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US utilities see the light

With US utility companies receiving conflicting signals with regard to deregulation, many are moving to rationalise business processes in order to generate the cash needed for investment.

Steve Bucalo, Capgemini, USA

In June 2004, Capgemini’s third survey of global utility executives revealed that there was a very clear need for utility companies to pay significant attention to investments needed for electricity reliability. Since then, little has changed in the US regulatory environment. No energy legislation has been brought to Congress for a vote. The federal agency reforming the wholesale electricity market in the US is still in negotiation with the industry. And the 2003 blackouts continue to be examined for what they can reveal about the overall North American utility grid.

Yet despite the apparent status quo, much is changing in the way some utility companies are positioning themselves to deal with this environment. There are nagging doubts as to whether deregulation will move forward at all, but nonetheless some utilities are taking matters into their own hands, seeking to solve some problems through their own investments in much needed infrastructure. These are welcome developments, as North American utility companies move out from under the dark clouds of 2002 and 2003.

The situation

The prospects for continued progress toward deregulated power markets continue to languish in uncertainty in North America. Capgemini’s own survey of more than 170 utility executives indicates that investor and consumer confidence in deregulation seems exhausted and unlikely to change. US regulatory agencies continue to send the utility industry a seemingly contradictory message: revamped regulation is the key to continuing progress toward a deregulated market design.

Figure 1. Investor and consumer confidence is at a low point in the USA
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The resulting situation is paradoxical, in that the call for increased investments in transmission grids is countered by a lack of incentive for such investments. A September 30 report from the Federal Energy Regulatory Commission (FERC) admitted as much when it said, “It is important to implement cost recovery policies in order to encourage investments in our nation’s bulk power supply system. Companies that are engaged in the evaluation, planning, operations, maintenance and construction of bulk power supply facilities need assurance that their prudent investments to safeguard security and reliability will be fairly compensated.

“As the regulator of interstate energy commerce, FERC is uniquely positioned to study, issue and implement such policies.” The agency has not been given the authority to do that, however. In view of this well-intentioned statement, it is possible to observe that the utility industry is taking matters into its own hands, taking great strides toward adopting cost-cutting and asset optimization strategies to find investment money for internal investments in electricity reliability and delivery.

Indeed, the executives surveyed by Capgemini concluded that continuing fallout from the collapse of Enron in 2001 and the manipulation of the California energy markets dealt bigger blows to investment and consumer confidence in 2003 than even the lack of a finalised US energy bill or summer blackouts. But as an example of their being twisted in the wind, eight in ten of the executives surveyed believed that the August 14 blackouts affecting the midwest and northeast US, and Ontario, Canada, served as a wake-up call to fix the outdated grid. Taking matters into their own hands is appearing to be a prudent strategy given the lack of progress on other fronts.

Adding another twist, in April the joint US-Canada Power System Outage Task Force investigating the 2003 blackout, offered 46 recommendations for preventing and reducing the magnitude of any future blackouts. It was found that the causes of the blackout in August were similar to the causes of past blackouts and efforts to implement earlier recommendations have not been adequate in both Canada and the US. The price tag for the US economy alone was estimated at between $4 billion and $10 billion. In Canada, about 18.9 million work hours were lost due to the blackout, and manufacturing shipments fell by C$2.3 billion ($1.8 billion) in Ontario. The single most important recommendation, in the eyes of the task force, included the need to pass US Congressional bills to make compliance with reliability standards both mandatory and enforceable, while ensuring that competition does not affect reliability. The task force argued that most of the other recommendations would be achieved after a legislative decision in both Canada and the US. The continuing gridlock over an energy bill was mirrored in the Capgemini survey results of power executives, with more than half of the respondents being less positive about the potential for continental deregulation, presumably because of the lack of a federal regulatory structure adequate to prevent the weaknesses of deregulation as experienced in California.

The Capgemini survey, however, did illustrate utilities’ need to earn their consumers’ trust through better customer experience, service, and performance as well as offering responsiveness to the vision of regulators and shareholders alike. Events since 2001 appear to have focused industry ” and regulators ” on the need to ensure reliability in order to restore confidence and encourage new investment.

Despite this environment, utilities will have continuing need for investments, especially as there are continuing worries about the possibility of future blackouts. Investors will be reluctant to pour money into the sector, and this will force the industry to continue its third year of cost cutting and asset management approaches to generate free cash flow for investment. The effect of the US-Canadian task force report will be to focus continued public pressure on the need for investment, while not offering, as we have seen from the recent FERC report, the tools for investments to come from outside the industry.

Need for improvement

In this sort of environment in North America, it is safe to conclude that operating improvements will need to come from IT-generated improvements in cost cutting, asset management, outsourced customer relationship management and the optimization of power plant portfolios. And by moving to these sorts of business improvements, utilities are being asked to accept that the old cost-plus days are long gone, despite the US government’s inability to develop a comprehensive policy. The end result of the adoption of innovative business process solutions contains the promise of lower prices to consumers and returns to stakeholders, in the eventuality that deregulation proceeds. Industry organizations and publications have taken note of the need for emphasis on organizational agility. A recent issue of an industry newsletter recommends implementation of the following agile oriented structures at a macro or enterprise wide level:

  • Outsourcing to align technology, operating costs and business strategies
  • Setting up mutual aid agreements for peaking requirements that exceed local capabilities
  • Improving customer service so that it is delivered quickly and inexpensively
  • Developing a corporate culture that stresses flexibility as a goal that needs to be realised up and down the organization
  • Managing knowledge in a timely manner and developing decisive value propositions.

Figure 2. There is little incentive provided for utilities to invest in new transmission capacity or to fix the outdated grid
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In addition, at the micro or tactical level, a number of utilities have also begun to empower their customers through online services web sites, refusing to delay offering self-service because of the slow development of competitive retail energy markets across most of the US. A recent CRM Magazine Return on Investment column profiled Cinergy Corporation and its efforts to move its 1.3 million residential customers from ‘dialing to dial-up’. Using CRM to allow customers to review their accounts, make payments online, submit meter requests and submit requests to turn power off or on through the internet enables Cinergy to drive traffic to its web site (a 52 per cent increase in visits to its online services site between July 2003 and July 2004). Cinergy can then identify the busiest parts of its site and put the content that customers want where it is easier for them to find; make information generally more accessible to customers; and prepare in-depth site usage reports, including information on specific users. This might sound like basic blocking and tackling and hardly the stuff of business transformation in the wake of the competitive markets that were forecast by utility executives and pundits alike a few years ago, but consider that Cinergy estimates that it costs $5 to $10 for calls to the call centre for customers to complete different services compared to à‚¢24 to à‚¢45 to complete those same services through the internet. How does that sound for cost leadership and service level improvements for a minimal investment?

Figure 3. There are mixed signs from the government over which direction it is going to take
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The energy example

The recent willingness of the Dallas-based utility TXU to form the joint venture Capgemini Energy provides another example of evidence that companies in the US utility industry are indeed restructuring themselves along the agile model above.

Formed in May 2004 to save up to $175 million in annual operational savings for TXU, Capgemini Energy transferred 2700 employees from TXU with the intent of transforming the processes it uses to provide improved, more efficient and cost effective services to TXU for information technology, human relations, supply chain, finance and accounting, billing and revenue management, call centre operations and regulatory compliance.

Figure 4. Utilities have taken the lead to generate the investment by outsourcing business processes
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In addition to introducing new and streamlined business processes, the company is leveraging technology, and Capgemini’s global distributed delivery centres, to eliminate manual procedures, integrate and consolidate operations and create an efficient, effective and standardized environment that will support future growth as other utility companies join the platform. Capgemini Energy outsources $510 million of TXU’s $1 billion expenditure on SG&A costs. Over the course of the ten-year deal, TXU believes it will save $1.5 billion in free cash flow, money that it envisions investing in its substantial generation and delivery assets.

So far, so good, according to Dan Farrell, a senior vice president from TXU overseeing the relationship between the two companies. Farrell recently offered the example of how a previously fragmented customer service operation has already been improved. He said that TXU had five call centers operated by four contracts. After 90 days of consolidation and transformation, Farrell said the average time that it took operators to respond to customers decreased from, in some cases minutes, to 15 seconds or less, a metric called for in the creation document for the new company. Farrell offered this as just one example of the way that TXU is freed from managing call centers to turning its focus to running generators and delivering electricity.

Similar transformations are occurring throughout the Capgemini Energy organization. The company is moving 10 to 15 of its financial and accounting business operations to a centre in Krakow, Poland, that Capgemini developed for its client International Paper. About 60 information technology and supply chain management positions are being moved to Bangalore, India. On the flip side of the coin, Capgemini is likely to move some of its other clients’ data storage needs to the vast server farms that Capgemini Energy gained from the TXU deal.

New solutions

As FERC’s summary says: “The North American electricity grid faces a challenge ” it uses some technologies invented in the early 1900s and facilities built primarily in the mid 20th century to serve an economy with electricity demands and needs of the 21st centuryU[While] there has been extensive investment in generation plants to meet the growing thirst for electricity, there has been little corresponding investment in transmission lines to connect those loads to the plants.” The report cites studies showing normalized transmission capacity declined at a rate of 1.5 per cent per year, from 1982 to 2002, while electricity sales doubled.

These issues alone, not to mention investors’ demands for better returns and consumers’ demands for lower electricity costs in an era of rising fuel costs, require power utilities to take measures into their own hands, developing an agile and flexible approach to managing and improving their business operations, in order to develop their investment solutions.

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