The Hindu Business Line : Powering reforms through the customer

THE sorry state of the power sector can be judged by energy and peak shortages (9.1 per cent and 12.1 per cent respectively), the plant load factor (71.1 per cent), transmission and distribution (T&D) losses ( 35 per cent), skewed tariff structure, cross-subsidisation, under-metering of electricity supplied and improper collection. But things are slowly improving.

Unbundling, corporatisation and privatisation are propelling the power sector's restructuring. The Electricity Act 2003 encourages investment in merchant and captive power plants, which will, in turn, bridge the gap between power supply and demand.

A new system of electricity trading, comprising bilateral and multilateral transactions, is its thrust. Customer acquisition and retention will be the key for retailers/distributors to maintain a competitive advantage. The focus will shift to customer relationship management, and information technology will facilitate the process.

The Act consolidates the laws relating to generation, transmission and distribution by establishing an appellate tribunal and creating a regulatory framework — the Electricity Regulatory Commission (ERC) — for development of the sector.

Competition is the name of game

The objectives of the reforms can be met only if competition is enforced in generation, transmission, distribution and retailing. With the power industry becoming conducive for setting up of merchant power plants (MPPs), competition can be achieved at the generation level. The MPPs work on the principle of a typical trading system that allows sale of power to the best buyer. Sales to the cash-strapped State Electricity Boards will no longer be mandatory.

Tata Power has initiated construction of an MPP with an installed capacity of 120 MW at Jojobera in Jharkhand. Also, Malana Power Company Ltd, promoted by LNJ Bhilwara, is operating an 86 MW hydel power project at Malana Nallah in Himachal Pradesh. It has already contracted its power to the Delhi Government.

The wheeling charges (for power transmission) are fixed by the Electricity Regulatory Commission (ERC) and each buyer has to pay this fee. These high tension transmission lines have to be maintained efficientlyto minimise transmission losses.Competition has been introduced at the retailing end as any buyer can purchase electricity from any seller, and a seller can sell to any buyer. Each area will have several retailers who will buy electricity at a competitive price from the various generating companies and sell it to consumers.

Power Trading Corporation (PTC) has provided buyers and sellers with a platform to put through electricity transactions. The increase in the number of retailers will spur competition at the retail end, with retailers providing better and cost-effective services. The focus will shift to customer relationship management.

The use of information technology will not only help in real time power flow management (transaction and billing) at the transmission level, but also measure demand (usage) from all consumers in real time. It will also spur bilateral and multilateral trading. In the former, a generating company can directly negotiate with any distributor/retailer or even independent customer.

Whereas in multilateral trading, the prices are determined through the intersection of supply bids (arranged in the increasing order of prices) with demand bids (arranged in increasing order of prices).

Real time customer management will enable service providers to manage sales, marketing, and customer service across all communication channels and points of customer contact.

This system of retail trading starts at the State level, analogous to regional stock exchanges. The establishment of the national grid will lead to trading at the national level that will allow transfer of electricity among States. This will force competition among generators/distributors/retailers, leaving them no choice but to improve operational efficiency. As for distribution, customer relationship is going to be the most valuable and to acquire this advantage, investment is required.

Value of a customer

A customer's value can be determined by subtracting the cost to acquire a new customer from the expected margin earned from that customer, taking into account the time value of money. The acquisition can be incremental or bulk and will require one to pay an initial acquisition cost (marketing, sales, and enrolment and contract renewal costs).

The retailer gets his margin during each billing period over time. Finally a break-even point is reached, where the total accumulated profit margin offsets the acquisition cost. Thereafter, any net profit earned would represent a positive value.

The various ways by which companies can increase the customer value are as follows:

Reducing the cost of acquisition of customers.

Increasing the margin per month. This can be achieved by minimising operational costs so as to increase net profit.

Increasing the life span/length of the customer relationship.

A company's tactic will depend on its business model and on macroeconomic factors. For example, a company making its entry into the market would focus on lowering acquisition costs. An existing company with a large customer base would like to retain its customers and increase the length of customer relationships.

Company A, for example, follows a control method based on a hypothetical acquisition cost of Rs 1,000 per customer. Assuming Company A earns Rs 50 margin per period per customer, the break-even point will be reached in 20 months and a customer value of Rs 595 is achieved in the expected three-year customer life cycle.

Streamlining the enrolment process enables Company B to acquire customers at a lower cost of Rs 500. This reduces the payback period to ten months and the accumulated margin for the remaining time span increases customer value to Rs 1,095.

Company C follows a different strategy of reducing its operational costs to increase its margin per period to Rs 75. In doing so, it succeeds in reducing the payback period to 14 months and accumulates higher margins thereafter to arrive at a customer value of Rs 1,393.

Company D clocks the highest customer value at Rs 1,465 because it retains its customers for two years longer (see Table).

Customer relationship management

Customer relationship management (CRM) considers a customer as an asset and, like any other asset, the customer has a value. The deregulation of the power sector has reduced the monopolistic power of the suppliers and enhanced the need for the companies to manage and retain their customers.

Also, a satisfied customer provides companies with various up-sell and cross-sell opportunities, thereby increasing its array of services.

Well-managed customers also increase the intrinsic value of the company, which plays an important role during mergers and acquisitions. A power distribution company has two ways to grow its market share — organically and bulk acquisition of the customer base.

In case of bulk acquisitions, a company that has managed its customers well will be in a position to charge premium for its customer base.

Various CRM product vendors such as Siebel, SAP, and Microsoft, have developed specific solutions to address the needs of the energy sector.

These solutions provide energy companies with the ability to have a single view of their customers across their sales, services and marketing channels, efficiently manage customer acquisition, retention, and churn management, complex sales and contract management capabilities, proactively gather and address the needs of the customer, efficiently manage and collaborate with channel partners and also enhance the life term of customer relationship.

Therefore, power sector companies need to be prepared to manage their customer relationships effectively via application of information technology so as to remain profitable and competitive in the long run.

(The author is an Associate Consultant, Enterprise Solutions, CRM Practice, Infosys Technologies Limited, Hyderabad.)

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