Aligning Customer Satisfaction and Utility Regulation

Aligning Customer Satisfaction and Utility Regulation a West Monroe Partners white paper by Will McNamara & Jack Winter

Today s utility customer expects similar treatment and choices that they receive from other advanced service providers. The level of service that has suddenly become expected as the norm includes: Mobile applications that allow instant access and analysis of their bill and energy usage; Easy and successful communication with the utility on a wide range of issues and questions; Automatic and one-touch transactions for bill payment, new customer activities, services selection, and even energy control choices; Assistance in a wide range of energy management and beyond-the-meter services; Ongoing updates and notifications of utility news, conditions, operations, and local construction projects; Controlled content and preferences through push messages concerning related energy and utility activities; and Instant and reliable updated communications before, during, and after storms. As the utility industry continues to evolve and the Millennial Generation becomes the energy user and household budget decision-maker, the traditional utility customer touch-points will expand and become more important to all stakeholders. Successful utilities are adopting practices and strategies to move their customers from passive bill payers to active and aligned advocates and partners.

Introduction Since 1996 and the advent of electric utility deregulation with FERC s Order 888, regulatory, technology, and cultural trends have increased the power and impact of customer choice in the electric utility industry. In addition to industry restructuring mandated by federal regulations, 17 states and the District of Columbia have some type of jurisdictional electricity competitive choice programs. As consumers buy smarter appliances and technology advances connect these devices to a dynamic network of communications and pricing signals, electric customers also have individual choices about the source, usage, and cost of their electricity. Finally, increasing societal expectations around reliability, sustainability, and transparency provide consumers ever-expanding models of customer-driven services and communications. These changing dynamics have prompted an ever-increasing focus within the energy and utilities (E&U) industry on customer satisfaction what impacts it, how to improve it, and how to measure it in regulatory proceedings. Why do some electric utilities consistently obtain high marks in customer satisfaction, while others do not? What is the role that regulators can or should play to incent or mandate utility initiatives that lead to increased customer satisfaction? It is clear that E&U customers are becoming more sophisticated and demanding regarding their electric services. Utilities are receiving other external signals from survey results, regulatory mandates, and social media/public opinion that customer satisfaction is rapidly becoming a significant driver in many aspects of utility services. Our observation from working with clients of varying size, geographical location, and competitive strategy is that many utilities have pursued initiatives aimed at improving customer satisfaction in an incremental as opposed to an integrated manner. Reactions to individual drivers can produce some short-term activity but no lasting strategy or results. The challenge is how to create aligned, integrated, actionable and measureable initiatives to increase overall customer satisfaction that can be incorporated into both a utility s business case and regulatory strategy. Given the increasing frequency of customer interactions and the importance of a positive experience, successful utility strategies can elevate the significance of customer satisfaction to the level of safety, security, and reliability prevalent in current strategic initiatives. The challenge is to define those steps that will transform a theoretical emphasis on improving customer satisfaction into an integrated and aligned tactical plan. A tactical plan to improve customer satisfaction often requires investment in multiple customer-outreach programs, which in turn need to be integrated with parallel programs more specifically focused on energy efficiency, AMI/smart grid, and retail choice. Utilities will need a means of determining the ROI from these programs, along with evaluating which program or approach is most effective. While regulatory and market conditions are driving some decisions, utility business strategies still can drive the primary consideration of the program investments to achieve customer satisfaction objectives above and beyond what may be needed for regulatory compliance. The objective of this white paper is to examine how initiatives aimed at improving customer satisfaction in the E&U industry are being influenced by the following factors: The impact that an improved customer satisfaction score can have on an electric utility s financial performance; The appropriate level of customer satisfaction given costs, stakeholder expectations, and jurisdictional benchmarking; Current trends among public utility regulators seeking to develop metrics designed to monitor and measure utility performance in customer service; and Best practices in customer satisfaction, as illustrated by those utilities that consistently obtain the highest scores in customer satisfaction surveys.

The Evolution of Customer Satisfaction in the E&U Industry Historically, utilities have treated their customers as invisible ratepayers with utility interaction limited to billing matters and service calls. In the growth era of utility services, economies of scale became a driving force, and the natural consequence was establishing monopolies where each utility was the sole provider in a given geographical area. Regulatory agencies ensured that all customers had access to utility service and that prices were fair and reasonable. As a monopoly, utilities had little need to focus on customer experience or customer satisfaction, and interaction between the customer and utility was scarce. Each month, the bill would arrive, and those who didn t pay simply lost electricity or water. Other limited involvement included customer relocation, billing issues, or power outages. As the utility industry has expanded the dialogue around energy usage and system security, the number of factors driving customer perceptions has increased, along with a plethora of internal and external quality assurance tools and feedback mechanisms. Several fundamental external forces driving the current emphasis on customer satisfaction: Changing customer expectations. Perhaps as result of developments in other, more competitive-based industries, and the rise of advanced technologies that has occurred in the last two decades, other industries have raised the bar for what customers expect from utility providers. Customers demand greater transparency and engagement, and it is essential for the utilities industry to keep up with customers expectations. Competition in the E&U sector. Those environments with retail choice mandated at a state level (at least 18 jurisdictions in the United States) have produced interesting and varied reactions to customer loyalty and satisfaction among incumbent utilities. Energy efficiency and demand response programs. Mandated EE/DR programs in most states have also produced yet another set of customer engagement and program success metrics. The growth of distributed generation alternatives. In increasing pockets of the country, incumbent utilities face the potential bypass of the electric distribution system by customers. Providing those customers with reasons to stay on the grid has become increasingly important for many utilities, given that opportunities for cost recovery can be directly impacted by sales volumes. The acceleration of smart grid technologies and end-use networks. The increasing market for smart appliances, intelligent thermostats, and mobile applications has expanded consumers abilities and interest in controlling their energy future. This factor is further supported by the proliferation of social media, real-time conversations, and peer-to-peer competition and information exchange. Despite this increased interaction and focus, both utilities and regulators have reacted incrementally to the emerging nature and importance of customer choice and satisfaction. The utility/customer interface is evolving and adopting attributes more commonly found in the competitive marketplace. Yet, the regulatory regime that is in place for most electric utilities still treats customer service costs as operating expenses with limited rewards for increased customer satisfaction and no opportunity to earn a return on investments in customer services. Under the traditional cost of service (COS)/rate of return (ROR) regulation, utilities can earn an ROR on capital investments generally for infrastructure such as generation and distribution facilities. Customer operations have been treated by regulators as operating expenses with the utility only able to pass on the actual cost and not earn a return. COS/ROR regulation does not reward utilities for exemplary performance and therefore a utility has traditionally had little quantitative incentive to achieve operational or customer service excellence. Further, while some states have adopted decoupling mechanisms to keep the utility whole, in the absence of regulatory policies that provide incentives to improve demand-side offerings, a utility has conflicting drivers to develop programs that help customers reduce their consumption. Further still, in the absence of clear penalties for sub-standard performance, the

traditional regulatory paradigm offers few if any financial consequences for continued customer service that is below a national standard. The end result is that the regulatory paradigm that still represents the norm in most U.S. states has become deficient with regard to active promotion of programs that seek to improve overall customer satisfaction. The Evolving Regulatory Model for Customer Satisfaction New data strongly suggests a positive relationship between an electric utility s customer satisfaction levels and its regulatory experience, including financial metrics, disallowance amounts, and the time it takes to complete a rate case (regulatory lag). Specifically, results from studies conducted by J.D. Power and Standard and Poor s have shown that higher levels of customer satisfaction one year prior to a rate case are associated with higher return on equity (ROE). A 10-point increase in customer satisfaction based on the 1,000-point index scale referenced above, has been correlated with a.04% increase in ROE, with those utilities performing in the top quarter of customer satisfaction one year prior to a rate case achieving a.5% increase in ROE in their subsequent rate case. Additionally, utilities with the higher proportions of satisfied customers received rate increases closer to their requests than utilities with low customer satisfaction scores. The message coming from the survey is that a positive customer experience and quality service helps build rate change cases. Historically, rate increases have been a major cause of customer complaints. While customers never view rate increases as favorable, satisfied customers are less likely to react negatively to rate changes. Coupling the benefits of increased customer services such as higher reliability, faster storm restoration, control over usage, and even factors such as green energy choices and energy advisory services may allow utilities and regulators to construct a balanced approach to risk sharing. Long-term ROI for customer experience can outweigh the initial investment required to modify business processes and technology. An investment in customer experience generates revenue because it is easier to enroll customers in programs and services if they are engaged with the utility. Utilities gain their ROI through customer trust, and the payoff comes from higher program adoption rates and a higher recovery for the utility. It shows that high enrollment rates in energy efficiency programs coincide with government rewards and incentives, but unsuccessful programs can lead to funding cuts. Successful customer experience strategy also reduces cost. Utilities with a positive customer experience spend less time and money promoting enrollment in the energy efficiency programs. Furthermore, these energy efficiency programs decrease the utility s need to build new power stations to generate energy and eliminates a significant investment in capital. With energy projected to increase by 50% in the next 25 years, funding this expansion is a major cost consideration for utilities. This makes the rationale for including customer satisfaction strategies into a utility s business case rather easy to understand. What is far more complex for most electric utilities is the determination of the optimum mix of resource investment aimed to increase customer satisfaction. The initiatives that have a more obvious customer engagement element such as new or expanded CIS/CRM systems, website overhauls, sophisticated EE/DR programs and the not-so-obvious initiatives that have a secondary or causal impact on customer satisfaction such as upgrades to the distribution network all share the common denominator of capital requirements. Creating Performance Metrics for Customer Satisfaction Today, one critical driver of utility response to customer expectations is the annual J.D. Power and Associates Electric Utility Business Customer Satisfaction Study. While most utilities poll their own customers for concerns and satisfaction, for many utilities the J.D. Power survey is a critical third-party measure of their success. For a period of time customer satisfaction becomes a hot button topic within the industry. Why do some utilities receive high customer satisfaction scores and others do not? In the period following survey results, utility executives and organizations can become preoccupied with the topic and a consideration of how well or how poorly their own utility organization is performing. As time goes on, however, more urgent and pressing operational matters associated with simply keeping the lights on may again take precedence. There are several customer satisfaction metrics that are emerging from stakeholder discussion and feedback. Traditionally the two most common determinants of customer satisfaction have been reliability and price. Thus it is not terribly surprising that the earliest regulatory efforts to measure customer service / customer satisfaction have been focused on reliability met-

rics, such as System Average Interruption Frequency Index (SAIFI), System Average Interruption Duration Index (SAIDI), and Customer Average Interruption Duration Index (CAIDI) calculations. Approximately half of the U.S. states have some form of quality of service (QOS) performance-based ratemaking that to some extent incorporates customer service metrics with established targets, penalties, reporting requirements, or some combination thereof. Typically this performance-based regulatory (PBR) model expands the conventional cost of service methodology with reliability targets imposed by a public utility commission with penalties and/or rewards based on performance. The evolution of this approach would be to include customer service metrics that go beyond reliability in the effort to increase overall customer satisfaction. Early types of customer service standards that may be built into a broader QOS ratemaking standard have included: Complaints received by the commission Service restoration statistics Call response times Bill accuracy Missed appointments Estimated meter reads Outage notification Commission-led customer satisfaction surveys A great example of customer satisfaction-oriented metrics built into a regulatory model is the state of Illinois and specifically the performance-based ratemaking formula that Commonwealth Edison has created with the Illinois Corporation Commission (ICC). These metrics are being used to determine (in a measurable way) how upgrades to Illinois electric grid are delivering benefits to customers. The Energy Infrastructure Modernization Act (EIMA) has improved regulatory conditions in the state by defining a new investment and customer strategy framework that redefines the regulatory for electric utilities in the state. Specifically, in ComEd s case (Ameren Illinois, another utility regulated by the ICC, has not finalized its performance metrics as of this writing), EIMA authorizes the utility to invest $3.2 billion in electric infrastructure upgrades and smart grid investments; sets distribution rates through a formula modeled on FERC s transmission formula; allows for annual regulatory filings to recover actual investment costs; and an annual reconciliation process to account for costs greater or less than projections. Most pertinent to the topic of customer satisfaction metrics, EIMA establishes annual reliability and customer service metrics that ComEd must meet and penalties enforced for the failure to meet the metrics. Along with five reliability metrics related to overall CAIDI and SAIFI, regional CAIDI and SAIFI, and reliability targets for specific customers, EIMA also establishes four customer metrics that are specific to ComEd: Reduction in estimated bills; Reduction in consumption on inactive meters; Reduction in accounted for energy; and Reduction in uncollected expenses Best Practices in Improving Customer Satisfaction Customer satisfaction can be influenced by a number of factors. Surveys that seek to measure customer satisfaction including the annual J.D. Power Associates survey solicit input from customers across factors such as: Power quality and reliability; Billing and payment processes; Corporate citizenship;

Price; Communications; and Customer service. Of course, the six factors listed above are interpreted by customers through real-word experiences such as their interaction with utility staff, length and frequency of outages they have experienced, and average response time to complaints. Trending over the last decade is an increase in residential and business customers giving steadily improving ratings for customer care functions such as billing, payment and call centers. Leveraging the extensive data that is now available through CIS/CRM systems and the data mining that is associated with these systems, new billing systems that increase the level of selfmanagement information and functionality correlate with improved satisfaction levels for customers. Responses to these improved services typically would be captured under the billing and payment processes and communications categories of customer satisfaction surveys. One way of looking at how customer satisfaction is influenced is to describe both controllable and uncontrollable factors. As indicated, factors such as reliability and price would generally be considered as more uncontrollable as they are determined or influenced by other factors beyond the utility s control such as the general economic climate, financing markets, and Mother Nature. It may be the case that regulators will increasingly focus on controllable metrics that measure customer interactions generally within the utility s control (e.g., billing issues, outage communications, payments, payment arrangements, disconnects, low-income, access to property, construction, corporate citizenship, etc.). In an effort to address controllable factors, many utilities have taken steps to improve their customer service infrastructures with new billing and Customer Relationship Management (CRM) systems; new product or service offerings; enhanced communications and public outreach efforts; or through the development of energy efficiency / DSM programs. There are other emerging trends among customer service initiatives that appear to be improving overall customer satisfaction scores: Call center transformations. Transforming the existing call centers through a more customer-centric approach allows utilities to focus on their service, program offerings, and education. Knowledgeable call center agents should not only resolve issues, but proactively suggest new energy programs and help inform customers of new offerings, similar to marketing outreach and contact programs. Electronic communications. Electronic communication is a large factor in a customer s overall satisfaction with a utility. In fact, electric utility customer satisfaction tends to increase when utilities communicate with customers via electronic methods. Electronic communication channels can include electronic billing and payment, email messaging, text or mobile applications, websites, and social media platforms. Social Media. Social media has no initial fixed costs and it is an inexpensive form of mass communication that is natively integrated with mobile devices. Social media can inform customers of new programs, provide outage information, and suggest energy-saving activities. Web Portals. A utility web portal provides a new channel for interaction and education and allows customers to manage and understand their energy usage. This offers customers a personalized look into their account and satisfies the growing expectation for personalized digital or mobile interaction. Finally, as utilities balance the need for capital investment in delivery systems, improving system reliability and security, incorporating generation diversity in their portfolios, improving environmental controls and impacts, adopting new technologies and partners, and replacing and training a new type of employee workforce, the level of investment and results of customer satisfaction programs must be defined on an equivalent and aligned basis. An overall investment portfolio of customer satisfaction services and systems must be evaluated and prioritized similar to any other resource investment. However, without an equivalent risk sharing mechanism with the regulatory jurisdiction, customer satisfaction will continue to be a second-class performance threat, rather than a truly aligned and integral part of a utility business strategy.

Conclusion Customer satisfaction as a measureable result of customer service provided by an electric utility is an increasingly important consideration in utility regulation. While there is a great variety in the types of initiatives that can be developed to improve customer satisfaction, one common denominator is that a successful customer engagement program will result in a measurable improvement in overall customer satisfaction levels. To the extent that price and reliability are the factors that primarily influence customer satisfaction, most public utility commissions have already put into place performance metrics that are associated with power outages and response times. Moving forward, as illustrated by the state of Illinois, additional factors that influence customer satisfaction such as billing and payment processes; communications; and other customer service enhancements may also be configured into measurable performance metrics that are part of an incentive or penalty model in regulatory proceedings. To incorporate customer satisfaction initiatives into an overall business strategy, utilities would be advised to first conduct an assessment of the current status of their performance in overall customer satisfaction. Subsequent tactical steps could include: Identify a specific customer satisfaction objective (e.g., increase of customer satisfaction score, increased customer participation in specific programs, etc.) Determine the appropriate investment for specific customer engagement initiatives or programs Align and integrate internal performance measures with external regulatory considerations Define cross-organizational responsibilities for improving customer satisfaction Socialize revised customer satisfaction plan with regulators to include new performance metrics in future rate proceedings Reconsider requested ROE for future rate cases The correlation between increased satisfaction and increased revenues is clear. Not surprisingly, more and more utilities are embracing a customer-centric business model to retain their customers, remain competitive, and meet regulatory requirements to improve the customer experience, which in turn is intended to translate into improved customer satisfaction scores. The challenge will be to develop a program that both utilizes investments in the most strategic manner possible but also to define a regulatory model that incorporates controllable customer service factors into measurable performance metrics. Contact For more information, please contact: Will McNamara, wmcnamara@westmonroepartners.com; Jack Winter, jwinter@westmonroepartners.com About West Monroe Partners West Monroe Partners is a North American business and technology consulting firm focused on guiding organizations through projects that fundamentally transform their business. With the experience to create the most ambitious visions as well as the skills to implement the smallest details of our clients most critical projects, West Monroe Partners is a proven provider of growth and efficiency to large enterprises, as well as more nimble middle-market organizations. Our more than 350 consulting professionals drive better business results by harnessing our collective experience across a range of industries, serving clients out of offices across the United States and Canada.