Reservoir Levels

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Water Utility Competition: Lessons from the Electricity Sector

Water and Electricity Utilities need to work together - Water Utility Competition

The energy-water nexus from a different perspective.

Water utilities are considered to be natural monopolies. Economic theory holds that in industries where long-run average cost decline as output expands, a single producer will be able more efficient in delivering services than multiple providers. But are water utilities natural monopolies?

In this paper, we sketch a scenario for a competitive landscape in the urban water industry and provide some thoughts on how to respond strategically to the threat of new entrants in the urban water market.

Water Utility Competition

Who says that the utilities have no competition?

Marketing guru Theodore Levitt prophetically wrote in 1960 about the problems currently facing electricity utilities: “Who says that the utilities have no competition? They may be natural monopolies now, but tomorrow they may be natural deaths.” Levitt sketches a future where “fuel cells, solar energy, and other power sources” threaten the sustainability of the centralised electricity distribution system. Half a century after these words was written, they are becoming a reality.

The electricity grid is being inverted and is moving from a centralised monolith to an active decentralised network driven by consumer demand for green energy self-sufficiency. The ongoing development of electricity generation and storage technology will drive this decentralisation even further.

A similar scenario is unfolding in the water industry. Competition does not originate in large scale third party access but in fragmentation of service delivery assets over multiple service providers. Developers are interested in decentralised service provision, seeking independence from publicly owned infrastructure.

Reviewing the concept of public utility in more detail reveals it to be an absurd one

The usual response of utilities is to move into defensive mode. Water utilities place themselves in a different category than other service providers. Utilities point out the unique qualities of water as a life-sustaining product considered the most essential of all services. But reviewing the concept of ‘public utility’ in more detail reveals it to be absurd. Every good is useful to the public, the fully commercialised food industry being a case-in-point. Water utilities cannot rely on a preference status within the gamut of service providers to mitigate the risk of competition.

How can water utilities respond to the entry of new service providers to the market? Three scenarios can be sketched. The least productive response is to keep our head in the sand and wait for the hype to blow over. The experiences in electricity show that this is not an acceptable proposition.

Secondly, water utilities could revert to their powers as water authorities and create a regulatory burden on developers that minimises the likelihood of these proposals coming to fruition. The current discourse in this area is focused on the risk of becoming the Provider of Last Resort. In this scenario, an independent, decentralised utility would no longer be able to meet its obligations, forcing publicly-owned utilities to inherit the assets and liabilities. This situation is certainly not theoretical. In Europe and much of the United States, this is precisely the mechanism of how large vertically integrated public utilities came into existence. This blocking of innovation is certainly not conducive to maximising the public good overall.

Become a provider of first preference

The most productive way to manage the risk of becoming the Provider of Last Resort is to ensure that we become the Provider of First Preference. Instead of focusing on their perceived special status as a service provider, utilities should focus on understanding why communities are seeking self-sufficiency. Can incumbent water utilities become more entrepreneurial and provide a suite of services that would make developers not see the need for taking risks in becoming a water utility themselves?

The electricity experience may be instructive. The three big power ‘gentailers’ in Australia are players in the renewable energy market but are not big enough to avoid competition, for example from the South-Australian wind. This case suggests water utilities should prepare for such a possible future by further developing contribution arrangements, as well as considering approaches to managing the risk of third party access, including insurance, options and guarantee arrangements.

Acknowledgements

This paper has been written with the help of Jon Anstey and Megan Kreutzer and was presented at the VicWater conference in Melbourne on 12 September 2014.

Service Quality in Essential Services: Smart Utilities 2013

This presentation outlines a model to measure the level of service in essential services, based on contemporary ideas in the field of services marketing.1

In economic models for the pricing of essential services, cost to the consumer is restricted to monetary cost. The cost to a consumer should, however, be extended to include the time required to consume services.

Given the high level of development of utilities in Australia, the time spent obtaining essential services is negligible, except when service delivery is disrupted. This is, however, not the case for facilitating services, such as the recovery from service failures, billing and provision of information and so on. These services require time to consumer, which can lead to frustrations.

My research indicates that consumers have a low level of involvement with tap water services and therefore have a low willingness to pay, both in money and time. This has implications on how to measure service quality and how to engage with customers.

The Invisible Water Utility is a concept used to describe the highest possible level of service quality, i.e. minimising the amount of time consumer spent on consumer essential services. Bills are paid automatically, billing is accurate and easy to understand and every time a tap is turned or a switch is flicked, expectations are met and there is no need to contact the utility, or to undertake other time consuming activities.

This presentation is based on research conducted with customers and customer stakeholder groups in Victoria. Also sentiment analysis using Twitter has been used to support the conclusions.

The methodology is innovative in the sense that it acknowledges the low level of involvement consumers have with essential services. This goes against the current drive to increase engagement with customers, which is based on theories for high involvement services.

This presentation provides an update of my on-going PhD research project into the relationship between organisational culture and service quality in essential services.

In summary

  • Essential services have a low level of involvement
  • Low involvement relates to a low willingness to pay (time and money)
  • A perfect essential service is invisible to the consumer

  1. Presented at the Smart Utilities Australia/New Zealand 2013 conference on 26 November 2013. 

The Value of Water—A Marketing Perspective

Image is courtesy of the Global Water ForumFather of economics Adam Smith identified the so-called diamond-water paradox in the Wealth of Nations. This is the idea that some commodities without value in use, such as diamonds, have a high value in exchange and vice versa, water has a high use value but demands a low price. Smith acknowledges the common sense idea that water is valuable, but how valuable is water exactly? The simplest definition of value is that it is the difference between perceived benefits and perceived cost. In this article, I propose a model to determine the value of water to customers.

The benefits of water

To describe consumer benefits we need to distinguish between needs and wants for water. The marketing definition of needs and wants is very different to the common sense understanding of need as a necessity. Based on Mallow’s humanistic psychology, human beings need a lot more than just that which is needed to survive. Human beings have sociological needs and psychological needs and they all have to be met. They are all necessary in order to be a complete human being. To say that water used for gardening is not a need is wrong. People need water to grow their gardens because they have a sociological need or psychological need. People have a garden because they want to invite friends and have a good time. Gardening also provides a sense of achievement, an important psychological need. Needs are a psychological state of felt deprivation. There is no threshold whether something does or does not classify as a need. Needs are  psychologically innate within us; they can not be changed or created.

Hand in hand with psychological needs, customers have ‘wants’, which is the manner in which a need is satisfied. If somebody has a need for self-fulfilment, some people might do a PhD in marketing, other people might enjoy working in their garden, for which they need water. Everybody fulfills their psychological needs differently. The core task of a service provider is to understand these needs and wants and create a value proposition that matches customer expectations.

Marketing can not change or create needs, but it can influence what people want. Wants are culturally determined and can be shaped through communication,and education. The traditional Aussie backyard is disappearing because customer’s values are changing. People now are no longer interested to express themselves through their garden, possibly because the younger generation has experienced the prolonged drought and has developed alternative ways to satisfy their needs.

The cost of water

The other side of the value equation is cost. Far too much has been said about the cost of water, but most of this discourse is about money. However, the cost of water is multi-dimensional. Besides a monetary price, people pay a psychological price for water.

The psychological price encompasses the mental effort customers need to expense in purchasing or consuming the service. With water, the psychological price is generally very marginal, but as soon as the service fails, the psychological price increases dramatically, thereby decreasing the perceived value and leading to unhappy customers. Third is the sociological price, which relates to how the purchase impacts how we are perceived by other people. Sociological cost is relevant to water users in that, for example owning a nice garden or swimming pool enhances the customer’s prestige in their social network.

The type of price that I want to focus a bit more on is time. People need to spend time to obtain water and around the world, things are very different. The worst possible water service imaginable you would find, for example, in arid parts of Africa where women spend hours every day to get their daily ration of water. There are some estimates that, collectively, around the world women, because you never see men carrying water, spend about 200 million hours every day to obtain water. In developed countries, the amount of time needed to obtain water is negligible, except in cases of service failure when customers need to spend extra time or delay their activities because water is not available or not of a potable quality and needs to be boiled.

The value proposition of water utilities

Understanding how the value of a service is assessed by your customers is the first step in developing a value proposition enhances customer experience. Water is an interesting service because in developed countries it is taken for granted. The price of water, monetary, psychological, sociological and time, is so low that any disturbance in the value equation will lead to dissatisfaction. This leads to a previous proposition I made on this blog, the best possible water utility is invisible to the customer.

The Invisible Water Corporation (IWA Blog)

Image is courtesy of the Global Water ForumManagers of tap water systems often struggle with the question of how you measure the level of service provided to customers. Most existing performance reporting systems are defined from an internal technical perspective, instead of a customer perspective. These methodologies view the water company from the perspective of the engineer and the accountant, instead of the perspective of the customer. For example, the IWA performance indicator system for water supply identifies 162 parameters to assess the performance of water supply, of which only about ten are defined from the customer’s point of view.1 Developing a meaningful performance measurement system is a complicated exercise. As Cabrera et al. (2011) point out: “performance assessment could be described as the art of simplification: the more condensed the data is, the better; but an excessive simplification of the picture may not provide sufficient information to make sound decisions.”

I am currently developing a customer-focused model to measure customer service in tap water as part of a PhD research project on customer service in reticulated water services. This model is based on the hypothesis that customers have a low level of involvement and low willingness to pay for tap water. From this model it follows that the best possible service a utility can deliver is to make sure that customers can use water without ever having to think about it. In other words, the ideal water company is invisible to the customer.

The purpose of customer service is about providing value to the customer, as perceived by the customer. In the simplest terms: the perceived value of a service is the difference between perceived benefits and perceived costs of that service. From this relationship, it follows that the lower the cost of the service, the higher the value perceived by the customer.

Discussions about the cost of water are usually focused on money, but the cost of water, just like any other service, is multidimensional. Besides the financial cost, the customer also pays a psychological cost when things go wrong, a sociological cost when no water is available and the time it takes to acquire and use water.

Focusing on time cost, the worst possible water service exists in undeveloped countries, where women spend hours every day to get their daily ration of water. Women around the world—you rarely see men carrying water—collectively spend millions of hours every day in the pursuit of their daily water. The best possible level of water service is a well-managed tap water service where the amount of time needed to obtain water is limited to the amount of time the tap is open.

The core tenet of The Invisible Water Corporation is that the better the service that is provided by the Water Corporation, the less time and energy people have to spend purchasing and enjoying the service. When you open a tap, water comes out; when you flush the toilet, the bowl is empty; bills are easy to understand and so on.

There are two reasons people don’t want to spend time and energy on water. The first is the concept of marginal utility, this is the idea that the perceived value of a service is determined by the least important use to the customer. Tap water suffers from a value paradox. On the one hand, tap water is a life-sustaining liquid, while on the other hand it is flushed down the toilet.

Economic theory suggests that the willingness to pay is related to the marginal utility of a service. In other words, what people are willing to pay for in tap water is a waste transport medium and not drinking water. This can be illustrated by looking at the bottled water industry. They are able to charge insanely high prices for plain water. They can do this, among other reasons, because the marginal utility of bottled water is maximised as their product is only used for drinking.

Second reason willingness to pay for water is low is consumer involvement. Preliminary research among tap water users shows that although everybody agrees that water is important, they don’t really care about water. This has been confirmed by many customer surveys conducted by water companies. It is not uncommon for people to not even realise which company provides their tap water.

The concept of the Invisible Water Corporation is best illustrated by describing what happens when a tap water service fails. You open a tap and no water comes out, or a bill arrives and the amount is wrong or the information provided is incomprehensible. The consumer pays in time and psychological energy for failures in the level of service provision of the water provider. Time is a quantifiable measure that can be used to develop a benchmarking model for the level of excellence of a tap water service provider.

While companies selling products are said to sell ‘widgets’, organisations that market services are in the business of selling ‘moments of truth’. Each moment of truth is an opportunity that can lead to satisfaction, dissatisfaction or something in between.

The average water company in an urbanised environment sells millions of moments of truth every day. Every single time a tap is opened, somebody calls the utility, opens a bill and so on is a moment of truth.

A water utility becomes invisible when every single moment of truth occurs without the consumer having to use more time than is required to enjoy the service, i.e. the amount of time it takes to use the water. This model for measuring service quality in tap water is currently under development. If you are interested in this topic please follow me on Twitter, LinkedIn or via my blog.


This article was originally published on the IWA Blog on 31 January 2013.


  1. Cabrere, Haskins and Theuretzbacher-Fritz (2011). Benchmarking Water Services. Guiding water utilities to excellence. IWA Publishing and American Water Works Association. 

The Invisibility Principle

Image is courtesy of the Global Water ForumManagers of tap water systems often struggle with the question of how you measure the level of service provided to customers. Most existing performance reporting systems are defined from an internal technical perspective, instead of a customer perspective. These methodologies view the water company from the viewpoint of the engineer and the accountant, instead of the view to the customer. For example, the IWA performance indicator system for water supply (Cabrere et al. 2011) identifies 162 parameters to assess the performance of water supply, of which only about ten are defined from the customer’s point of view.

Developing a meaningful performance measurement system is a complicated exercise. As Cabrera et al. (2011) point out: “performance assessment could be described as the art of simplification: the more condensed the data is, the better; but an excessive simplification of the picture may not provide sufficient information to make sound decisions.”

I am currently developing a customer-focused model to measure customer service in tap water as part of a PhD research project on customer service in reticulated water services. This model is based on the hypothesis that customers have a low level of involvement and low willingness to pay for tap water. From this, it follows that the best possible service a utility can deliver is to make sure that customers can use water without ever having to think about it. In other words, the ideal water company is invisible to the customer.

The purpose of customer service is about providing value to the customer, as perceived by the customer. In the simplest terms: the perceived value of a service is the difference between perceived benefits and perceived costs of that service. From this, it follows that the lower the cost of the service, the higher the value perceived by the customer.

Discussions about the cost of water are usually focused on money, but the cost of water, just like any other service, is multidimensional. Besides the financial cost, the customer also pays a psychological cost when things go wrong, a sociological cost when no water is available, and the time it takes to acquire and use water.

Focusing on time cost, the worst possible water service exists in undeveloped countries, where women spend hours every day to get their daily ration of water. Women around the world—you rarely see men carrying water—collectively spend millions of hours every day in the pursuit of their daily water. The best possible level of water service is a well-managed tap water service where the amount of time needed to obtain water is limited to the amount of time the tap is open.

The core tenet of The Invisible Water Corporation is that the better the service that is provided by the Water Corporation, the less time and energy people have to spend purchasing and enjoying the service. When you open a tap, water comes out; when you flush the toilet, the bowl is empty; bills are easy to understand and so on. There are two reasons people don’t want to spend time and energy on water. The first is the concept of marginal utility; this is the idea that the least important use determines the perceived value of a service to the customer. Tap water suffers from a value paradox. On the one hand, tap water is a life-sustaining liquid, while on the contrary it is flushed down the toilet.

Economic theory suggests that the willingness to pay is related to the marginal utility of a service. In other words, what people are willing to pay for in tap water is a waste transport medium and not drinking water. This principle can be illustrated by looking at the bottled water industry. They can charge insanely high prices for plain water. They can do this, among other reasons, because the marginal utility of bottled water is maximised as their product is only used for drinking.

Second reason willingness to pay for water is low is consumer involvement. Preliminary research among tap water users shows that although everybody agrees that water is essential, they don’t care about water. This idea has been confirmed by many customer surveys conducted by water companies. It is not uncommon for people to not even realise which company provides their tap water.

The concept of the Invisible Water Corporation is best illustrated by describing what happens when a tap water service fails. You open a tap, and no water comes out, or a bill arrives, and the amount is wrong, or the information provided is incomprehensible. The consumer pays in time and mental energy for failures in the level of service provision of the water provider. Time is a quantifiable measure that can be used to develop a benchmarking model for the degree of excellence of a tap water service provider.

While companies selling products are said to sell ‘widgets’, organisations that market services are in the business of selling ‘moments of truth’. Each Moment of Truth is an opportunity that can lead to satisfaction, dissatisfaction or something in between.

The average water company in an urbanised environment sells millions of moments of truth every day. Every single time a tap is opened, somebody calls the utility, opens a bill and so on is a Moment of Truth. A water utility becomes invisible when every single moment of truth occurs without the consumer having to use more time than is required to enjoy the service, i.e. the amount of time it takes to use the water. This model for measuring service quality in tap water is currently under development. If you are interested in this topic, please follow me on Twitter, LinkedIn or via my blog.

References

Cabrere, Haskins and Theuretzbacher-Fritz (2011). Benchmarking Water Services. Guiding water utilities to excellence. IWA Publishing and American Water Works Association.

This post was originally published on the IWA Blog.