More for your money
Deregulation and competition in the UK has given birth to the multi-utility offering `added value products`. The rewards for the new utility could be considerable; and hopefully it will mean good news for consumers as well.
The concept of the multi-utility is not new. In Europe the likes of Generale des Eaux of France and Tractebel in Belgium offer customers electricity, gas, water and telecommunications. With the onset of retail competition and deregulation across all sectors, UK utilities are now moving down the same route and are even looking to go one step further.
But while deregulation will present opportunities, the competition that comes with it will squeeze margins. And the utilities that will succeed will be those which offer `added value` in customer service, innovative pricing and products.
One utility currently among the front running added value multi-utilities is ScottishPower. In the space of two years, the UK utility has gone from being a local electricity generator and supplier to a position where it can offer customers throughout the UK a mix of utilities as well as a nationwide chain of more than 160 retail shops stretching from Inverness in Scotland to Southampton in the south of England. The road to becoming an added value utility has been an interesting and rewarding one.
In 1991 the company had 1.8 million customers, an annual turnover of £1.2 billion ($2 billion) and a market capitalization of £1.8 billion. SP now has five million customers, an annual turnover of some £3 billion and a capitalization of £6 billion. As a multi-utility company, SP now serves one in five of Britain`s homes.
The multi-utility journey
SP`s journey to becoming a multi-utility began with its move into telecoms. It has since successfully moved into the gas supply business; acquired regional electricity company Manweb; and Southern Water, the southeast England water and waste water services company.
On privatization, SP inherited the largest telecommunications network in Scotland outside BT. This ready-made infrastructure and pool of telecommunications expertise allowed it to launch ScottishTelecom in late 1994. ScottishTelecom`s advanced optical fibre network provides communications services to about 250 `blue chip` groups throughout Scotland.
A domestic telephony service delivered by Fixed Radio Access is being rolled out across Scotland. A joint venture at the beginning of the year has given ScottishTelecom about 20 per cent of Scotland`s mobile phone market. Despite being a newcomer, ScottishTelecom has gained five per cent of the regional corporate market and is already making a profit. The company foresees capturing ten per cent of the £2 billion telecommunications market in Scotland by the turn of the century.
More recent investment in telecoms has seen the company extend an invitation to engineering consultants, Kennedy & Donkin to develop the future telecommunication strategy for its Power Systems Division. Under a £90 000 contract, Kennedy & Donkin will spend the next six months examining the Power System`s Division current and future telecoms requirements. A detailed Study will be developed from this to establish a strategic direction for the cost-effective development of the wide variety of communications services required to manage and control a modern electrical power system.
Current and future developments including fibre-optics, microwave, mobile radio and telephone, satellite and across the board IT are being considered as part of this project. On completion of the Strategic Study, SP will have the capabilities to effectively optimize the management of their network i.e. protection, telecontrol, automation, mobile communications, telephony and business information systems.
SP`s move into the gas market spawned from its use of gas in many of its power stations. The sector is characterised by fluctuations in demand, both seasonally and daily. According to SP, its use of large quantities of gas at power stations and for supplying customers, allows it to broker the best deals. In other words it can uniquely manage `swing` to the benefit of its customers. This has allowed it to capture some 8000 customers in the business markets – the first to deregulate. SP now has more than 150 000 domestic customers in Scotland, England and Wales where competition has been introduced. It aims to capture 12 per cent of the £2 billion gas market in its main operating regions.
In 1995 SP became the first UK electricity company to acquire another. The company integrated Manweb`s 1.3 million customers and operations into its own making significant cost savings.
Less than a year later, Southern Water was acquired, making SP a full multi-utility. The customer base gained from this acquisition was put to good use – SP now provides gas to some 80 000 people in the region – one of the first trial areas for domestic gas competition.
Moving into these areas called for significant capital investment. From just over £100 million in 1991, capital expenditure in 1997 totalled £500 million. Heavy investments were made in strengthening the network of wires and pipes, developing customer service facilities and building new business. Between 1991 and 1997, SP invested some £1.5 billion in its businesses.
Much of this money can, however, be recovered through savings resulting from economies of scale. The economies of scale from a customer base of 5 million can cut costs dramatically. The expensive duplication of billing can be removed; operating costs can be cut by utilising common depots and services; and purchasing power can be exploited.
An indication of the economies of scale that can be made is evident from figures which show only a single utility in action over a year: four million telephone calls; 55 million payment transactions; 9 million meter readings; 1.5 million other visits; 200 000 service calls; 170 000 written service queries. Imagine these figures multiplied by four for each utility, and the savings made – by combining these in a multi-utility – soon become evident.
The multi-utility approach also opens up infrastructure opportunities. At a private estate near Glasgow, Scotland, where 1400 houses are being built, the cabling and piping of all the basic services are being installed by SP in one of the first developments of its kind in the UK. Instead of digging separate trenches for each utility all basic services are planned, designed and built in one trench and at one time – providing economies of scale and considerable environmental benefits.
SP sees reducing costs while improving efficiency and customer service as the key to being a successful multi-utility. Since privatization ScottishPower`s customers have enjoyed significant improvements in service and price reductions in power, telecommunications and gas while shareholders, according to SP, have seen returns beyond their expectations. Benefits for electricity customers throughout the UK have included price falls in real terms of more than 20 per cent for industrial customers and 16 per cent for domestic customers.
Between 1994 and 1996 operating costs at Manweb were cut by more than £60 million, while customers have seen three price reductions in four years. At Southern Water, staff have been cut and the business has been refocused on its core and waste water activities.
Help at hand
Information technology is a key driver in cutting costs and SP has made significant investments in new systems. But not all utilities are as geared up as SP in terms of the expertise needed to become an effective multi-utility.
In this situation, outsourcing can be an option and many are going this way. A recent report predicted that by 2005 most companies will outsource over 60 per cent of their entire range of activities.
According to leading European consultant Cap Gemini, 70 per cent of functions related to business processing can be outsourced. Accordingly, it has just launched a new service known as UtilityPlus. Aimed at Britain`s gas and electric companies, it is based on two key elements:
– A comprehensive and fully integrated set of IT systems specifically designed to handle all the customer-facing activities that utilities have to manage
– The outsourcing of back-office functions such as billing, handling of customer enquiries and registration of new customers to dedicated business processing centres operated by Cap Gemini.
The company believes that by applying efficient and custom-designed computer systems, it can streamline all aspects of customer processing to reduce average costs from the current level of about £18 per customer per year to £10. Average net profit per customer per year, currently as low as £5 would as a result more than double to £13.
Cap Gemini sees cutting costs in this manner as one of the secrets to success. “Most UK gas and electricity companies have been spending heavily on marketing and advertising to win new customers. But research shows that unless customer processing costs can be cut, it could be many years before they show a profit on their new businesses,” explained Jon Brooke, head of the utilities sector at Cap Gemini.
This was explained by a brief look at customer processing costs. Research suggests that an average domestic electricity bill comes to £270 a year. The net profit to the supply company can be, typically, as low as £3 to £5. While energy costs are the main expense for supply companies, customer processing costs will amount to £18 on average, and in some cases over £30. It is currently costing utilities about £40 in advertising, selling and registration costs to sign up each new customer. In the worst case therefore, it is going to take 13 years before the new business shows a profit.
An important part of UtilityPlus is its ability to produce unified bills for customers buying dual fuel (both gas and electricity) – or a range of additional products and services – from the same supplier.
Specific functions of UtilityPlus include:
– Billing and cash collection
– Registration of new customers
– Day-to-day customer service and 24-hour customer help lines
– Processing enquiries from advertising and marketing leads
– Management of agents such as meter readers and sales staff
– Direct mail and special offers
– Management of loyalty cards and customer incentive programmes.
According to Cap Gemini, UtilityPlus is based on the `best of breed` concept and a detailed evaluation of all leading commercial packages for billing, customer management and call centres. These are integrated with an integration hub and interfacing software developed by Cap Gemini, plus the required industry-specific systems such as links to the Electricity Pool and the gas industry`s Network Code regime.
The cost of the service will be based on a pay-as-you-go, cost-per-transaction format which significantly reduces the need for high initial investment. The service will be tailored to the needs of individual companies by means of a fast-track scoping study carried out by Cap Gemini`s specialist utility consultants.
Even more important than cutting costs, however, could be the long-term benefits of better customer service and a platform for easy diversification into new services – something that UtilityPlus will be able to offer. “With markets open to competition, utilities can now use their huge customer bases to pursue all kinds of new and exciting opportunities. They can expand their product and service portfolios, they can build strong brands and they can stake their claim for world-class marketing and customer service. “Our UtilityPlus service can help them to do all these things quickly and profitably,” said Robert Dunkley, UK executive director at Cap Gemini.
Dunkley added that UtilityPlus should bring forward the day when British households will be able to buy a wide range of household services from a single supplier – from gas, electricity, telecoms and insurance to interactive TV and even home shopping – with the option of combined billing and discounting between services.
SP also believes that adding new services is the way multi-utilities will evolve in the future. The company sees burgeoning opportunities for the provision of integrated advanced products to the householder, such as the “Smart Home” concept – taking in security, remote control of appliances, energy management etc.
The company sees the markets of the future presenting opportunities for new innovative nationwide marketing partnerships with large and respected organisations such as the AA (the UK`s leading car breakdown and recovery service company). These alliances have given SP an ideal springboard from which to launch a nationwide fuel supply service.
Deregulation and retail competition opens the doors for everyone not just electricity companies, and other big utilities are already racing to gain new customers. British Gas Home Energy is now offering electricity to its gas customers. Going one step further, it has just entered into a deal with UK supermarket chain Sainsbury`s which sees Sainsbury`s becoming the first British supermarket to offer customers the chance to buy electricity at its stores.
Shoppers are being invited to register with the retail chain which will then transfer their electricity supply to British Gas Home Energy. Sainsbury`s Reward Card (a form of loyalty card) holders who sign up will be given a guaranteed price on electricity until 2001 and receive an extra 1000 bonus points.
The next 12 months will be interesting for UK utilities and consumers, with much of the world watching to see how the market develops. I have not switched electricity supplier or tried to buy car insurance from the local REC. But I will be keeping my eyes open – there`s always an insurance policy about to run out and soon the best quotes may drop through the door in the electricity bill.
Figure 1. ScottishPower today serves one in five of Britain`s homes
Figure 3. UtilityPlus service offer model
One of the major stumbling blocks in becoming a multi-utility is the lack of systems which enable the utility to collect revenue for different products i.e. gas, water, electricity.
Schlumberger Resource Management Services has just launched a customer management system for multi-product utilities with prepay customer accounts. The system, TaleXus Vendor, is claimed to be the first to handle revenue collection, account analysis and meter management tasks for electricity, gas or water.
TaleXus Vendor is organised as a dual-level system, comprising a single Central Management System (CMS), and a number of distributed Point-of-Sale (POS) terminals. The CMS offers flexible control data, revenue and meter management tasks, allowing utilities and resource providers to manage a diverse customer base efficiently, and to increase the security of their revenue collection process while reducing overall operating costs.
The POS terminals are fitted with interfaces for two-way data transfer between the system and smart card tokens held by customers, and employ an easy-to-read graphical user interface specifically designed for vending applications. The management and control software on both the CMS and the POS terminals runs under Windows on IBM-compatible PCs equipped with standard modems.
All administrative tasks on the CMS – such account management, change of tendency programmes and consumption analysis – use the Oracle database. In addition to being a powerful database it provides the potential for integration with the other information management systems. The use of Crystal Reports software enables data to be archived for long-term security, and a full audit trail is maintained for easy account monitoring.
The CMS controls the uploading and downloading of data, via the POS terminals, to the smart card tokens. The data includes the amount of credit on the card, consumption information obtained from the meters at the customer`s premises and applicable tariffs. According to Schlumberger, a unique aspect of TaleXus Vendor is that it also enables utilities to reprogramme the meters remotely from the CMS, again by transferring data via a POS terminal and smart card to a Schlumberger PayGuard meter attachment at the customer`s premises. The ability for utilities to commission and decommission meters from their customer base, and to monitor fraud and detect meter failure – all without visiting the customer – helps them to reduce operational costs.
Alongside TaleXus Vendor, Schlumberger has introduced a new smart card version of its PayGuard electricity meter attachment, which attaches directly to a standard meter and enables consumers to buy electricity using credit held on the card. PayGuard is said to be the only pre-payment solution on the UK market that can be attached to meters that the utility has already installed. This allows them to introduce advanced revenue collection technology without major reinvestment in infrastructure.