By Mark Spalinger
It’s not a great time to be running a regulated utility. A perfect storm of inflation, high interest rates, cuts in energy production and constantly growing compliance requirements have conspired to crimp profitability nationwide.
That leaves the C-suite and boards of directors of utilities companies in the unenviable position of having to navigate the next several years of strategic capital expenditures and expansion plans against the headwind’s uncertain forecasts and an economy on the brink.
Fortunately, there is a way to mitigate this volatility: customer satisfaction. For decades, J.D. Power and S&P Global Ratings have examined the relationship between customer satisfaction and financial metrics, such as profitability and credit ratings, and found that higher levels of customer satisfaction continue to be associated with higher return on equity, which is the amount of profit, or financial return, utilities return to shareholders after paying off debt and expenses.
Connecting the Dots Between Customer Satisfaction and Return on Equity
Our data has consistently shown that an investment in customer satisfaction will yield dividends in the form of higher rates and increased profitability. By grouping regulated electric utilities into quartiles based on customer satisfaction, that has continued to be the case. Higher levels of customer satisfaction one year prior to a rate case are associated with higher ROE.
In terms of concrete dollars and cents, it’s a significant difference. A 10-point improvement (on a 1,000-point scale) in the overall satisfaction index score increases ROE between .02% and .04%. That means that if a utility were requesting a rate change on an equity base of $1 billion, it would translate into an increase of $200,000 to $400,000 for every 10-point increase in the overall satisfaction index score.
Macro Market Creates Headwinds
It is important to note, however, that despite the positive correlation between higher levels of customer satisfaction and improved ROE, average overall ROE has been trending down for the past seven years. In fact, for the period between 2001 and 2014, the average ROE for all electric utilities was 10.4%. Today, that number is down to just 9.4%.
All told, there were a total of 55 rate case decisions in 2021, which is consistent with historical average amount of activity.
Gap Between Requested and Approved Rate Increases
Also consistent with historical findings, all regulated electric utilities receive a lower approved rate increase than requested. However, utilities in the upper quartiles of customer satisfaction performance continue to receive rate increases that are closer to their actual request compared with lower quartile utilities.
Utilities in the bottom quartile receive an approval rate that is on average $2 million to $8 million lower than utilities in the upper quartiles, which is consistent with historical findings. On average, utilities in the upper quartiles of customer satisfaction ratings received an approved rate increase that represented roughly 63% of what they initially requested while those in the lower quartiles received an approved rate increase that was just 42% of their original request.
Satisfaction Drives Profits
A primary driver and key performance indicator for all companies is profit. J.D Power research continues to show a positive relationship between electric utilities’ customer satisfaction performance and reported profit margin.
Electric utilities in the top quartile of customer satisfaction tend to report profit margins that are on average 3%-4% higher than utilities in the three lower quartiles.
The Delicate Balance
There’s no escaping the inevitability of rate changes. Navigating that simple truth has become an art form for utilities, and in this type of evolving landscape, it’s something they’ll have to be vigilant about managing.
It’s not an easy task, and customer satisfaction is the lynchpin to the entire process. From service to communication, excelling at every facet of the customer experience will be necessary to prevent any potential blowback to rate changes. The stakes are high, but the rewards are worth the effort. The utilities that can navigate the delicate balance between improved customer satisfaction and a difficult market environment will see huge benefits in not only satisfaction scores, but profitability as well.
–This article was derived from a utilities intelligence report from J.D. Power
About the author
Mark Spalinger is director of utilities intelligence at J.D. Power. He is responsible for delivering actionable insights and thought leadership to utilities across the United States to help them understand the importance of customer satisfaction and how to improve their customers’ experience.
