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So Long As It's Black Now that nearly everyone is "getting back to basics" or "returning to the core" it's a good time to ask: where will growth come from? Sure, squeezing your assets harder and conventional asset management will bring short-term gains but ultimately you need to grow the value of your assets and generate new revenue streams. Where to find these new revenue streams? Finding them calls for taking a fresh look at the delivery company business model - a model increasingly (and unfortunately) called the "bare bones pipes and wires business". This view of the delivery business evokes Henry Ford's famous offer to customers that they could have a Model T in any color -- so long as it was black. Today, you can have any energy delivery arrangement - so long as it's by the utility specification book. So long as "universal" service means "uniform" service the potential to differentiate service and thereby create new asset and customer value will be unrealized. Henry's myopic view of product differentiation kept costs low but gave General Motors and Chrysler a competitive opening they drove through and nearly ruined Ford. The "bare bones" model is a prescription for corporate atrophy. Delivery companies need to practice positive asset management and offer customers what they want and will pay for. Embracing Customer Diversity
The uniform delivery service model implicitly assumes that all customers have uniform tastes or needs and that there exists an appropriate or optimal service level that fits all. Companies are loathe to admit that they have a standard service level for fear regulators will penalize them for the natural variation around the standard. But the growth of performance-based rates and service quality standards is bringing more standards out of the closet. One danger in these regulatory devices is that they may lead inexorably to ramping up delivery service levels uniformly for all customers regardless of whether they want or need them and with little regard to the economics. The cure for uniformity is to recognize the diversity of customer needs and values and to appreciate the range of potential delivery business models such diversity allows. To find out if your system is a candidate for delivery differentiation, indicate if you agree or disagree with the following:

• All of my customers place the same value on reliability
• All of my customers define “reliability” in exactly the same way
• All of my customers need and want the same information about their energy consumption
• All of my customers have the same interest in co-generation. Distributed generation, and other equipment connected to the distribution system
• None of my customers would be willing to pay more for a higher level of service
• Every customer in my service territory has the same utility system aesthetic values
• The cost of providing any given level of service is uniform across my whole system
• SAIDI, CAIDI and SAIFI accurately reflect customers’ values and preferences

If you agree with any of these statements, we believe you need to get out more. Of course you know all of the statements are false, but you may feel that uniform service standards are unavoidable for one of three reasons.

• It is impractical to offer different service levels to different customers
• It is impossible to offer differentiated services profitably
• The regulator will never go for differentiated services

Each of these obstacles can be overcome by application of a concept we call Differentiated Delivery^TM that is a practical way to scan your system for opportunity, to build regulatory support, and to implement customized deliver solutions to increase customer and delivery asset value. Degrees of Freedom to Differentiate
There’s a lot of raw material from which to build differentiated delivery services. The factors that can be varied to some extent or another include:

• Reliability levels
• Power quality
• Information
• Facility aesthetics
• Network services
• Risk management

Delivery service can be differentiated at three points in the value chain:

• Before the meter, largely through adding or customizing facilities to achieve a particular set of reliability, quality or aesthetic levels
• At the meter, through price design and information gathering technology
• Beyond the meter, through such things as monitoring, alarms, energy management

Of course many differentiated products or services involve simultaneous actions before, at and/or beyond the meter. Pricing and beyond-the-meter differentiation have been fairly common since the late ‘70’s due to PURPA and its offspring. We are concerned here primarily with those products or services that involve actions before the meter though they will in many cases be complemented by pricing or information services.

Differentiated delivery services generate a new revenue stream that can be isolated from base revenues. This fact makes it possible to devise innovative regulatory (discussed below) and financial strategies. For example, since many differentiated delivery products can be assigned to the property rather than a particular customer, the revenue stream might be collateralized separately, supported by more highly leveraged financing, and even, in some cases, shared with vendors and contractors as incentives to co-market and support the program. Regulatory Acceptance
The fear that regulators will not allow different levels and types of service is by far the most cited obstacle to differentiating delivery services. Regulators, goes this line, will balk at any program that might involve reverse Robin Hood subsidies or lead to substandard service for the mass of customers (read: voters). It may therefore be necessary to borrow from the telecom playbook and design the program along the lines of the so-called “enhanced services” such as call forwarding and caller ID. Many local telecoms “value-price” their premium services. For example, Bell South charges $5.50 a month for call waiting although the incremental cost is far below that. In turn for pricing flexibility a portion of the higher margins are used to offset the cost of basic service – thus meeting a regulatory objective of low basic prices. Since no other provider can offer these services, recovery is nearly certain and no third parties are damaged and incited to contest the program (this is not always true for beyond-the-meter programs). Delivering Different Colors
Moving from all black to a palette of delivery configurations calls for a change in mindset and opening up the delivery design process to ideas from customers, trade allies, vendors and internal customer-contact staff. This typically involves:

• New product conceptualization
• Preliminary market analysis
• Regulatory alignment
• Developing delivery capability

Each is discussed briefly below. New Product Conceptualization
A creative product conceptualization exercise bringing together engineering, marketing, customer service and regulatory staff can break the ice and get some initial ideas on the table. These exercises usually begin by making explicit and testing the plethora of assumptions, values and history embodied in the current product catalog. Then, alternative parameters and models can be introduced and used to explore non-traditional product/service configurations. At first blush the technical participants might be seen as defenders of the status quo but if they see an opportunity to capitalize on the many emerging new technologies that make it easier to differentiate delivery services, they can be a force for innovation and change. The initial product concepts should be developed only so far as is necessary to discuss them with potential customers, trade allies and regulators. This leaves room for design contributions from others and avoids premature lock-in. The concept, estimated price, and recovery mechanism should be captured in collateral material to support conversations with interested parties. Preliminary Market Analysis
Going to the market early and wisely is the best way to avoid costly flops. Given the custom nature of most differentiated delivery concepts, informal group sessions with representative developers, city planners, customers and others can enhance the initial concepts, suggest new products and discard non-starters. It’s fairly easy to over-complicate this initial research. Treat it as a mutual learning and idea sharing exercise - what we call “co-development” - rather than classical research. This may include bringing members of the team into the session rather than relying solely on facilitators and 1-way mirrors. You’ll still need professional quality prep and discussion-stimulating material but you’re trying to get people to think along with you rather than to discover what they were thinking before they were exposed to the ideas. Regulatory Alignment
Some regulators are going to suspect that differentiating delivery on a pay-as-you-go basis is discriminatory and may result in neglect of basic service customers. Although some utility people will resist standards for fear of having them used against the company, there’s probably no way to avoid setting some form of standard service. But this would be the case under many of the performance-based rate or service quality standards being mooted in many jurisdictions. The danger is becoming subject to penalty for every instance below standard while receiving no credit for performance above standard. This argues for measuring performance over broad, representative populations rather than individual customers. It also argues for definitions that are relevant to customers’ perceptions of reliability rather than system-wide technical definitions. Let’s begin with a little honest perspective: if you implement a high margin product that touches the regulated sphere of your business, the regulators will “capture” a part of that margin. Your job is to manage that capture so that it doesn’t spill over into your basic rates and is directed to worthwhile goals. Your regulator will be suspicious that any non-universal delivery configuration will either be “discriminatory” in some evil sense or be subsidized by other customers (voters). One way to pre-empt the subsidy objection is to advance a program to share the returns with commission-favored programs. A Robin Hood rate for enhanced delivery services may be based either on cost-of-service or market value. In the former case a higher rate-of-return might be imputed to the offering and a part of the extra contribution directed to commission sponsored programs such as conservation, weatherization or low-income assistance. If value pricing is used, as in the telecoms example, the company could agree to buffer rate increases with a portion of the enhanced revenues. Specifics will vary by jurisdiction and there is ample room for imaginative “win-win” pacts and programs.

Differentiated delivery, unlike the existing rate structure, is “new” revenue, so it is can be segregated from base revenues to avoid the eventual 100 percent capture inherent in performance-based rates and quality standards. The key is to come up with a recovery mechanism that isolates enhanced revenues and manages the capture/sharing process. Differentiated delivery provides an opportunity to take a solution instead of a problem to your regulator. Some companies, recalling the more irresponsible conservation and load management boondoggles of times past, are uncomfortable with simply turning money over to a fund or program over which they exercise no control. In that case, it behooves the company to advance a positive program to deliver social value. The sidebar illustrates the potential to integrate differentiated services and community or social goals.

Developing the Capability to Deliver
A number of functions and systems need to be prepared and, in some cases, modified to deliver the new products and configurations. Given the customized nature of most products, the rate of development can be paced but a plan for dealing with all aspects should be created early and reviewed periodically. Some of the key factors include:

• Contractor qualification
• Quality control and acceptance
• Mapping considerations
• Maintenance programs
• Billing capability

All That’s Needed is a Little Imagination
Uniform and universal service has become a trap that inhibits innovation. Customers have different needs and values that are often left unsatisfied by the standard offer. As a result, utilities have not tapped the full potential of their greatest asset – their regulated service territory. Differentiated delivery offers:

• A view of the delivery system as an asset whose value can be managed by differentiating services in response to customer preferences and values
• New, relatively low-risk/high margin investment opportunities in the “core” business
• Doable projects that can, over time, instill a more positive asset management approach to the delivery business
• Greater customer choice and control without alienating local contractors
• Regulators a way to benefit the basic service customers

If you are serious about focusing on the core business, then begin by thinking about how that business can look in the future.

This paper expands on the ideas contained in Bob Wayland’s earlier EnergyPulse article "It's Time to Manage Assets for Growth". Our colleagues, Harlan Dellsy, Mark Gerber and Tom Madden made valuable contributions.