CUSTOMER PREFERENCES IN SETTING TARIFFS BRETT MATHIESON AUGUST 2014

THE POINTY HEADED ECONOMISTS VIEW

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• Variable prices should be based on LRMC

• Fixed charges are the balancing item to

allow the efficient business to meet its

revenue requirement.

• When SRMC > LRMC the prices should

increase to SRMC.

• Provides a signal to customers about the

efficient use of the resource

THE BEHAVIOURAL ECONOMISTS INPUT

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• Asymmetric elasticities of residential

water demand

• Reference block tariff impact block

pricing.

• Reference transaction impact on cost

recovery.

• Social comparison.

WE DON’T OPERATE IN A VACUUM

We are influenced by: Externalities – climate change, drought, etc

Customer pressure – media, letters more

control over bill

Regulatory pressure – ESC, ACCC, Ofwat,

Government pressure – Efficiency, lower prices,

Debt

Academic pressure – Scarcity Pricing, Choice,

Competition

Comparison with other industries – Electricity

Retailers only

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Internal Pressures External Pressures

YVW’S VIEW - OUR 2020 STRATEGY

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OUR CUSTOMER FOCUS

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“service is not a department, it is a mindset”

“If you are not servicing a customer you are

servicing someone who is”

• Tracking Research Program – (infield 10 months of the year) [monthly, quarterly,

bi-annual reporting, 24/7 dashboard access]

Residential Service Evaluation Monitor

Residential Brand Monitor

Non Residential Service Evaluation Monitor

Non Residential Brand Monitor

Price Elasticity Benchmark Study

Qualitative Study Dips (2-4 annually)

Value Study (July 13)

Hardship/Vulnerable customers (May 2014)

Online Customer Self Service (February 2014)

Backlog Customer Review (September 2013)

WE RESEARCH OUR CUSTOMERS CONSTANTLY

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OUR MARKET/CUSTOMER RESEARCH SHOWS

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5 Research studies over a period of 10 years provides clear consistent insights into

what customers want in relation to pricing/charges.

Customers want simple and transparent information about:

• Basic philosophy behind pricing structures & charges

• Simple explanation of charges

• Is the basis of charges the same for everyone

• What will my bill look like in the context of these charges

• What should I am for (benchmarks)

• How do I compare – relevant, actionable & achievable

“We actively compare our water

usage to the family sizes on the

water smart bill.”

FOR OUR WATER PLAN THE ESC CHALLENGED US

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BLACKBURN LAKE

“without clearly

committing to

creating value and

delivering value to

your customers,

there is no such

thing as a fair and

reasonable price”

YVW’S WATER PLAN ENGAGEMENT PROGRAMME

‘Roundtable’ forum with over

100 business customers

Six-hour deliberative forum

An on-line portal

Focus groups

Workshop

An on-line quantitative survey

VERY HIGH LEVEL OF PRE-EXISTING CONCERN OVER FUTURE PRICES

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Some groups were significantly more concerned about

future prices, those:

who owned their home (8.2) vs. (7.0) among renters;

with a garden (8.0) vs. 7.1 among those without a garden;

receiving a water bill concession (8.4) vs. (7.7) among

those who were not receiving one

with a low household income (8.5) compared to those

with a medium (7.7) or high household income (7.4)

Older people 55+ (8.4) most concerned compared to

35-54 (8.1) & 18-34 (6.8)

IMPORTANT FOR CUSTOMERS TO UNDERSTAND PRICES

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• Customers who were more confident they

understood how water and sewerage

prices were structured – Their satisfaction

was 8 compared with respondents whose

confidence was fair 6.8 or low 6.1.

• Customers whose household income was

low were significantly more confident they

understood how prices were structured

• Low income customers more likely to

scrutinise their bills which is a good place

to promote customer support program

CUSTOMERS WANT REWARDS FOR WATER SAVING EFFORTS – PRICE ISN’T ENOUGH

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• Consistent concern expressed that

they weren’t seeing a reduction in their

bill despite their water savings efforts.

• Many call for rewards for efficient

water users including those with water

tanks and other water saving devices

• Suggestions for higher usage charges

lower fixed charges

THE PROCESS FOR TARIFF DESIGN

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TARIFFS FOR CUSTOMERS THAT UPSET ECONOMISTS

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1. RISING BLOCK TARIFFS

2. 100% VOLUMETRIC

RISING BLOCK TARIFFS TO ENCOURAGE WATER EFFICIENCY

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• Overwhelming customer support

• Conserve water

• Encourage alternative sustainable

sources

• Quarterly blocks send more frequent

signals to customers compared to

annual blocks

• Introduces a seasonal element

• Block 1 – Essential

• Block 2 - Reasonable outdoor use

• Block 3 – High use

DRIVERS OF PREFERENCES – CLAIMED WATER USE LEVEL

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Wanted Three Steps

• Low water use

• Owned home

• Not on a concession

Wanted One Step

• High water use

• Dissatisfied with retailer

• Rated value of water and sewerage services low

CUSTOMERS PREFER TO KEEP 3 STEP TARIFFS

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Wanted 3 Steps

• Encourages Water Saving

• Better for low users/rewards water

savers

• A cheaper rate will pay less

• Use more pay more

One Step

• Easier to understand less complicated

• Cheaper rate will pay less

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RESEARCH ON CHOICE LED TO 100% VOLUMETRIC OPTION

Unrestricted tariff

(for customers who are happy to pay extra to avoid restrictions and want certainty )

Dynamic scarcity “dam tariff”

(for customers who know the value of water)

Community tariff

(for customers who want to contribute to water for community facilities)

Green tariff

(for customers who want to contribute to better environmental outcomes.

Similar to “green energy” tariffs)

100%

Optional

Tariff

Usage based tariffs are seen as

a faired option, although most

customers are unhappy with

the fixed sewerage component

because it can not be changed

through behaviour

“sends the wrong message

… have money so stuff the

rest of you (Hawthorn, low

water user)

“this should

come under

taxes and rates”

(Hawthorn, low

water usage)

Water conservation should be top of mind all of the time,

not just when dam levels are low in order to minimise any

negative environmental impacts (low volume customer) “Too complicated to explain

and implement” (Hawthorn,

low water usage”

In regard to a scarcity tariff - customers are split between those who feel it is

a good idea and those who feel there is too much uncertainty around the

cost variability and the environmental consequences of not conserving water

perceived as

encouraging

excessive water user

Confusion as to

whether this is

already covered in

the parks charge

(mainly landlords)

Feel good way to contribute to the community

Helping the environment is

viewed as a good thing, however

the additional cost limits interest

with most customers believing

that this should be paid for by the

government

“yet again another expense” (Coburg, low

water usage)

“I think we pay enough

with the parks charge

(landlord)

“Allows us a

better world to

live in” (tenant)

The ability to influence the

outcome of the water bill is

thought to be limited

We put a number of tariff options to customers during market research ….

Lots of insights but no common view….

OBJECTIVES OF THE CHOICE TARIFF RESEARCH

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At an overall level, the key objectives of the research were to:

Determine if residential customers would value a choice of billing tariffs

Assess the overall appeal of a number of specific tariff pricing concepts

Gage their level of support among the community

How best to configure the preferred pricing

Best way to communicate

LITTLE UNDERSTANDING OF CURRENT CHARGES

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• Customers tend to focus on what they have to pay

Total amount that needs to be paid

How does that compare to previous quarters

• Customers have strong views on the charges though

Little incentive to influence their water usage because of all the non water charges

Saving water is what very household should be aiming to achieve (and should be rewarded for doing so)

Some customers believed that a minimum charge was appropriate to ensure that an appropriate level of service is maintained

User Pays - People who consume more should pay more as they are putting a strain on the system

CHOICE : THE OPPORTUNITY TO HAVE CONTROL OVER WATER BILLS

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1. Unrestricted – had appeal with concerns for the community/environment

Good to offer choice to those that can afford it

People can decide how and when to use water

Reduces the value of water, creates divisions in society and practical implementation

2. Scarcity – polarises customers

Matches supply and demand & bills down when storages high

Should always be an incentive to conserve water, not fair as rainfall is not within

customers control, concerned about how often prices would change

CHOICE : THE OPPORTUNITY TO HAVE CONTROL OVER WATER BILLS

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3. Green – supporting environment good but additional cost prohibitive

Provides an option to make a difference

Perceived as expensive and unaffordable, difficult to measure the outcomes and parks

charges should cover this.

4. Community – good idea in theory

Positive community benefit

Extra cost unwilling to pay, user pays (Sports clubs should pay) & should covered by

parks charge

100%

Optional

Tariff

SUPPORT FOR 100% VARIABLE TARIFF TRIAL

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Some customers have been frustrated over the size of fixed charges on

their bill. In response, we tested the option of piloting a new tariff option

that is 100% variable. They were strongly supportive of the idea that they could have a degree of choice.

“I would wait to see how the

others went before signing up.”

“This is where incentives come into play, we

start to get a bit more control.”

THE BIGGEST CHOICE IS ALREADY AVAILABLE

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WARNING FOR REGULATORS & GOVERNMENT

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Good regulation does not always

produce good outcomes for the regulated

sector, but bad regulation will almost

always contribute to bad outcomes.

Ashley C. Brown

John F. Kennedy School of Government

Harvard University

THE ROLE OF THE ECONOMIC REGULATOR

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1. Focus on efficient revenue requirement to achieve the level of service customers

are willing to pay for.

2. Price control – Tariff Basket/Revenue Cap with side constraints

3. Businesses should demonstrate that prices are => LRMC

4. Allow business to introduce tariffs options