Kevin Monte de Ramos, Every decade a Hollywood blockbuster perpetuates the myth, “It’s not personal, it’s just business.” Within the utility industry, business is personal. And the industry must become even more personal in the future. Just as we customize some services within the commercial and industrial sectors, the residential sector requires specialized attention.
Every decade a Hollywood blockbuster perpetuates the myth, “It’s not personal, it’s just business.” Within the utility industry, business is personal. And the industry must become even more personal in the future. Just as we customize some services within the commercial and industrial sectors, the residential sector requires specialized attention.
trends in residential energy expenditures
Residential expenditures on both natural gas and electric have risen 10-fold in just 35 years. Fortunately, U.S. households have enjoyed a robust growth in income over the same period of time.
Dividing residential energy expenditures by the aggregate income of all households yields a national energy burden. Combining data from the Energy Information Agency and the U.S. Census Bureau, we find the national energy burden has actually declined from 3 percent in 1975 to just under 2 percent in 2003.
So, why do we hear growing concerns over uncollectible accounts?
a more detailed look
Looking at the individual components of our national energy burden, the story told paints an alarming portrait. Home energy expenditures are at their highest levels. Current estimates suggest U.S. households spend $160 billion annually on home energy.
Of this total, $43 billion (28 percent of residential sales) are borne by households near poverty.
This is significant because these homes often have less earning power than your teenage daughter. Despite high priorities given to utility accounts, large proportions of our population simply have no discretionary income to cover the home energy costs.
To make tangible the issues of utility credit and collection, simply imagine the troubles your children would face when tasked with the monthly payment of your gas and electric bills. Agencies working closely with the low-income families understand the tough choices confronting households who must ration food, medicine and childcare to maintain utility service.
For low-income households, the utility business is indeed personal.
a growing need
Still, you need not be impoverished to feel the inflationary effects of rising energy prices. Energy costs are imbedded within every commodity from our morning coffee to each romantic getaway. As a result, discretionary household incomes have declined in the wake of rising energy costs.
However, not all homes are impacted equally. Top earning households take home the greatest proportion of earned income and these same households also outpace the general population in growing their incomes. So, it goes from top to bottom across all income segments.
While the national energy burden has declined, our estimates suggest 33 percent of U.S. households have seen higher energy burdens. Furthermore, these estimates do not include rises in energy costs nor have they included increases in utility rates over the 2004-2005 heating season. Both of which are certain to exacerbate the problem of utility service affordability.
Even high earners may feel pressured to redirect utility payments to other uses. Financial distress from consumer debt, unplanned expenses or other insecurities may alter individual payment patterns. When taken aggregate, individual behaviors can adversely impact utility cash flows.
reacting to the problem
As arrears extend beyond bad debt reserves, utilities are seeking recovery mechanisms to maintain profitability. Because utilities are turning to the general ratepayer for support, homes struggling with current home energy costs must now struggle with even higher energy burdens. Homes that successfully balanced obligations in the past are likely to fall behind. And, the remaining households will simply pay the incremental home energy costs.
How long can this cycle continue without consequence? At some point, individuals say enough is enough. I pay my fair share; so, why should other homes be any different? Once this inquiry starts, legislative action is not far behind. The State of Pennsylvania, ignoring lessons learned, weakened consumer protections. As a result, utilities may utilize aggressive practices in the collection of unpaid accounts.
But, is this really a solution?
Consumer protections evolved because service terminations and litigation simply did not resolve service affordability issues. This practice increased collection activity leading to higher utility costs. As a result, key cost-effectiveness and customer service ratios were negatively impacted. With higher imbedded operating costs, time led too additional rate hikes and even greater gaps in affordability.
the need for a better solution
When my clients entrust KMDR Research to streamline their multi-million dollar service delivery infrastructure, it is more than just business. It is personal, very personal. The careers of those endorsing my hire are at stake, as is the financial security of their families.
Each day you and I are evaluated on the activities in which we indulge, the decisions we make and the actions we take. Our fortunes can pivot on a single seemingly trifle interaction. The successful outcome of a visible project or competition can significantly influence the lives of those involved.
Organizations are susceptible to similar whims. CEOs engaging in unethical activity may find the assets of their multi-billion dollar organization listed on the auction pages of EBAY. Corporations choosing the wrong celebrity endorsement may awake to news of a boycott against the full range of product and service offerings.
In short, companies ignoring human instinct will find their operations ineffectual and long-term shareholder value in jeopardy.
integrating human behavior into utility operations
Granted, we cannot change the overall market dynamics from within the utility. Both national and international intent would be required to make home energy affordable to all. Yet, management retains an obligation to shareholders and utilities have obligations to the community. So how are these interests united?
The answer lies in the evolving field of psychology. Corporations use psychology to enhance brand equity, to increase sales and to enlist new subscribers. Your son does not ask for a hamburger, he asks for a Big Mac. Your spouse uses Kleenex, not facial tissues. And we choose to Google our favorite topics.
Politicians use psychology to frame controversial issues; such as, the Culture of Life and a War on Terror. Whether or not we agree with the positions espoused by these phrases, you will have difficultly finding compelling arguments that rally the emotions stirred by these tightly crafted euphuisms.
Business involves personal choice. The more influence you have over these choices, the better positioned your organization. During the dot-boom, prominent online retailers introduced the concept of personalization engines to individualize customer care. For this effort, notables such as Amazon were rewarded with dominating market share.
But, can home energy distribution be personalized? Surprising to most, the answer is yes. There are a number of opportunities within our industry to improve customer interactions and to influence consumer behavior.
real world examples
One example of this customization comes from rate innovations. Georgia Power found that approximately 10 percent of homes were willing to pay a slight premium to insulate themselves from rate increases and fluctuations in electric use. Under the flat bill tariff, customers purchased an unlimited supply of electricity for a fixed negotiated monthly payment.
Another customization is evidenced by the Woodstock Hydro Pay-as-You-Go initiative. Using smart metering technology, customers are able to buy energy credits from local convenient stores. These credits are then redeemed for home energy. Today, the presence of prepayment technology is seen an asset, often appearing as a desirable feature in property listings. Furthermore, smart metering technology provides consumers with incremental feedback.
This allows households to conduct ad hoc experiments to improve their use of electricity. One exemplary story is that of a couple struggling to agree on setback temperature. One felt a deep setback temperature would lower home heating bills while the spouse believed more energy would be used to bring the home back to a comfortable level.
Since the thermostat displays current and accumulated energy use, the couple was able to verify over the course of two days that the deep setback temperature was most energy efficient. This simple experiment settled an argument that could have easily continued without resolve for decades.
potential of psychological savings
We have learned that information can alter human behavior. Yet, there is more to be done. The study of self-changers, individuals wishing to alter chronic behavior without professional assistance, reveals a six-stage process of change. Dr. James Prochaska found individuals passed through the following stages: pre-contemplation, contemplation, preparation, action, maintenance and eventual termination.
One common underlying factor of all six stages was the reliance on “helping relationships.” These relationships come in many forms, but all involve empathy and communication. Even within traditional customer service interactions, there is considerable opportunity to influence and support consumer behavior.
Water utilities successfully employ voluntary restrictions to curb water use during times of critical demand. Electric utilities offer interruptible rates to ensure system reliability. The use of psychological mechanisms to trigger consumer response can add significantly to the bottom line.
Imagine the value of a demand response initiative that requires no technology, no installation crew and no annual maintenance costs. Payment behavior is no different. Helping relationships can assist those wishing to ration energy or adhere to monthly budgets.
We recommend the following approach for our clients. First, segment the population in question on socioeconomic factors. Second, train and/or hire specialists who deal with the target segments. And third, transform all customer interactions into “helping relationships.”
When a customer turns from a long-history of paying the full amount due and begins a sequence of partial payments, your instinct should tell that something different is going on within this household. An empathetic phone call and some carefully crafted statements on the bill could open a valuable dialog, allowing you an opportunity to influence future behavior.
Few would dispute a net positive resulting from such an interaction. Making the utility business more personal will improve the economics of both the utility and the community it serves. Few other investments can enhance consumer satisfaction and loyalty while raising corporate profitability.
Monte de Ramos is president of KMDR Research, which specializes in the utility service delivery infrastructure; your people, processes and systems. He can be contacted at 888- 563-7638. His book, Poverty and the Public Utility, is now available from PennWell Books (www.pennwellbooks.com).