Leveraging Utility Incumbency
in Metering and Billing Services
Under Retail Competition
by William B. Marcus, JBS Energy, Inc.
for NASUCA Conference, November, 1998, Orlando, Florida
Let me list a few of the conferences I didn’t go to this year.
- Competitive Billing Strategies
- ’98 Energy Marketing and Customer Services Conference
- Credit and Collections for Electric and Gas Deregulation
- Making the Most of Call Center Staffing and Technology
The fact that all of these conferences are being offered shows the realization that metering, billing, and customer service are very important for utilities in new deregulated markets. They are changing from a quiet
backwater to a means of holding onto customers in an era of choice.
There are two models of the future distribution utility. In the first model, the distribution company is just a wires provider, with aggregators, alternative sellers, or energy service providers (ESPs) providing the
rest of the service. This is the Nevada model in its most general form.. The second model has the distribution utility retaining a retail function for serving default customers. This second vision is the choice of
This presentation focuses on how existing utility companies and their future retail affiliates can use metering, billing, and customer service to hold onto existing customers in a more competitive environment and
manipulate the regulatory system to do it.
To look at utilities’ actions, we first need to step back and take a short look at some facts about the energy market and small customers and about the ways in which marketers must therefore view and deal with
As a pure commodity market, small customers aren’t very interesting because they don’t use much energy.
- Typical California residential use is a little under 600 kWh per month.
- The California PX price averaged over the year for residential customers is around 2-1/2 cents.
- That means that the average residential commodity bill is $15 per month.
- If a really savvy marketer can save 10% of that, it saves a big $1.50.
Thus, the electric generation market is a low profit market on a pure commodity basis, particularly when a new competitor needs to incur marketing costs to attract new customers in an infant market.
To survive in this kind of a market, a new market competitor needs either to add value or lower costs, or both. If a marketer cannot do this, it will not survive. A commodity based provider of conventional utility
power, can’t make it in the residential market by trying to pick off individual customers. That’s why Enron has given up on small customers in California and Pennsylvania, particularly given the market
rules I’ll talk about in a couple of minutes.
An alternative seller must adopt some of the following strategies to add value or lower costs, given that a commodity market will not work for small customers.
- Differentiate its product and sell something distinctive (like green power)
Cut marketing costs and increase marketing success by letting someone else do its marketing and working with groups of customers who are already aggregated. (affinity marketing – through churches, credit unions, environmental groups, etc.)
- Change aggregation rules to allow people other than utilities to go out to bid for large groups of customers (bidding for default service, municipal aggregation)
- Cut billing and metering costs
- Add services to metering (smart meters that modify consumption as well as measuring it)
- Sell (or at least promote consolidated bill paying for) a combination of services with energy. These can include efficiency investments, appliances, burglar alarms, long distance telephone, cable, etc.
Now that we have reviewed the challenge facing marketers, let’s look at utility incumbents. They have the same general set of goals:
- Add value to transactions
- Sell new unregulated products
- Keep customers. They also have one more goal.
- If not divesting generation, get the best possible price for their own generators in the retail market (in less polite words, exercise vertical market power if possible).
However, in most markets, the utility incumbent gets to keep the customers who do not choose anyone else. Therefore, it does not have nearly as much pressure to be as active in adding value or cutting costs of its
products as its competitors. Its survival usually is not at stake. Moreover, the incumbent has a number of other advantages going into the process, and has the potential to create more advantages through the
Incumbent utilities have six advantages.
- They already have the customers and don’t have to spend money to acquire them.
- They already have a system of meters and meter reading with economies of scale.
- They already have billing and Customer Information Systems, many of which have just been refurbished with ratepayer money.
They have fully functioning call centers, which have excess physical capacity most of the time because they are sized for emergency events, as well as transient excess staffing capacity. The new paradigm being discussed in the industry is to use these call centers to make outgoing marketing calls rather than simply receiving calls from customers.
- They have a better understanding of how to use the regulatory system to their advantage than many of their competitors.
- In many cases, they are supported by their existing work force. Utility workers’ unions in California are working with the companies to stop metering and billing competition.
California provides a set of examples not to follow showing how the utilities were able to build on these already substantial advantages to hobble the competition. Two specific strategies in California have worked to
incumbents’ advantage. In addition, incumbent monopolies are adopting several of the more generic national strategies discussed below. The two California strategies are:
- Kill municipal aggregation before it even has a chance to get started.
- Make it almost impossible for customers receiving competitive generation service to receive one single electric bill including all services (the two-bill strategy)
First we start with the restructuring legislation. In the name of protecting consumers, California utilities knocked out municipal default aggregators. The utility gets to keep any customer who does not make an
affirmative choice for someone else. This was the anti-Palm-Springs provision in AB 1890. Palm Springs wanted to go out to bid on behalf of all of its customers. Edison put a stop to it. Only about a quarter of the
Palm Springs customers made the affirmative choice for the municipal aggregator because of the inertia in choosing anyone. Are Edison’s customers in Palm Springs protected? Are they better off with Edison than
with a municipal government which went out to competitive bid and found power that is cheaper?
Having fended off the municipalities in the restructuring legislation, the next California utility strategy is to make sure that two bills get sent to nearly all small customers, one from the ESP, and the second from
the distribution utility. This strategy is not universal. For example, in Nevada, even utilities agree that one bill is expected to be the norm, and the types of barriers discussed below have not emerged to date.
But if this trend emerges in other states, it needs to be quickly identified and nipped it in the bud if possible.
Two bills have the following advantages to incumbent utilities.
- The utilities want to be able to continue to communicate with customers by sending their own bills.
Incumbents don’t want their competitors in utility billing envelopes sending conflicting messages. In California, the incumbents’ role as default providers at wholesale rates may change after 2001, so that there may ultimately be more profit by holding onto customers.
It doesn’t hurt that the two-bill strategy adds costs to small customers served by the competition, because that creates a barrier to entry by eating up a large block of the already meager commodity savings.
Amplifying on this last point, duplicate bills eat up most of the savings that an alternative seller could bring to a small customer because they cost over $1 per month to the ESP and at least indirectly to their
customers. Residential customers of ESPs who receive two bills are now paying the full embedded cost of utility metering and billing plus the cost of getting a bill from the ESP. And then they have to deal with the
hassle and cost of paying the second bill (another 35 cents a month in direct costs for postage and checks unless the customer chooses a direct pay option). It’s a dead weight loss. Money wasted. But
it’s great for the incumbent utility.
In California it is legal for alternative sellers to meter and send out one bill. It’s also required that if an alternative seller requests it, the utility must bill for them and send one bill (just as
long-distance was initially billed with local service, and still is for some carriers at some times).
So how did the California utilities get around these rules? In theory, utilities must credit competitors with avoided metering and billing costs but can charge them for costs they cause the utility to incur. However,
in the words of the old song reversed, the utilities eliminate the positive and accentuate the negative..
PG&E and SDG&E are combined utilities that provide gas and electricity. Only electricity is deregulated. Combined utilities still have to send the customer a gas bill. Therefore, if an electric competitor
sends one electric bill, the utility says that it still has to send a gas bill, so there are no savings if one electric bill is sent by the competitor, and thus miniscule credits for avoided costs (perhaps a little
bit for uncollectibles). It only takes a few junk fees and charges to make competitors pay for the privilege of sending a single bill to their customers and thereby get them to give up for small customers. This
tactic was reinforced by legislation passed this summer blocking any thought of gas metering and billing deregulation in California for four years.
The combined utility ploy doesn’t work for Southern California Edison, which supplies only electricity. SCE sees Sempra Energy (parent of SoCal Gas and SDG&E) breathing down its neck with a full gas
metering and billing infrastructure overlapping most of its service area. So it has adopted more brazen tactics.
Its first response was to get the Legislature to prohibit Sempra Energy from competing for metering and billing against Edison. The Legislature went along, but it was too blatant. The Governor vetoed that bill
at the request of the chair of the Commission.
Edison’s concurrent regulatory strategy was to diminish the credits for avoided costs to nothingness while inventing and inflating costs imposed on the utility.
The cost side of this strategy failed. SDG&E is protected from competition in its area as a combined utility, but its affiliate wants access to Edison’s market. So SDG&E said that credits should be
higher (except of course for combined electric and gas customers). It even offered higher credits for ESPs serving its 300,000 electric-only customers. The Commission adopted SDG&E’s approach and told all
the utilities to implement it. As a result, an ESP gets a credit of about $1.40 for sending one bill to an all-electric customer. This looks somewhat fair and at least is better than Edison’s original 52 cent
But Edison’s is so far winning on second half of the picture – the invention of alleged costs imposed on it by ESPs that use up or even outweigh the credit. If Edison only provides usage information, and
the ESP sends a complete bill, Edison will charge the ESP about $6 per month for the privilege of sending a residential bill. Edison claims that there are costs of several dollars per ESP customer per month for
auditing bills sent by the ESP, building new computer capability to audit bills, and massive fictional call center costs for the utility to deal with non-existent complaints about ESP bills. In evaluating these
claims, one must remember that a residential bill is simple; all that is needed in California is metered energy usage, a frozen total energy rate, the average Power Exchange price for a residential customer (which
varies according to the week when the meter is read but is constant for the entire class), and a baseline quantity that is encoded in the customer’s utility account number. Other ates undertaking restructuring
may have even simpler residential bill calculation methods for ESPs. It is very difficult to make mistakes on residential bills, unlike industrial bills with complex demand or time-of-use charges. But it costs $7
per month to let a competitor start with the meter read and compute and send the bill because Edison needs to check the allegedly complicated residential bill for mistakes.
Edison has given ESPs another choice. If Edison provides a complete calculated bill for its services, Edison will only offset 70 cents in cost against the $1.40 credit, leaving a net of 70 cents. A 70 cent per month
credit plus the cost of sending a calculated Edison bill in Edison’s format (but using different formats to send PG&E’s and SDG&E’s corresponding bills) plus some non-price tariff
conditions such as deposits and credit checks for ESPs that send one bill and no authority to disconnect for non-payment mean that 70 cents is not enough to stave off two bills.
Here are a couple of examples of Edison’s outrageously high costs that form the basis of the 70 cent cost offset. Edison’s cost of electronically transmitting its separately calculated bill to the
ESP for each customer is higher than the cost of sending a first class letter for each ESP customer. Edison also assumes that it will mail notices to the ESP on paper in separate envelopes for every one of the
ESP‘s customers to notify the ESP of a late payment to Edison. Apparently sophisticated computer technology doesn’t exist when a utility must deal with its competitors.
On behalf of The Utility Reform Network (TURN), representing residential customers, I recommended that the Commission set Edison’s cost of dealing with ESPs at less than 5 cents per customer month, not 70
cents. The Commission’s Office of Ratepayer Advocates (ORA) made similar recommendations against these charges. We lost, not because the Commission said we were wrong, but on procedural grounds.
The California PUC instead adopted a process for utilities to file charges to ESPs in Advice Letters that can become effective without hearings or cross-examination. It also lets the utilities file the detailed
basis of their charges under seal as competitively sensitive. So we have secret ratemaking for charges the utilities can impose on their competitors. Nice deal for the utilities! So despite public handwringing from
California Commissioners that there is no residential competition, the Commission is at least tacitly supporting the utilities’ two-bill strategy.
With these monopoly-building strategies, it’s no wonder the only utility that was trying to send one bill to residential customers – Enron – found the residential market unprofitable.
The utilities also adopted a strategy of disproportionately raising costs to keep ESPs out of their billing envelopes. The task of adding one ESP page to a utility bill and pro-rating money collected by the utility
between the utility and the ESP costs only slightly less than an ESP’s costs to send its own entire bill -- $1.05 for PG&E, set by advice letter. The utilities tack on some onerous non-price terms to make
utility consolidated billing unattractive. Finally, they provide metered usage data for small customers at no cost to the ESP as long as the ESP sends two bills. But the ESP gets charged for the very same data if it
wants to send a single bill.
Competitive suppliers want to communicate directly with their customers. It therefore takes a significant cost advantage to decide to piggy-back onto the utility bill. Without that advantage, ESPs stay out of
the utility’s envelope and send their own bills.
Now I’ve brought you through the California Chamber of Horrors. Let’s look at other ways that utilities leverage their monopolies to hold onto customers.
One of the biggest national strategies is to spend millions of ratepayer dollars on new billing and Customer Information Systems. Many CIS and SAP systems are justified to fix Year 2000 computer problems and to
handle direct access. The big computer companies love it. The utilities build in features to use for themselves or their affiliates in a competitive market, and costs will either be recovered in non-competitive
rates, giving the utility the jump on the competition, or will become the next round of allegedly stranded costs if competition moves forward in metering and billing. There are some very large numbers. PG&E is
spending $146 million on CIS improvements and is trying to recover the full cost in non-competitive distribution rates in its current rate case.
Utilities are moving into consolidated billing with others. Sierra Pacific is best example. Its new Simple Choice program (advertised by Willard Scott of the Today Show) allows a customer to receive a single
bill and write a single check in a single envelope for:
- Sierra’s regulated services (electricity, plus water and gas in some areas)
- Satellite TV
- Cellular phones
- Long-distance phone service
Sierra says other options for bill consolidation will be coming soon.
This program, which is likely to be transferred to a Sierra affiliate, will give Sierra great advantages over its competitors. Competitors can’t offer anything like it, because they do not even exist yet.
This program is being rolled out to great fanfare about 15 months before full competition arrives in Nevada. Sierra will be entrenched before the competitors are even allowed to open their doors.
Other utilities are leveraging billing envelope and call center marketing. Edison is selling security alarms; Sempra is selling long-distance telephone service. Many utilities are moving into furnace and appliance
warranties, to the chagrin of HVAC contractors. SDG&E tried to sell newspaper and cable subscriptions to new customers but failed commercially. SDG&E then tried not only to recover the costs of this failure
from ratepayers not once five times over in a five year PBR plan until UCAN caught them.
Meter reading is between the competitive and the monopoly worlds. New meter technology is here for large customers but is not yet cost-effective for smaller customers. Until that technology takes hold, economies of
scale create geographic market power in conventional meter reading and the transfer of data from those meter reads.
This will require close regulation to prevent leveraging this market power into the rest of the market for billing service, aggregation service, or energy for small customers. At the same time, it is necessary
to encourage the dissemination of the monopoly-breaking technology as it becomes cheaper.
- The critical point is to try to open up Provider of Last Resort service beyond just the utilities to reduce the incumbent lock. Push for bidding of PLR service, and the automatic rights of municipals to
aggregate residential and small commercial customers by buying cheaper or greener power in bulk. Most residential customers will end up on default service, so it is important to create competition in default
service. Use Massachusetts and Nevada as your models, not California.
Metering and billing are competitive functions. They should be spun off into affiliates. Continue to regulate small customer meter reading as possessing local market power, much as load pocket generation is likely to remain regulated in an overall competitive generation market.
- Affiliate transactions rules, and particularly stiff rules applying to the use of computer systems, the billing envelope, and marketing information, are of critical importance to reduce the value of incumbency.
Be wary of new CIS systems. This is the last chance for the utilities to get guaranteed ratepayer dollars for systems loaded with features for their future competitive needs by calling them Y2K projects or direct access implementation projects, or otherwise touting their supposed advantages to regulated customers.
If metering and billing remain in the utility, block the two-bill strategy. Not only is it bad for competition, but it is specifically aimed at killing competition and raising costs for the small customers that consumer advocates work for. In particular, advocates should fight unjustified charges on ESPs along with marketers since those charges will impede competition most for small customers. Also, consider opening up gas billing or payment processing at the same time as electric billing is made competitive to allow competitors to add value. This is particularly important for combination utilities.
- When a utility proposes fees and deposits for its competitors, be skeptical. While consumer advocates must part company with laissez-faire marketers, it is important to make sure that deposits and fees are
set at levels adequate to protect consumers, without increasing them to levels that protect incumbent monopolists.
Stop giving new customers free meters as part of line extension. Why should a customer get a meter from the utility for free but have to pay an ESP for a meter? California has approved this in concept. By charging new customers for meters, it will also mitigate stranded meter costs if technological change occurs rapidly.
These seven steps will not guarantee a vibrant competitive market for small customers. The problems are extremely great, as Michael Shames from UCAN has pointed out in his presentation at
the concurrent NARUC conference. However, not taking the necessary steps to respond to aggressive utility incumbents determined to exploit their advantages will assure that there will not be a competitive market for serving small customers.