Regional Electric Utility

Our client is a large regional electric utility company that has seen negative earnings trend in the last 12 months. They think that part of this relates to the write down of a significant amount of bad debt in the past year. They operate in a state similar to Texas where utilities market is open and competitive. There are approximately 30 players in the market, and consumers can choose the provider that they want. Contracts are generally 6-12 months, after the end of the contract customers can change providers with little or no costs. 1) The client wants to identify the root cause of their loss of profitability 2) What actions should they take to improve profitability. The company does not produce the electricity; they purchase it on the open market and sell it to customers

• Revenue has been consistent over the past 12 months. The company has very little ability to increase prices as it is a very competitive market and customers make choices on price. There are a lot of rules in place as far as incentives you can offer and differentiation the company can make. • They have 1M customers, which is largely unchanged in number from prior years, and the kilowatt usage by these customers is largely unchanged. • Although the # of customers is consistent, there are large amounts of turnover in customers each year as their contracts expire. Some customers leave for other providers, and other customers are obtained. • Deposits are required to start service: The largest deposit currently in the market is $400. The deposit we require from all customers is $100.

Our client is a large regional electric utility company that has seen negative earnings trend in the last 12 months. They think that part of this relates to the write down of a significant amount of bad debt in the past year. They operate in a state similar to Texas where utilities market is open and competitive. There are approximately 30 players in the market, and consumers can choose the provider that they want. Contracts are generally 6-12 months, after the end of the contract customers can change providers with little or no costs.

Debt collection is the primary focus of the case. If the candidate tries to pursue a different topic in further detail, make it clear to her that there is no further detail available for the first three items. Once debt collection is the focus of the discussion, provide her with the information on the next page. If the candidate asks, the only thing the company can look at by law is the customer’s credit profile; no customer may be turned down for service. At this point, show the candidate Exhibit 1. Tell the candidate to focus on analyzing the “Low” segment, with the goal of arriving at a customer lifetime value. Inform her that the acquisition cost is $50 on average, with a cost to serve of $7 per month. Other facts to provide: • Average electricity usage: 1,000 KW/month • $0.10 per KW/ hour is the price to them; $0.09 per KW/ hour is our cost • Cost to cut off service: $75 • Collection costs: $50 dollars per account, with a 50% success rate Ask the candidate to brainstorm ways to increase profitability as well as the risks of each. Possible ideas include: • Require higher deposits for lower credit ratings • Focus marketing toward higher credit rating customers • Make bills easier to pay through online tools • Automate billing process Lastly, ask the candidate to wrap up with a final recommendation. A strong candidate should be able to determine the CLV with little or no assistance. She also will be effective at brainstorming profitability improvements while considering the risks and limitations of each.