Utility Customer Satisfaction: A Faith-Based Initiative?

By John Egan

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“Faith” is generally defined as the belief in things that are unseen. Using that definition, many utility-industry managers and leaders apparently consider customer satisfaction the ultimate faith-based initiative. They may be wrong.

Consider these heretical propositions:

Customer satisfaction probably doesn’t generate new revenue for utilities (although utilities in restructured markets may find that it slows customer churn and reduces potential lost revenue and earnings).
It is not clear that customer satisfaction lowers costs for utilities.
If customer satisfaction does lower costs, how would those savings compare to the savings from asset sales or downsizing?
Could the pursuit of customer satisfaction create new costs, at a time when cost-reduction is the industry’s mantra?
Finally, how important are the perceptions of the utilities’ customers compared to what industry veterans see as the dominant realities of the utility business: operating cost per unit, new construction costs, reliability, and safety?

I’ve been analyzing utility customer satisfaction (CSAT) for several years, conducting dozens of lengthy interviews with managers, directors, and officers at electric and gas distribution utilities, both shareholder-owned and publicly owned, across North America. My goal has been to move beyond faith and try to determine, quantitatively as best I can, whether and to what degree utility customer satisfaction is related to business outcomes for utilities.

Shareholder Returns

Creating shareholder wealth is a critical measure of success for most businesses, so we’ll start there. Data compiled by L.E.K. Consulting and J.D. Power and Associates clearly shows that top-tier utility customer satisfaction does not correlate with (either as a result or a driver of) higher shareholder returns. Shareholder return is the sum of changes in the price of a stock, plus the payment of cash dividends. For this analysis, I chose annual shareholder returns over a 10-year period to minimize the potential for distortion from unusual, transient, or one-time events. The longer time frame smoothes out dramatic swings from one year to the next.

Table 1 is a list of the investor-owned electric utility holding companies that posted top-quartile average annual shareholder returns over a 10-year period through December 2007, as calculated by L.E.K. Consulting. That year was the last that L.E.K. performed its calculations.

Table 1. Top quartile utility HoldCo shareholder returns don't correlate with utility OpCo customer satisfaction. This table shows investor-owned electric utility holding companies with first-quartile average annual shareholder returns over a 10-year period ended December 31, 2007. The three columns to the right show the J.D. Power and Associates residential electric customer satisfaction scores for the operating utilities that are units of that utility holding company. Source: Data from L.E.K. Consulting and J.D. Power and Associates

These eight utility companies all had annual shareholder returns that were well above average for a prolonged period of time. The utility industry average annual shareholder return for this 10-year period was 10.16%. The last three columns show the performance of each firm’s operating utilities in the three years of the J.D. Power and Associates residential electric customer satisfaction surveys. Holding companies with multiple operating utilities (such as Exelon, Entergy, and FirstEnergy) show multiple J.D. Power quartile scores to reflect the different scores of those operating companies.

Only two utility holding companies—Southern Company and PPL—that achieved top-quartile annual shareholder returns over a 10-year period while their operating utilities also scored top-quartile customer satisfaction in recent the J.D. Power surveys. This pattern has persisted for several years. Three of Southern Company’s four operating companies achieved top-quartile CSAT scores in 2008 while the fourth unit was near the top of the second quartile.

The table shows more instances where top-quartile shareholder returns negatively correlated with customer satisfaction at the operating utility. Cases in point include Exelon (its Commonwealth Edison unit has been fourth quartile for some time), NSTAR, and TXU Energy. This relationship has persisted for several years.

Table 1 also shows a number of cases where holding companies with top-quartile average annual returns had either second- or third-quartile CSAT performance—which further muddies the customer-satisfaction waters. This broad distribution of results, which I’d call almost random, raises questions as to whether there is any hard and fast rule about the relationship of shareholder performance and customer satisfaction.

Table 2 is a list of utility holding companies that posted fourth-quartile average annual shareholder returns over a 10-year period through December 31, 2007, again drawing on calculations from L.E.K. Average annual returns for these companies were about as far below the industry average as the returns in Table 1 were above it. As with Table 1, the industry average annual return was 10.16%, and the last three columns show the performance of each firm’s operating utilities in the three years of the J.D. Power residential electric customer satisfaction surveys.

Table 2. Fourth-quartile utility HoldCo shareholder returns don’t correlated with utility OpCo customer satisfaction. This table shows investor-owned electric utility holding companies with fourth-quartile average annual shareholder returns over the 10-year period ended December 31, 2007. The three columns to the right show the J.D. Power and Associates residential electric customer satisfaction scores for the operating utilities that are units of that utility holding company. Sources: Data from L.E.K. Consulting and J.D. Power and Associates

Table 2 tells the same story, albeit from a different vantage point, as Table 1. There are several instances where holding company shareholder returns and operating company customer satisfaction tended to correlate positively. But there were also several instances where operating utilities received first-, second-, or third-quartile CSAT scores at a time when the holding company recorded fourth-quartile returns.

Tables 1 and 2 show TXU and CenterPoint Energy as “NA” for 2008 because J.D. Powers removed them from its national customer satisfaction survey last year. Both were placed in the narrower survey of the Texas market, because those utilities’ scores in the Texas survey can’t be compared to the national survey.

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