1	AMR’s Role in a Targeted Marketing Program Marty Blake The Prime Group, LLC 502-425-7882
2	Key Questions Who are your most profitable customers? Are all of your customers contributing to margins or are margins on some customers negative? Which customers are your competitors most likely to target? Does your current rate design result in price exposure in a retail choice environment?
3	Identifying Competitive Exposure If you have no idea where your competitors will attack, it is difficult to prepare a solid defense You need a scouting report on areas where you are vulnerable Marketing resources are limited and targeting is necessary for maximum effectiveness Individual customer profitability is the key
4	The Basics of Profitability Profit = Revenue - Cost Revenue = Price x Quantity Sold Total Cost = Fixed Cost + Variable Cost Sounds easy, but …
5	Revenue Relatively easy to determine historically Determined from customer billing data for a specific period Usually a fixed price environment Difficulties predicting future revenue Price elasticity of demand (how does quantity change in response to price changes) Quantity drivers – weather, economic conditions Price variability
6	Cost Fixed costs Generation capacity Transmission capacity Distribution capacity Variable costs Fuel Environmental controls – scrubber reactant, emissions allowances
7	Cost Drivers Fixed cost – time that the demand is placed on the system Generation – Coincident peak demand Peaking Baseload Transmission – Coincident peak demand Distribution - Non-coincident peak demand Variable cost – time of use
8	Cost Allocation Because time is a critical cost driver, it is essential to determine when customers place demands on the system or when they use energy Need timed usage data to accurately allocate fixed costs (at least hourly readings) Need timed usage data to accurately allocate variable costs
9	Peaking Generation Fixed Costs $450/kW for installed frame gas turbine 20% carrying charge $450 x .20 = $90/kW/year revenue requirement Over how many hours will this cost be allocated?
10	Load Duration Curve
11	Peaking Generation Fixed Costs
12	1998 Daily Price Index of Spot Electricity ECAR On-Peak ($/MWh)
13	1999 Daily Price Index of Spot Electricity Into ComEd On-Peak ($/MWh)
14	Peaking Generation Variable Costs $4/MCF natural gas 10,000 BTU/kWh $0.04/kWh variable cost using natural gas About $0.01 to $0.015/kWh variable cost using coal
15	Peaking Cost Decisions Take variability on the supply side Build capacity to meet the peaks Given the shape of the load duration curve, this can be expensive Take variability on the demand side Price signals Equipment to help customers respond to price signals Load control Utilize both supply and demand sides
16	Supply Side Approach Given the substantial fixed and variable cost of peaking units To which customers will peaking capacity costs be allocated? To which customers will coal based fuel costs be allocated? To which customers will natural gas based fuel costs be allocated? Time of use is the key
17	Demand Side Approach Data necessary to estimate price elasticity of demand Need means of sending real time price signal to customers Integrating price signal with customer controlled equipment to respond to price Provide customers with real time usage information
18	Role of AMR AMR can play a substantial role whether the supply side approach, the demand side approach or a mixed approach is adopted
19	AMR on the Supply Side If you are going to incur substantial peaking costs, it is important to allocate them correctly Timed usage data makes fixed and variable cost allocation much more accurate Greatly improves accuracy of cost of service studies Greatly improves calculation of individual customer profitability
20	Danger of Incorrect Cost Allocation Incorrect allocation of substantial fixed and variable costs will result in some customers subsidizing the usage of other customers Subsidies are not sustainable in a retail choice environment Customers paying the subsidies will select another energy supplier (competitive exposure)
21	AMR on the Demand Side Provides data necessary to estimate price elasticity of demand (price responsiveness) Can provide infrastructure for transmitting real time price signals to customers
22	Benefits of AMR AMR installation has frequently been justified based on operational savings Another magnitude of savings may result from utilizing price response With high wholesale power prices Being a seller rather than a buyer Usage information as a saleable product
23	Supporting AMR Operational savings Purchased power savings Wholesale power revenues Selling customer usage information Accurately allocating costs and determining customer profitability Utilizing multiple benefits is the key
24	Preparing For Competition
25	Cost of Service Study Provides detail regarding a utility’s cost structure Provides data for pricing efforts Identifies differences in rates of return among rate classes Can be used to determine the characteristics of an “average” customer in each class
26	Cost of Service Study
27	Cost of Service Summary
28	Using Cost of Service to Target Your Marketing Efforts Rates support the average customer Which customers do you want to attract or to help expand? Attracting customers that are better than “average” will help to grow margins Attracting customers that are worse than “average” will reduce margins and can result in financial distress Identifying better than average customers
29	Using Cost of Service to Target Your Marketing Efforts What does the average customer look like? Plant investment Load factor Operating expense revenue Margin
30	Individual Customer Profitability Picks up where cost of service leaves off Allocates costs and revenues to individual customers Identifies differences in rates of return within rate classes Who are your most profitable customers? Least profitable?
31	Individual Customer Profitability
32	Rate of Return versus Load Factor
33	Rate of Return versus Load Factor
34	Rate of Return versus Load Factor
35	Rate of Return versus Load Factor
36	Rate of Return versus Load Factor
37	Rate of Return versus Load Factor
38	Segmenting the Market Using Cost of Service
39	Segmenting the Market Using Cost of Service
40	Attitudinal overlay Likelihood of switching based on price may be mitigated or enhanced by the customer’s satisfaction with and its attitudes regarding the current supplier. Integrate the raw data from previous attitudinal surveys and market research studies
41	Integrate Customer Satisfaction and Attitudinal Data
42	Correcting Problems Identified With Individual Customer Profitability
43	Revising Existing Rates Large differences in profitability within classes result from rates that are not cost based Cost based rates reduce or remove within-class subsidies Reduces revenue variability Need accurate information on cost allocation (role for AMR)
44	Rate of Return versus Load Factor
45	Rate of Return versus Load Factor
46	Targeted Rate Options
47	Rate Menus Targeting vs. One Size Fits All Choice vs. Control Rate options as a foundation for a marketing program Bundling rates with products and services that take advantage of the rate
48	Rate of Return versus Load Factor
49	Rate of Return versus Load Factor
50	Rate Unbundling Unbundle into at least 5 components Generation demand Generation energy Transmission demand Distribution demand Customer charge
51	Unbundled Rates Components of an unbundled rate structure can better reflect principles of cost causation Coincident peak (CP) basis > production and bulk transmission components Non-Coincident peak (NCP) basis >distribution, radial transmission and transmission substation components Rate structure that will be utilized by electric utilities in a more competitive environment More tools to use in working with customers
52	Rate Unbundling Load all margins on distribution and customer charges No margins on generation energy or demand Bulletproofs utility financially Reduces financial impacts of switching Similar to rates for natural gas LDCs
53	Relationship-Based Marketing Relationships established through multiple transactions with the customer Multiple transactions as an exit barrier A web that helps to retain customers
54	Earning High Margins Price / Value relationship Increasing value rather than reducing price Utilizing value added products and services Role for AMR in providing value added products and services
55	Product and Service Menus Definition of basic electric service Identification of premium services Menus of fee-based services Bundling fee-based services
56	Configuring AMR for a Competitive Future Billing data Usage data Cost allocation Customer profitability Price elasticity AMR data as a value added product Infrastructure for delivering real time prices