REPORT: MULTI-UTILITIESà‚– BuSCo: the world of bundled offerings

One of the biggest challenges faced by electric utilities today is retaining customer base, and making that customer base profitable. This challenge has brought innovation to the industry in ways that no-one would have thought possible just a few years ago.

It is well known that utilities selling power to the mass market must have a ‘critical mass’, or be of a certain size, to succeed. Because of this, utilities have started to position themselves along new business models: some have exited the retail energy market altogether, leaving others to expand, and some have looked overseas for new assets and new customers.

The competitive pressures that have followed deregulation in both Europe and the USA have made life tough for utilities: their margins have been squeezed, they have had to gain a whole new skill set, and they have come under increased scrutiny from both regulators and consumer groups. But while the competitive pressures have meant challenge and change for the utilities, they have brought choice to consumers.

In many parts of Europe and the US, as an electric utility customer, you can now switch supplier to make savings. You can choose any supplier operating in your service area, and you can do this, and pay your bill, over the Internet.

Ten years ago, when deregulation started to become a reality for some countries, this was the utility landscape that many foresaw. But this landscape has now started to evolve even further.

The product of continued intense competition has been the emergence of the multi-utility, or BuSCo: the bundled services company. Offering everything from energy to home security, to home entertainment and telecomms, these companies are leveraging their core skills and combining them with new technologies to find new customers and keep them loyal.

According to market analysis firm Datamonitor, in the USA, over 40 per cent of energy consumers are likely to purchase more than one product from their electricity provider by 2010″ Offering a bundled service, says Datamonitor, increases customer loyalty and helps to minimize switching. This is especially the case if the bundled product is properly constructed and marketed.

Essentially what a bundled package allows utilities to do is to generate new revenue streams from their existing customers, thereby making each customer more profitable to them. Michael Boyd, senior manager and electric utility practice leader with KMPG Consulting LLC explains: “Clearly as [US] states deregulate and customer choice becomes prevalent across the country, most utilities are looking at it as an opportunity to add bundled service offerings on top of energy, first of all to retain customers, but also as geographic lines are greyed, to attract customers outside of their normal service territory.

“The drivers here are primarily deregulation and customer choice brought on by state deregulation.”

New offerings

In Europe, multi-utilities have appeared in many countries: ScottishPower was seen as a pioneer in the UK, and was closely followed by PowerGen and Centrica; Germany’s RWE has high aspirations; Enel of Italy recently announced its somewhat controversial takeover of telecommunications group Infostrada; and EDP of Portugal envisions itself offering bundled services in the future.

But for the most part, the offerings of these companies are relatively tame: most stretch to power, gas and telecomms, while a few have recently made the leap into financial services and Internet offerings.

Utilities in the USA, meanwhile, are being more aggressive and innovative.


Figure 1. Brand marketing is shifting towards the long-term and personalized
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According to Boyd, the initial entry point for most US utilities aiming to broaden their services is energy management, for example HVAC control. “[The utilities] are taking the traditional offering, which is electricity, and really expanding upon that at all levelsà‚– at the mass market level, small businesses, and even large commercial and industrial [customers]. You see a lot of utilities leveraging the Internet, setting up commercial and industrial portals, extending their core competency around energy management into their customer base.”

Another entry point is in the provision of telecommunications, which is a natural extension of electricity supply as the provision of the two services is fairly similar. From here, says Boyd, other services can grow: “We are starting to see bundled offerings around telecommunication services, energy, andà‚– depending on the market you’re looking atà‚– also convenience services, which could include home monitoring for security purposes

“It could also include things like remote surveillance, where video cameras are installed and you’re leveraging high speed broadband connections to the home. Obviously energy companies have been very good at infrastructure and the installation of this kind of device aligns very nicely with their core competence.

“What a lot of utilities are beginning to look at is leveraging off their core competencies of infrastructure management and the installation of a residential gateway which is a physical device that sits in the business or the home that allows high speed connectivity that could be wireless, or cable, or DSL. That device has a capability to leverage infrastructure in the home, typically a power line, or the phone lines, to communicate with various devices, for example appliances or a meter.”

Advantages

For the utility, offering bundled services through devices such as a gateway can be extremely advantageous as it gives them the opportunity to learn more about their customers and how they use each of the services: “[The use of gateway devices is] particularly appealing to energy companies because traditionally [they] have not had access to load profile information at the mass market level. If one is able to gain access to how people are using energy, that has an incredible value going back into essentially the trading operation of the organization so as to be able to shift or level load at peak times, and reduce these incredible peaks that occur.”

The bundled offering also has advantages for the consumer. Ultimately, the consumer will see only one bill for all the services supplied by the utility, and this brings in a convenience factor, as well as potential cost savings. Boyd believes that this convenience factor is important: “I think it is really convenience, safety, cost reductionà‚– it is those attributes that go along with the bundles. You have to be able to show the benefit to the consumer on the basis of cost, but there is also the convenience factor.”

Switching sides

But in spite of these advantages, switching rates in the USA, as well as in Europe, remain low. This is even the case in some US states where the Public Service Commission has mandated a certain level of switching within the market, setting targets for utilities to reach and enforcing penalties if the targets are not met.

Boyd estimates that the average level of customer switching has been around nine per cent in the USA. He pinpoints the problem: “There has been long-standing brand equity with the utilities, there is a strong community presence and people are in general satisfied with their utility service. So switch rates are perhaps not as high.” He continues: “Nonetheless, utilities are still very interested in focussing on customer retention as well as customer acquisition.”


Figure 2. Customer purchasing and building brand equity
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Datamonitor has forecast that switching rates will rise rapidly in the US over the next ten years. In a recent survey, it found that consumers responding most positively to bundled offerings are young and well educated, with relatively low incomes. Its research showed that 45 per cent of 18-35 year olds and 32 per cent of college graduates in the USA would be interested in purchasing multiple services from a single supplier, along with almost 40 per cent of individuals earning less than $40 000 per annum.

Market leaders

According to Boyd, the companies that are leading the way in innovating their services are not new start-ups, but very traditional brick and mortar companies which are evolving their business models to offer these kinds of services. There are a number of ‘pilots’ currently out in the market in the area of energy management at the mass market level, including Gulf Power; Northeast Utilities; Keyspan Energy; and TXU.

“TXU for example has a joint initiative with Keyspan Energy in which they have both contributed $12.5 million to an organization called myHomeKey,” explains Boyd. “This is actually a mass market portal that provides services at the consumer levelà‚– anything that one can imagine for the home is really what myHomeKey is about. [The initiative is] operational in their home service territories and they obviously would like to make that a national play.

“Similarly, Reliant Energy has a similar offering in Houston, Texas, called GuideStreet.com, in which it has made an equity play in GuideStreet to evaluate various contractors for home-related services.”

These forward-thinking utilities have therefore begun to position themselves for future plays. In some cases, alliances have been set up with “premier” companies to offer services even further removed from energy and home security. Enron is a prime example here. The company has formed New Power Company, which is a consortium of Enron, AOL and IBM. In addition, it also has a relationship with Blockbuster Entertainment to deliver video on demand to the home.

New Power Company also has ties with a Cisco Systems initiative known as Internet Home Alliance, whose partners include Visa and General Motors.

“The play there is to leverage their wholesale energy capability in terms of delivering energy with other services from premier players,” explains Boyd. “This gives you a glimpse of how energy companies are starting to position themselves relative to these kind of service offerings at the mass market level.”

The need to succeed

Technology has, of course, played a large part in the development of these services. Gateway devices, broadband and the Internet are all of great importance to utilities operating in a competitive market. But to succeed, utilities need excellent back office capabilities, a strong brand and essential skills.

The skills set required for establishing, marketing and retailing these products successfully is very different to the skills set of a traditional utility. For this reason, many of the utilities are now recruiting from the telecommunications and retail sectors for top management positions. “And obviously there are a lot of change issues and cultural issues that go along with that,” points out Boyd.


Figure 3. Bundled services are a must to tie customers in and increase revenues
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The back office function is critical. Utilities need to invest heavily in IT, Customer Relation Management (CRM) systems and asset management systems to ensure a seamless flow of information from the front to back office, and to provide billing and other services to their customers. Boyd believes that the back office needs of utilities will open up new opportunities for consultants to lend their expertise, particularly those with experience from the deregulation of the US telecomms industry.

The bundling of goods is also important to the success of a multi-utility operating in a competitive environment. If properly designed and implemented, the bundle will provide value-added features to the residential energy user, according to Datamonitor, and in most cases, these features will result in a greater number of services being subscribed to by the customer.

In addition, bundles are an efficient way of fighting ‘churn’, or constant switching. It is in the interests of utilities to retain each customer for as long as possible, as customer capture can cost over $100 in marketing costs alone, and it can take up to three years for the utility to recoup these costs.

Bundles can therefore enhance customer loyalty, and the convenience factor once again comes in to play here. If a utility is undercut by a competitor on a particular service, customers are unlikely to switch that one service as they would lose the convenience of having one bill.

Bundled services can also help a utility to strengthen their brand equity, an especially important concept when fending off the competition, says Datamonitor. A brand provides an identification badge, sets one product apart from another, and also communicates a message to the consumer.

Brand equity therefore generates value, and is important in a highly competitive market. It can also generate customer loyalty, if effective, and can help to attract new customers through its existing customer base.

Building a brand is not easy, however, especially in a highly competitive and deregulating market where short-term pressures are high, and where incumbent utilities already have a strong brand equity.

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