The Dynamic Pricing Debate Shows that Utilities Won't be Able Engage Customers

Jose Antonio Vanderhorst-Silverio | Jun 19, 2010

        

Under the IntelligentUtility.com article The Dynamic Pricing Debate, by Kate Rowland, editor-in-chief of Intelligent Utility magazine, which originally appeared in the magazine's May/June issue, I posted two of the five comments until yesterday. Below you will see last comment first; then the second comment, which was written to respond to the comment logic flow? of Jun 18, 2010 - 9:00 AM

Please Don’t Try to Teach Old Utilities Competitive Tricks

 

Jun 18, 2010 - 4:39 PM

 

Thank you Jack for responding the post Engagement doesn't grow on trees. What follows extends my comment This is the Logic Flow, which is below, and goes to the heart of the Dynamic Pricing Debate we had recently.

 

The action plan that resulted from that debate is that there is an urgent need for federal and state leadership to start the process to restructure the power industry, as explained in my earlier response to you, which is quoted below, about "a little history..." to come up with a "virtuous circle" that opens the industry to business model innovations.

 

So, instead of imposing on customers to opt-out to expensive flat rates, while utilities extend, well beyond their useful life, their obsolete business model of winning rate cases to the regulator, what citizens really need is fully functional service choice in a true competitive retail market environment that promote said business model innovations.

 

My interpretation of "Utilities will only listen to their customers when regulators stop interposing themselves as protectors of customer interests.  Under the current regulatory framework, utility revenues and profits depend far more on managing regulators than on delighting customers," is that most utilities are just unprepared to listen, as they have no competitive engagement experience.

 

Related to the same idea that utilities will be able to make the highly difficult culture shift to be able to listen to their customers, under the EWPC postMaking Socio-Technical Architecture and “The Smart Grid Game” Mutually Reinforce Each Other, I wrote that “… a response to ‘how do you train old dogs new tricks, so that they can gain the same gut understanding of the latest rules and technologies?,’ maybe part of the problem is the old dogs are just unable to unlearn the old tricks needed for the smart grid to be successful. The games will be great to train new dogs new tricks.”

 

Engagement will easily fit in the restructured power industry, but not before restructuring. Contrary to the opinion posted under Engagement doesn't grow on trees, most utilities are just unprepared since “Engagement is earned over long periods of time by a company, like Best Buy, Zappos, or Apple, because they have consistently created, communicated, and delivered value to there customers.  If your customers don't trust you, don't value your product offering, or simply are not aware of your offerings, there is little or no chance of engaging them.”

 

Regards,

 

José Antonio Vanderhorst-Silverio, Ph.D. - LinkedIn

 

 

This is the Logic Flow

 Jun 18, 2010 - 10:17 AM

 Hi Kate,

Thank you for a great piece to incite productive debate. As anyone will see, the "company focusing its efforts on consumer-driven energy management and efficiency" is looking at the whole demand side relationship of the citizens. As the creator of the Electricity Without Price Controls (EWPC) Architecture Framework (EWPC-AF), I will contribute to this very important debate with the insights of a recent debate on the same issue.

As you can see in the EWPC post Simplistic DynAMIc Pricing Will Cost Payers a Fortune, of June 6, 2010, which is the result of a long debate under the EnegyPulse.net article Dynamic Pricing, Fairness and Consumer Advocacy, written by Jack Ellis, even that so called dynamic pricing itself is very questionable. The synthesis of that debate from comments 19 through 40 under said article, that stood the test of said debate, is that:

Taxpayers and ratepayers representatives are being tricked to let state regulators approve rate increases to utilities related to an Automated Metering Infrastructure (AMI) investment, based on the "ethics" of a simplistic Dynamic Pricing scheme. For lack of an updated restructuring mandate to be led by state governments, under the fact that customers’ needs will evolve in ways that cannot be determined by anyone, state governments (via state regulators) are taking huge risks by letting utilities invest risk free into AMIs that will very likely result in early obsolescence and thus cost a fortune for taxpayers and ratepayers.

But there is a lot more in the logic flow under Mr. Ellis' article to reflect the need of a whole customer relationship. In the comments 41 to 54 under under Jack's article, which can be found also under the EWPC post, you will see that in addition to the needs of simple pricing and innovation, restructuring led by state governments should introduce retail market competition and add real customer choice, with an integral approach, instead of a series of never ending incremental extensions of an century old business model of utilities winning cases to a regulator. Out of the mentioned context, I will select next two key posts from those comments to support the underlying assumptions of the need of a whole citizen relationship, while adding valuable insights to the logic flow:

 

Jack Ellis said on 6.7.10:

 

I agree with Bob that it's very difficult to get regulators to surrender control over pricing. For one thing, if they didn't have prices to regulate, what would they do? For another, although regulators are supposed to be independent the reality is they are subject to political interference and cannot entirely ignore public pressure.

 

It would help, of course, if the public really understood how they're on the losing end with flat prices but they don't, and neither utilities nor regulators nor politicians seem inclined to clear things up. No one has explained the benefits in clear, simple language using very specific examples to make the point.

 

I was quite surprised at some of the comments on this article that attacked dynamic pricing as just another scheme to extract more money from consumers, when in fact it is likely to at least stem the inevitable increases in electricity prices. The naysayers made enough of an impression that I'm thinking about another article on this topic with a different approach.

Jose Antonio Vanderhorst-Silverio responded on 6.7.10

Thank very much Jack for your post.

 

A little history on how regulators took control of pricing. At some point in time, under vertical integration, regulators did not need to control at all of pricing, because there was a virtuous circle that made the industry sustainable. Up to the end of the 60s or the beginning of the 70s, prices were lowered year after year. Customers and state governments were happy and regulators didn’t need to do almost anything as the utility won the regulatory case.

 

At the end of that very happy period, the guarantees of lower prices disappeared and that is when regulators tried to take control under a vicious circle. The EWPC-AF is designed to make the industry sustainable once again, by enabling a virtuous circle. While regulators will no need to control prices, they still will have a lot of work on prudential regulations, as they do in other industries.

 

Without any pun intended, the problem with Dynamic Pricing in the article is that it is the “Jack of all trades, master of none.”

José Antonio Vanderhorst-Silverio, Ph.D. - LinkedIn

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