1	An Evaluation of Alternative Pricing Models for Utilities Convergence Matthew Rees Principal Consultant Charteris plc matthew.rees@charteris.com
2	I’ll start by establishing a few ground rules for this session Ignore current regulations as these are likely to change due to pressure from the industry to allow innovation All the ideas are possible today, e.g. there is no need for new technologies such as real-time metering All of these suggestions are either in use by some utilities today or have been discussed with them
3	I’ll try and answer these questions What is a Pricing Model and why is it important? What are the products? Who are the customers? How are they billed? How much do they pay?
4	A Pricing Model defines all aspects of the offering, apart from the underlying utility Products bundled or unbundled Customers single or multiple relationships between customers Billing and Payment billing/payment method billing/payment frequency Price unit and standing charges discounts and special offers
5	Pricing Models are important as they determine the customer proposition The underlying product, electricity, gas or water, is virtually indistinguishable between suppliers What differs is the price, billing process and payment options Different customers have different needs and so are attracted to different Pricing Models
6	This example shows one bank’s use of Pricing Models on current accounts
7	Alternative Pricing Models also help to improve profitability Costs can be reduced through higher customer retention derived from meeting customers’ needs for price, billing and payment options Revenue can be maximised by, for example, linking the payment frequency to customers’ wages/salary dates to improve collection rates They can even be used to charge a higher price than other customers for the same service
8	The financial services sector is a good reference for utilities The underlying products, e.g. current accounts, are very similar between all financial institutions The products are intangible, the real money is recorded on a computer Financial products are used and understood by most people The competitive nature of the financial services market is similar to utilities Other sectors, e.g. telecoms, also share some of these characteristics
9	Similarly, utilities can learn from their colleagues in other countries
10	Agenda What is a Pricing Model and why is it important? What are the products? Who are the customers? How are they billed? How much do they pay?
11	A recent trend has been the introduction of single accounts for multiple purposes
12	The move to home services enables utilities to bundled multiple products
13	Prepay phones enable customers to buy the phone and the calls at the same time
14	Utilities could bundle their products with the things they are used for
15	Powergen’s “Surf & Save” is an innovative product bundling
16	Agenda What is a Pricing Model and why is it important? What are the products? Who are the customers? How are they billed? How much do they pay?
17	Open Plan Together allows parents to help with their children’s mortgages The Woolwich’s Open Plan Offset mortgage enables a customer to offset the interest earned on their savings against the interest due on their borrowings Open Plan Together takes this one step further by allowing the offset to be between accounts held by two different customers
18	Utilities could allow one customer to pay all, or part, of the bill of another The most likely use of this would be for semi-dependent relatives, either new home owners or pensioners The bill could be split in many ways with one person paying: a fixed amount a percentage of the usage, or standing charge or total bill any amount above a predefined value specific bills during the year, e.g. during long-term absence
19	Individual customers can combine to increase their collective strength
20	Utilities can naturally group customers by location Historically, utilities owned all the customers in their area Now they are losing previous customers to the new competitors Offering location based products could be a way to retain customers Products could be developed for all flats in a block or all houses in a street
21	Agenda What is a Pricing Model and why is it important? What are the products? Who are the customers? How are they billed? How much do they pay?
22	Traditional banks and building societies are introducing internet only products
23	There are also several internet banks
24	Electronic Bill Presentment and Payment (EBPP) enables internet only products
25	EBPP uses internet technologies to deliver, pay and query bills
26	Utilities are interested in EBPP because there are significant benefits to them
27	There are some internet utilities
28	Billers offer a wide range of billing frequencies to suit their customers’ needs The most common billing frequencies are quarterly and monthly but customers do not always have a choice Other frequencies, such as 4 weekly, are sometimes used The date within the billing cycle is also important, e.g. just after pay day This could be an absolute or a relative date, e.g. 17^th or last Wednesday Must be able to change payment date easily as circumstances change
29	Budget plans enable the billing and payment cycles to be separated The biller normally defines the billing cycle and the customer chooses the payment cycle Separating the two allows both parties’ objectives to be met Annual billing with monthly payments is common However, a fixed monthly payment may be a poor compromise In an extreme example, some Australian tariffs allow customers to pay any amount of money at any time
30	Agenda What is a Pricing Model and why is it important? What are the products? Who are the customers? How are they billed? How much do they pay?
31	Unmetered/fixed-price products are becoming common in telephony
32	Unmetered products could also be considered by utilities Unmetered services reduce utilities’ costs be removing meter reads and reducing the number of bills sent For utilities, the risk is higher because, unlike telephony, there is the generation/production cost to pay On the other hand, some customers will pay more through fixed price than through metered usage Water has a long history of unmetered billing; which it is now moving away from
33	Unmetered products do not have to cost the same each month An annual consumption pattern, month by month, can match billing to expected usage without reading meters Useful where there is an obvious pattern of usage, e.g. holiday homes Also useful where there is an annual cycle of income, e.g. builders who work more in the summer Annual consumption patterns are common in Denmark where bills are sent annually with payments made every month
34	Profit is enhanced by getting customers to pay for something that they do not use
35	Utilities can also charge for unused services As discussed earlier, unmetered/fixed-price products will have both winners and losers Utilities can also encourage customers to use energy off-profile, e.g. to use off-peak power when the assumption is that they will be using peak power For example, many professionals go to work too early and get home too late to impact the morning and evening peaks!
36	Late payers can be charged substantial fees and/or interest Late payments fees are complimentary to discounts for early payment, the customer is paying for the additional costs incurred by the utility As with credit cards, customers could see this as a legitimate form of short-term financing for which they are happy to pay The penalty could take the form of fees triggered by specific dates and/or interest payments which could also be tiered
37	Some customers have shown a willingness to pay more for green energy Most UK utilities offer some form of green energy, but not always to the domestic market Powergen’s price calculator showed their GreenPlan as costing about 1% more than their standard tariff In Denmark, consumers get a discount if they own a share of a windmill
38	Many UK companies give discounts to shareholders
39	Affinity products are common in the financial sector
40	Some utilities offer near equivalents to affinity products
41	Eastern Energy customers can earn Tesco Clubcard points
42	I hope that I have answered these questions What is a Pricing Model and why is it important? What are the products? Who are the customers? How are they billed? How much do they pay?
43	And shown that an effective Pricing Model considers all of these factors Products bundled or unbundled Customers single or multiple relationships between customers Billing and Payment billing/payment method billing/payment frequency Price unit and standing charges discounts and special offers
44	And pointed to examples in other industries that utilities can copy or adapt
45	The final message A Pricing Models is aimed at a specific customer segment and meets a need of that segment, of which price is only a part The need of the utility is also important, of course The aim is to arrive at terms and conditions that both parties are happy with But be cautious, people may take advantage of your generosity; remember Hoover!