Restructuring of the Australian energy industry gains momentum
Electric utilities are becoming more competitive as they restructure their operations
By H. (Tod) Kennedy
Asia Pacific Editor
The enormous degree of restructuring of electricity and gas utilities in Australia was highlighted at a recent three-day conference and workshop sponsored by the Electricity Supply Association of Australia (ESAA) in Sydney, Australia. However, these far- reaching changes are still in the formative stages as government-owned hierarchical systems give way to a culture of corporatization and privatization. According to one observer, “Functional silos, or ivory towers, are being toppled to make way for the new competitive environment.”
All this is encompassing a new area of cost cutting, staff reorganization and efficiency, as the leaner structures take over and can now offer more and quicker customer services. In the not-too-distant future, it is possible that electricity will be ordered by phone. Key words such as customer focus, loyalty, involvement, trust, benchmarking techniques, strategic alliances and market strategies are all part of today`s electric utilities` vocabularies. In the current environment, electricity and gas are now being recognized more as a commodity to be traded. The lines between buyer and seller have become increasingly blurred in today`s new energy market.
In a corporate climate, which changes daily, Australian utilities are encouraging more forums and conferences so their executives can keep up with marketing technology and industrial relations guidelines. PennWell Publishing Co., the parent company of this magazine, is also in the forefront of these changes with its EnergyMart conferences. The first one in the Asia Pacific region is scheduled for May 19-20, 1997, in Sydney, Australia.
Significant is the ongoing process of downsizing and the introduction of a different echelon of players into the industry. These comprise lawyers, economists, financial advisers and specialist corporate consultants to deal with the new culture of buying and selling electricity. Even engineers are soaking up the jargon of the marketing gurus but with guarded enthusiasm.
Speakers at the ESAA conference included David Eiszele, Western Power Corp. managing director; Greg Hoppe, Edison Mission Energy Holding managing director and CEO; Steve Blanch of the newly formed Eastern Energy, Victoria (state distributor); Ric Charlton of the COAG Gas Reform Task Force; Dr. Veronika Rabl of the Electric Power Research Institute (EPRI, USA); and executives from a cross section of electricity generation, transmission and distribution groups.
As always, environmental standards were recognized as a cost-effective part of the utilities business, but the possibility of a carbon tax received a collective thumbs down along with similar suggested imposts aimed at suppliers to provide revenue for government coffers, rather than funding for projects within the industry.
The conference was opened by Keith Orchison of ESAA, aptly backed by the association`s insig-nia–a flash of lightning across the stars of the Southern Cross. He then introduced Allan Moyes, AO and former chairman of Sydney Electricity, who chaired the conference and posed the initial question, “Will speed of change now increase, and if so, are we ready to take advantage of it?”
“Customer pressure is building up, protection is behind us, while customers are looking for prices and services as never before,” Moyes said. In addition, Moyes commented that federal and state governments are committed to deliver privatization, including foreign ownership. However, the general focus of papers was on doing business with customers in a profitable and sophisticated manner in the new business climate.
Grant Gustafson of Arthur D. Little spoke on the customer-driven future of the deregulated industry and its effect on integrated utilities, and the reinventing and development of operational customer service. “The integrated utility is simply one possible outcome of the drivers affecting the utility industry,” he said.
Gustafson said that the changes include new entrants such as US investors, intrastate and interstate competition and internal rivalry, all of which are being influenced by customer sophistication and choice. He warned suppliers of the danger of trying to be all things to all people, jumping through hoops at any cost or developing new core business activities to please a client. In Gustafson`s opinion, a supplier should first decide what customers it wants to work with and then determine the net value in acquiring and retaining those customers.
An instance was given of a major US utility which responded to deregulation early on by developing an uncoordinated laundry list of verbal and written customer services to retain major users. By failing to take a disciplined approach to customer service, this utility put incorrect values on various services which differed with the customers` values. The end result was the utility indulged in overservicing where such services were not highly valued.
Key lessons derived from this consultant`s work with the utility included the critical need to understand what customers truly need and the actual value the customers place on service/ancillary services. One should also look at the cost and options of providing ancillary services. In addition, customer needs and leveragable utility capabilities must be assessed in tandem. Utilities need to strengthen their capability to market and sell value-added services and other offerings, Gustafson said. Even small improvements in a company`s ability to strengthen customer loyalty can yield significant value.
In Gustafson`s opinion, customer value comes from several sources and increases over time, depending heavily on the strength of a supplier`s base offering. He further said that given the otherwise negative pressures of deregulation, utilities need to exploit all possible sources of customer value, including cost-effective new customer acquisition.
Frederick Baird of Putnam, Hayes and Bartlett-Asia Pacific Ltd., carried on the theme, addressing customer priorities, partnerships and strategic alliances. He said that to meet customer expectations, energy suppliers need to be customer responsive, proactive, understanding of the client`s business and possess knowledge of financial instruments and the forming of partnerships. In addition, they should have engineering expertise and understand transmission issues. A company should be delivering energy rather than merely supplying electricity solutions, said Baird. According to Baird, the utility should be able to offer product diversity and choice with the capability to hedge and swap products and energy services.
It was suggested that power companies can diversify risk by having a range of different customers while being vertically integrated. The carrot to the customer in transferring gains requires the need to convince customers that “lower cost” means lower projected and expected future costs, while making lower cost electricity a least-cost total service, said Baird.
The electricity provider should consider overall load management by recognizing when electricity is needed and selling it in conjunction with other services, including time-of-use.
If consumers are unable to manage exposure to highly correlated, profit-limiting events, they face huge funding risks, pressure on credit ratings and poor profits. A highly competitive market will see pressure on energy suppliers to share business risks because electricity consumed by large users tends to be used to produce price-volatile commodities. Many such businesses do not want major energy suppliers which benefit from their customers to be immune to market risk. Similarly, increasing competition will force existing suppliers to move away from “comfortable” tariff arrangements.
Other issues include quality and security of supply and interruptible loads as a cheap means of meeting obligations which can be mutually beneficial.
Douglas Pitt of ABB Transmission & Distribution Ltd. highlighted some of the negatives that the electricity utilities industry (EUI) would possibly face, including dramatic downsizing to meet productivity goals, reduced engineering expertise, loss of long-term product knowledge and a reduced ability to monitor suppliers quality assurance performance.
EUIs were becoming more reliant on performance specifications rather than detail specifications and opting for strategies of outsourcing to suppliers, consultants and maintenance organizations. This posed the question, “How can these changes be sustained and system reliability maintained?” Part of the answer is to remove excess costs and drive the system harder. Another is to encourage suppliers to take over more of the responsibility of the technical and associated supply services. However, the supply system will be dependent on an efficient and effective supply chain.
In recent years, the ESAA equipment rationalization taskforce, with input from the Electrical Engineers Association of Australia, has embarked on a program of equipment standardization covering a range of cable and transformer products. The thrust of this combined cooperative effort was to develop a standard specification for products to reduce the vast number of product varieties promoted by the EUIs. Its aim is to reduce tendering documentation and design application efforts for both parties, with benefits of economies of scale, rationalization of materials, reduction of inventories and unit costs.
According to Pitt, the newly formed distributor utilities are developing into commercial supply management activity companies. However, this situation only occurs if the standardization process has been carried out between the customers and the suppliers, he said.
One of the applauded success stories was produced by Blanch of Eastern Energy, Victoria–a state that has led all others in rampant privatization. Since moving away from government ownership, Eastern Energy has reduced its staff to 10,000 from 23,000 in 1988 and its customer service businesses from 18 to six (Figures 1A-C).
The restructuring involved flattening the hierarchy, recruiting a new management team and closing a regional office and four depots, along with reduced staff and vehicle fleets. All this has resulted in a salaries saving of (US)$8 million per year and a similar reduction in capital expenditure. The 1994-1995 budget of (US)$104 million has been reduced to (US)$72 million.
With the implementation of customer focus, benchmarking and continuous improvement, using quality guidelines to ISO 9002 standards, targets have been met and operational costs have been under budget. The end result was the company`s sale to Texas Utilities, USA, for (US)$1.65 billion.
Average one-day installation of services for the utility`s customers is now comparable with world standards. In addition, a proud safety record has been maintained with a lost time injury frequency per year of only eight days compared with a national average of 27, which is slightly better than the US average.
Eastern`s contractor usage is well above the national and US averages–mainly due to severe employee reductions. But the challenge goes on, and unacceptable outages are expected to be overcome with the installation of new automatic control gear. Low asset utilization is another issue, but plans are under way to rectify this problem.
Government and greenhouse
The Australian Government`s National Greenhouse Response Strategy (NGRS), devised in 1992 and updated in 1995, was established to stabilize greenhouse gas emissions, at 1988 levels, by the year 2000. Emissions will be reduced a further 20 percent by 2005
Senator David Brownhill, of the Primary Industries & Energy Department, spoke on the nation`s drive for international competitiveness in the energy market and confirmed the government`s encouragement to reform the electricity, gas industry and renewable energy services in a new internationally competitive energy market. This includes developing ways to mitigate greenhouse emission in all sectors of the economy as part of NGRS`s regular review.
According to Eric Groom of the Independent Pricing & Regulatory Tribunal of New South Wales, the government is taking a hands-off position and is encouraging a self-regulating electricity supply industry with regard to greenhouse gas control. A “green pricing” trial program has been established in the Hunter Valley (mining and winery district) to seek expressions of interest in supply and demand for “green energy,” along with a range of options for customers.
Dr. Peter Brain and Dr. Ian Manning, of the National Institute of Economic and Industry Research, addressed greenhouse goals by improving energy efficiency and international competitiveness but warned that government policy might initiate the demise of some inefficient, but competitive, energy production processes. The restructured environment should offer new opportunities of delivering energy, innovation in product design, process enhancement and the exchange of ideas. They pointed out that an entrepreneur can use the concept of energy efficiency to gain a competitive edge. This would involve such things as energy-efficient customer appliances and cogeneration for both in-house and export of energy.
This theme was further enhanced by EPRI`s Rabl, who championed the progress in electrotechnologies. “Although electricity is cheaper and more efficient than gas, customers are looking for value rather than cost,” she said. As an example, Rabl said that modern adjustable speed drives are forecast to save some 15 billion kWh in the US during the next 15 years, but more important to the user is the new drives can closely match the speeds of a specific process or application with better controllability characteristics.
Other technology developments mentioned by Rabl were advanced electric motors, the advantages of electric arc furnaces over coke-fired types and advanced electric heat pumps, including multifunctional water loop units, microwave fabric dryers and freeze concentration and dehumidification equipment (Figure 2).
Harry Schaap of ESAA ran with the technology theme in relation to communications, pointing out that nearly every building, including most dwellings, have telephone lines linked to ever-expanding communication facilities and pathways.
Every circuit switch or power outlet can also be a communication carrier, enabling direct interaction between customers, their appliances, plant and equipment and the electricity supplier. When this occurs, it will no doubt provide unprecedented opportunities for the tele-electric industry and customers alike, according to Schaap. With the advent of smart meters and new power outlet switches to control equipment operation, appliances will in the future be able to perform a multitude of functions without separate external controls. In the not-too-distant future electricity utilities, in partnership with telecommunications companies, will almost certainly become tele-electric companies.
Left to right, Steve Blanch, Greg Hoppe and Dan Spaulding, three prominent Victorian members of ESAA discussing the outcome of the ESAA Conference, “Pursuing Lower Electricity Cost & Market Success.”