Thoughts on the Future of the Electricity Industry

(The following is a slightly modified and abridged version of a dinner speech that I gave at the Rutgers Center for Research in Regulated Industries annual Eastern Conference in Pennsylvania earlier this month.)

What I am going to do is to sketch out, in broad strokes, an outline of the core issues that the American electricity industry is facing, and what I feel are the methods that it will have to adopt to effectively face these issues. And I’m going to do this in a very personal sort of way, by highlighting some of the life lessons and experiences that have come to mind as I’ve pondered the challenges confronting it.

Let me begin with an experience that I had as a very young man, when I was working my way through college as a lab technician for a metallurgical company. Now the manager of this laboratory prided himself on having state-of-the-art equipment, and apparently equipment manufacturers had picked up on this, because it seemed that we had a steady stream of salesmen passing through that laboratory, each trying to convince him that they had the next big thing in laboratory devices. One of the more laborious tasks that we technicians regularly had to perform was to polish little test pieces of metal so that we could examine them under a metallograph. This was done by pressing them – one piece at a time – down onto a rotating polishing wheel, and it would sometimes take several minutes to get the necessary flawless finish that would enable testing of the piece. And then, one day, a salesman came into our lab with something that he promised would change our lives. It was an automatic polisher! Several little metal pieces could be attached to mechanical arms, which would then polish them, all at the same time, and no lab technician would ever have to sit hunched over a polishing wheel again. It sounded wonderful. It sounded fantastic. It sounded too good to be true. We lab technicians were given a demonstration of the machine. About a half dozen pieces were polished at once. One of the lab technicians was given one of these pieces after the machine had finished, and he was asked to render his opinion. “Terrific!” he said. “Let’s buy it!” I picked up another of the pieces and looked at it. It was terrible. The piece had not been polished properly at all, and was far from suitable for inspection under a metallograph. I brought this to the manager’s attention. The salesman protested that the machine had probably just not had its settings properly calibrated. I challenged him to a contest: his machine versus me. He could have as many tries as he liked, while calibrating his machine, but he had to eventually demonstrate that his machine could produce suitably polished test pieces as rapidly as I could. After several trials, with the machine still not able to properly polish a single piece, the salesman eventually gave up, saying that the machine just wasn’t suited for the particular kind of lab work we did. He was sent packing. Meanwhile, that other lab technician – the one who said we should buy the thing – pulled me aside and apologized for his early endorsement. “I was just trying to be a good company man,” he explained. “A good company man,” I thought to myself, “What did he mean by that? How was giving his rubber stamp approval to a machine that would have cost us thousands of dollars, and would have been completely worthless, doing a favor to the company?” I remembered this incident when I heard the president of an electric utility give a speech recently, talking about many of the dubious “innovations” that others have been trying to foist on his industry, and particularly when he quoted Stanford economist Thomas Sowell, who said, “Much of the social history of the Western world, over the past three decades, has been a history of replacing what worked with what sounded good.”

Three decades sounds about right, because it was approximately three decades ago when Coca Cola nearly made one of the most devastating product “innovations” in its entire history. Having been convinced by a third party – its competitor, Pepsi – that its formula was no longer a winning one – in spite of its continued dominance in the soft drink market – Coca Cola redesigned its signature brand, labeling it “New Coke”. Public reaction was swift and negative, and had Coca Cola not quickly realized its error and reintroduced its signature brand as “Coke Classic”, this misstep might have resulted in complete disaster for the company. Here, then, was a case of replacing something that worked with something that sounded good. Coca Cola’s product designers assured upper management that, based upon taste tests, the new formula would be preferred over Coke’s “classic” one as well as the one used by its principal rival, Pepsi. What management failed to realize was that the long-running success of Coca Cola was due to a product brand that had been thoroughly embraced by a loyal customer base which expected a corresponding loyalty from its provider. The switch to New Coke constituted a betrayal to them of the worst sort, and one which they could only grudgingly forgive when the original brand was restored to them.

Now in the midst of all of this clamoring for change in the electricity industry, its leaders must be careful to not lose sight of what their own special “brand” is, and thereby risk losing it – and with it, everything that contributed to the levels of customer satisfaction that the industry may have enjoyed in the past. And I do think that it has a brand: its own version of a “secret sauce” or formula that worked for its customers. That brand, quite simply, was the ability of a customer to flip on the switch to any electrical appliance in their home, and know with almost perfect confidence that the appliance would operate. It was a combination of simplicity and reliability. There were no complex procedures involved in bringing electricity into the home – no market transactions, or negotiations, or elaborate sequences of necessary steps to make it happen. Electricity, quite frankly, has always been something that we have never had to think about. We don’t have to care about where it comes from, or how it gets into our home, or whether we’ll have enough of it from minute to minute, or even hour to hour. We flip a switch, and the light comes on. That’s all there is to it. End of story. It is the same magic that underlies all of our most precious services – the utilities: natural gas, water, the telephone, and electric service.

This is electricity’s brand, and if electricity providers depart from it, they do so at their own great risk. I had an experience of this first hand, when I worked for a natural gas utility several years ago. We introduced a customer choice program: not because our customers demanded it, but because we became convinced by third parties – like Coke did in the mid-1980s – that it was a change that would be for the better. Customers were given the option to choose a different natural gas supplier, while still receiving delivery service from us. I’ll never forget the experience that I had one afternoon, when I was invited to speak to a group of senior citizens about my company and some of the new services that it was offering. I waxed eloquent about our new customer choice program, saying that it was a bold and wonderful step into the future, and how it would improve the quality of the lives of all of our customers. After I gave my talk, and invited questions from the audience, the last woman who stood up with a question said this: “I don’t see what’s so great about your ‘choice’ program. Since you’ve introduced it, I’ve gotten a barrage of calls from gas telemarketers, confusing me with offers that I don’t understand. And all of this time, my gas bill has actually gone up rather than down. Your program has been nothing but a source of grief to me.” It was a real wake-up call: here was something that most customers didn’t want, and at least some of them genuinely resented. It was a change that sounded good, but ultimately sounded better than it actually was.

Now at this point I know that it is sounds as if I am arguing against change – that change would not be a good thing when it comes to electricity. But nothing could be further from the truth. I believe that change is going to have to occur. Let me explain why: There was a historical event in North America, called the Great Blackout of 1965. It was a massive power outage that affected parts of Canada and the northeastern United States. It was not just the geographical scope, but the duration of the outage that made it so memorable. Over thirty million customers were left without power for nearly thirteen hours. Thirteen hours! Now the duration of that outage doesn’t produce the same reaction of shock and horror from those reading or hearing about this event as it did, say, ten or twenty years ago. At least it doesn’t from me. For most of the past few years, if the worst outage that I had during the entire year was only thirteen hours in length, rather than a few days in length, I would have counted that as a good year. Sadly, we have seen a marked drop in electricity reliability, in an era when continuous electricity service is more important than it has ever been. Thirty or forty years ago, if we found ourselves without electricity, we might spend the time sitting on the front porch with a glass of lemonade, talking with our neighbors. But now, not just our business life, but our social and leisure life as well is contingent upon being continuously connected electronically to a network. Why has electricity reliability declined? We have an aging infrastructure in this industry, just as we do in the rest of the country. The American Society of Civil Engineers gives the nation a grade of “D” for the quality of its infrastructure. It gives the electricity industry a “D+”. I guess that means the industry is “above average”, but that sounds like a dubious honor. But we’ve also seen an increasing frequency of very disastrous weather events in this country which have caused widespread outages. My vocabulary for these calamities has expanded in just the past few years, with words like “derecho” and “polar vortex”.

And this leads me to the second reason that change has to occur: the environment. Producing electricity is a dirty business. That has always been true, and electricity producers have already made great strides in cleaning up its power plants. But more needs to be done, and the growing consensus that greenhouse gas emissions are moving our climate along a trajectory to disaster only adds to the urgency of this task. One-fourth of all non-natural greenhouse gas emissions that have been produced since the beginning of the industrial revolution have come from the United States alone. And currently one-fourth of all non-natural greenhouse gas emissions produced in the United States come from electricity power plants. I know that there is a lingering debate about what the real impact of these emissions are, upon temperatures, and upon climate in general, but among the scientific community there really is an overwhelming consensus that climate change is real, and that it is dangerous. I know that I’m a believer, and so are many if not most of the CEOs of our electric utilities in the U.S. As Jim Rogers, former President and CEO of Duke Energy, once said, climate change is a serious problem, electricity power producers are a significant part of the problem, and electricity providers have to be a part of the solution.

This, I think, is the essence of what is driving change in our industry, from the customers’ perspective. But there are all sorts of other drivers that have come into the national conversation on this issue. Managers of investor-owned utilities are concerned about flat or declining sales, and how they will be able to maintain earnings growth. National policymakers, think tanks, and other third parties have become intoxicated with the idea of a decentralized grid, with electricity supply and delivery being managed by just about everybody, using solar-paneled roofs, microturbines, windmills, electricity storage, and price-responsive devices. But ultimately, it is what the customer wants that will drive the really important and substantial changes to the electricity system. And what I believe that the customer wants is a more reliable, and a cleaner, electricity service. That’s it. In spite of all of this talk of “smart” this or “smart” that, “cyber” this or “cyber” that, “prices to devices”, et cetera, et cetera, when you get to the real base of it, that’s really what our customers – and our citizens – are looking for. And of course a customer is always sensitive to price. It really comes down to a very simple formula: Achieve a desired level of reliability and clean energy at as low a cost to the customer as possible. And every public policy initiative, regulatory action, and business decision made by electricity providers should be done in the context of this formula.

Now I know that there is this other conversation going on, about how there is a new breed of customers that are more “tech savvy”, and who want to play a greater role in managing their electricity service, as they do in other areas of their lives. And I don’t dispute that there probably are some people out there who would love to have a “smart app” with which they can turn on or shut off their water heater at any time of the day, in response to hourly electricity prices, or have a “smart toaster”, or a “smart thermostat”. I suppose that I could eventually warm up to the idea myself of being able to remotely run the electric appliances in my home, so that potential burglars, seeing certain lights being turned on throughout the day, would not realize that I am away, and it would be nice to be able to run my heating and air conditioning units remotely so that the house will be at an optimal temperature by the time that I get home from work. The rise of smart phones and smart phone "apps" is often pointed to as a prominent example of how people want to use modern information technology in ways that were unimaginable just a few years ago. And this is true. Up to this point, I have been stressing the fact that a significant part of the value proposition for electricity is that customers don’t have to think – or do – too much about it. They flip a switch and it’s there. There was a time when the same thing could have been said about telephone service. So what is it that motivates somebody to invest more time (and money) in a service that they are receiving, rather than less? Why are all these smart phone “apps” so popular, and is there a similar potential hiding somewhere in electricity service?

I have been a student of business transformation, and it was questions like these that eventually led me to a fundamental insight. The greatest product innovations in our economy have one thing in common: they have moved customers from a condition of “bad time” to one of “good time”.

What do I mean by this? I believe that the single most important feature of each of our lives is how we spend our time, and there is a continuum stretching from extremely unpleasant ways, to extremely pleasant ways, to spend time. Let me give you a few examples. Bad time includes the performance of drudgery: scrubbing floors, mowing the lawn, or doing some mundane task over and over and over again. It includes unpleasant interactions with other human beings, like a rude clerk in a store, an annoying coworker, or an insensitive customer service representative. It includes long waits, whether in line or on one of those annoying calls to a customer service number, where a recorded message comes on every thirty seconds or so, saying “Your call is very important to us”: a lie which makes the long wait even more unbearable. Another example of bad time is when we have to drive all over town to try to find something that we want or need. Good time, on the other hand, corresponds to those experiences that we like to savor, and preserve in memory. Of course, the greatest of these involve happy times with significant persons in our lives, such as family members, spouses, or close friends. Entertainments – music, television, and movies – are also important examples of good time. But good time also includes new experiences, such as novel encounters, interesting new information, or other discoveries that are of interest or practical value to us. Even a pleasant interaction with a customer service representative, or the website of a company, might be counted as an example of good time.

All of the greatest product or service innovations have moved us from bad time to good time. Think of the vacuum cleaner, or the washing machine, or the dishwasher. Or think of the radio, and television, and the internet. Even bank ATMs count as a significant example of this. I remember some people actually saying, when ATMs first came out, “Oh, they’re so terrible – they’ve replaced the experience of interacting with real human beings with that of interacting with machines!” Well, I can tell you firsthand, I would much rather deal with an ATM than with a rude or indifferent bank teller, and I would definitely prefer using an ATM rather than waiting in a line at a bank. And as we move to more recent times, and the great successes which have emerged in the past couple of decades, the same phenomenon can be observed. It is certainly true that Borders Books had made the process of book-buying more pleasurable: they added chairs in their stores where people could read books at their leisure, a cafeteria where people could buy coffee and snacks, and even allowed their customers to do other things, like play Chess, in their stores. But Amazon.com did something even better. They made it unnecessary for book buyers to even leave their homes! Borders improved the quality of book-buyers’ time by giving them a more pleasant environment to shop, but Amazon improved it even more by making it unnecessary to make a shopping trip at all. And what about those “apps” on smart phones? What is the value in those? I think that the Blackberry was the first machine that demonstrated to customers how they could improve the quality of their time just about anywhere. We have all been in meetings, or other events, where we feel that our time would be served better by doing something else. Blackberry made that possible, by allowing us to check our e-mails, or even go onto the internet to catch up on the news. They gave us a means by which we could move from bad time to good time – or rather, inject good time right into the midst of bad time. And contemporary smart phones have only expanded on that service, allowing us to communicate with our peers via text messaging, play games, or even listen to music.

Every major product innovation – and every major industry overhaul – came about as the result of somebody figuring out a way to move customers from bad time to good time, or from good time to better time. I remember a personal experience of being put into bad time. Blockbuster (remember them?) called me one evening to tell me that I had never returned a rented movie, and that I owed a large fine for holding it past its due date. I argued with that person for twenty minutes, explaining that I had returned the movie weeks ago, and finally, after putting me on hold for several minutes while she checked her records, the Blockbuster employee came back on the phone and told me that I was right. And then she hung up. No apology – she just hung up. That experience, of course, made me furious. But when Blockbuster subjected somebody else to a similar experience, he did more than just get angry. I’m talking about a gentleman named Reed Hastings. He got $40 in overdue fines from Blockbuster for holding a movie too long. You might recognize the name: he was one of the cofounders of Netflix.

Have utilities ever put their customers into a “bad time” experience? I’ve already explained how one of my former company’s customers felt about our choice program. She definitely had a “bad time” experience. And, closer to home, I remember when my neighborhood was out of power for several days a couple of summers ago, after a severe storm. As we watched all of the surrounding neighborhoods get their lights back on, while we remained in the dark, our feelings of despair and frustration grew with each passing hour. Finally, when I was walking to the subway station one morning, I noticed that somebody had posted a sign facing a major street which bordered our neighborhood. It was addressed to our electric utility and said, “Please don’t forget about us. We’re your paying customers, too!” That desperate sign was evidence that a lot of people had been experiencing really, really bad time.

And so, as the movers and shapers of the electricity industry look to their future, they have to ask themselves what needs to be done to move their customers from bad time to good time, or from good time to better time. It’s really as simple as that. Whatever the eventual winning strategy is for future success, I am convinced that it will answer that basic call, better than any other strategy that had been tried or proposed. Like Coca Cola, the electric industry should never forget what its longstanding secret recipe for success had been, and should continue to be: give customers access to all of the electricity that they will ever need, any time, and in a way that they don’t have to think too much about it. And yes, there may be customers who want to take a more active role in managing their electricity supply. There may even be customers who want to produce their own electricity. And we all want an electric system that will not do irreparable damage to our environment, either locally or globally. The successful utility will be there, for all of us, finding ways to give us what we want, and in so doing, move us into a happier state. We have to be careful, though – all of us, including regulators and other policymakers – and avoid being lured into believing that something that sounds good should replace something that works. There are already many versions in the electricity industry of the “automatic polisher” that I described earlier – a device that sounded good, but that would have ultimately been more expensive, more time-consuming, and more unpleasant than the systems already in place. The successful entrepreneur, the successful innovator, and the successful incumbent provider have always succeeded by focusing on what is truly important and valuable from the perspective of their customers, and then finding the optimal way to improve the quality of their customers’ time and their lives – and keep them in that happy place.