways. For example, providing lower cost energy may help make local industry more competitive, or providing financial incentives may attract new industry to the community.
Most organizations have already started some of these strategic actions and may be engaged in strategic planning activities. But no matter how well prepared you are to deal with the opportunities and risks, having a formal review process is critical. A good first step is to conduct a high level gap analysis. This process could start with a leadership workshop to identify priority gaps and develop a plan forward to assess them further. Steps that may come out of this high-level gaps analysis may be more specific analysis, benchmarking and meetings with community stakeholders. Rapid action is not always needed; just a plan to make steady, measured progress.
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