Benchmarks
Innovative Ratemaking for Product Differentiation
April 15, 2003
By Nathan Adams
Three keys to heighten customer interest.
A recently completed analysis of innovative ratemaking in the electric utility industry by Platts Re-search & Consulting found a handful of customer-centric utilities expermenting with novel innovations in ratemaking, although most continue to miss the boat on this form of product differentiation.
Product differentiation is a method used by competitive product firms to increase customer satisfaction by more accurately addressing each consumer's specific desire. The consuming public does not operate under a one-size-fits-all paradigm. Each consumer makes purchase decisions based on different wants, needs, levels of sophistication, and so on.
Take, for example, orange juice. Homestyle juice is for the customer who likes juice a little pulpy; calcium-enriched juice is for those fearing osteoporosis; low-acid juice is for sensitive stomachs; and house-brand juice is for the price conscious. Long-distance telephone service and toothpaste are just two more examples of this strategy.
Electricity today is in a position similar to that of the aforementioned products several years ago. Very few people think about electricity. A kilowatt-hour is a kilowatt-hour; each one accomplishes the same thing. But opportunities for differentiation can be found mostly in the categories of source, price structure, and reliability.
Through various green pricing programs, we know that the source of the electricity is important to a certain segment of the market.
Price structure doesn't affect the quality of electricity but rather how it is used. Some customers may want flat unit pricing because they don't want to think about electricity. Others, looking to minimize costs, may want a dynamic pricing schedule that takes advantage of near-wholesale prices.
Customers also can pay a premium for a higher level of electricity reliability or pay a discount for a lower level of reliability. For years interruptible/curtailable rates have offered savings to customers who can withstand occasional, intentional interruptions. A few utilities have taken this idea to the other end of the spectrum, offering redundant distribution feeders or backup generation for a premium price.
Utilities can use these levels of differentiation, and possibly others, to design their own attractive menu of rate options and achieve greater customer satisfaction.
But some innovative rate designs can attract segments of the market and serve their needs more effectively. For example, Gulf Power has found 3,000-plus residential customers that desire its critical peak "RSVP" rate. Those customers obviously don't mind adjusting their usage to achieve savings on their bill. At the opposite end of the spectrum, Georgia Power has found almost 100,000 customers in the residential and small business market for its flat-bill rate. These customers have no desire to respond to price signals and would rather pay a premium for a predictable bill.
It is a rare innovative rate design that will immediately be adopted at high levels in a service territory. But over time, marketing efforts crafted to convey the true value proposition of the rate will resonate with consumers, likely resulting in higher levels of satisfaction.
(This article is partially adapted from the 2002 E Source Survey of Innovative Rates.)
Nathan Adams is product development manager at Platts Research & Consulting. Contact him at nathan_adams@esource.platts.com.
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