Forces outside the control of the utility industry will create a pattern of
change that will transform the way the industry operates and create significant
opportunities for newcomers. The drive toward deregulation, the expectations
of financial markets, and the need to meet key reliability indices are placing
increasingly heavy pressure on utility companies to cut their costs. At the
same time, utilities are being faced with new technologies that could disrupt
the way they do business
and open the door for new market entrants that could pose significant threats
to their long-term futures.

Because the timelines of these technologies are unclear, utilities must consider
how to position themselves to make sure they can respond flexibly to the threats
and opportunities related to these technologies and to the threats that new
entrants will pose. At a time when all expenditure is subject to intense scrutiny,
high levels of operational service must be maintained. Any investments made
in inappropriate areas now may severely limit the potential for success in
the future.

Three Big Issues

Three major issues are putting pressure on utility companies to cut costs:
deregulation, regulatory trends, and financial markets’ expectations.

This pressure to reduce costs comes when utilities are also being expected
to maintain high levels of operational service. The recent high-profile outages
that hit parts of North America, Scandinavia, the UK, Indonesia, and Italy
demonstrated the economic and social implications of a supply failure. They
also raised questions about whether the failures were linked to an ongoing
pressure to cut costs.

In Europe, this pressure is being exacerbated as markets are being deregulated.
Across the European Union (EU), electricity and gas services are to be unbundled.
The challenge for utilities will be to retain existing customers and attract
new ones. In those countries that are not already deregulated commercial users
will be able to switch suppliers by the middle of 2004, and domestic users
will be given the same freedom by 2007. Monopoly network businesses are likely
to be separated and will be measured and regulated as standalone entities.
In this new environment, they will have to generate returns that meet the expectations
of their owners and their shareholders.

However, in the EU their ability to raise prices will be severely limited by
independent regulation. In Ireland, Italy, Norway, Spain, the Netherlands,
and the UK we already see utilities working to a formula that effectively reduces
their income year over year. Additionally, utilities in Ireland, Spain, and
the UK already face financial penalties for poor performance, and the Netherlands
plans to introduce similar strictures. Regulators are also using comparative
benchmarking between different companies to drive lower-performing utilities
to match the performance of their more efficient peers.

In North America, the move to deregulate at the retail level has all but stalled
as a result of the collapse of Enron and the fallout from the California market
collapse. In Canada, deregulation varies province by province.

As a result of the chilling of deregulation and the collapse of the trading
market caused by Enron’s demise, the focus of North American energy and
utility companies has returned to optimizing the performance of physical and
human assets and operational efficiency. The glitz of foreign acquisitions,
merchant energy plants, and energy marketing and trading as growth engines
has faded. Companies are now focusing on the regulated portions of the business,
energy production, and utilities energy delivery network.

A third critical issue lies in the changing attitude of financial markets.
To be blunt, utilities are no longer seen as a safe bet. A combination of factors
has brought this about, and the individual reasons vary according to the location
of the business. They include: wholesale market volatility, the disappointing
results of investments made by utilities in the Latin American and other continental
markets, poor stock market performance everywhere, pension fund deficits, and
continued forecasts of sluggish economic growth. Faced with a finite number
of customers in a monopoly market utility, companies have no chance to grow
organically. What’s more, in the view of the market, many have not yet
delivered enough synergies or benefits from previous mergers and acquisitions.
Utilities stocks have underperformed market indices, and the response of market
analysts has been cool. They have told clients to maintain or reduce their
holdings.

Faced with this potentially damaging nexus, utilities are being forced to act.
As we shall show, their choices are limited to six key actions, each of which
offers potential benefits as they build upon one another:

Regulation. The first and most basic area is the regulatory
framework within which the business must operate. Utilities must seek to set
the best agreement
they can with the regulator.

Asset lifecycle management. Efficiently managing the planned work that happens
on the network can have a direct link to achieving savings in the supply chain,
the required amount of maintenance-related work, and the overall reliability
of the network. Utilities need a clear and coherent asset strategy, maintenance
policy, and capital plan.

Customer satisfaction. With freedom of movement for customers now either a
reality or an imminent prospect, utilities would do well to concentrate carefully
on this area of concern. Utilities need real-time control, effective network
management, and efficient customer relationship management if they are to respond
well to the reactive requests of customers who are reporting faults or asking
for work to be done. Wherever possible, reactive work should be integrated
with the planned maintenance of asset lifecycle management. Again, this is
an area that calls for accurate and timely information.

Service delivery. Getting your service delivery right can be a consequence
of effectively integrating planned and reactive work programs – providing
you manage effective delivery of the work that has to be done. Utilities need
to drive out the inefficiencies in the delivery process. The key to efficiency
and reduced costs lies in a mobile-enabled workforce that can travel straight
from home to the first job of the day, and start work when they get on site.
Further, the just-in-time delivery of materials to the job site, so that crews
never have delays caused by the unavailability of materials, could drive an
additional 5 to 10 percent in crew performance. Eliminating wasteful “depot
time” at the start and end of each shift will drive out enormous amounts
of cost. The capture and sharing of information is very important whether there
is an internal labor force or a collaborative effort with third-party providers.

Figure 1 shows how integrating asset, maintenance, and work management is the
first step in a virtuous circle that puts management back in control and creates
benefits throughout the organization. Improving service delivery can result
in performance gains of more than 25 percent.

Supply chain. The development of work requests is the starting point for the
supply chain. Research shows that the data captured in the work request often
comes too late to be of any use in formal planning. The unpredictable nature
of demand, isolated functional departments, and the lack of powerful accurate
analytics causes inventory (and therefore cost) to build up along the supply
chain like a clogging artery. Utilities should focus on getting materials from
the manufacturer, and deploying them straight to the point of use. Utilities
are giving up between 10 percent and 15 percent of the available cost savings
in their supply chains because they haven’t gone down the same route
as manufacturers of motor vehicles and fast-moving consumer goods.

Support functions. Utilities also need to look at their information systems,
human resources, and financial controls and information to promote more efficient
operations.

The Changing Landscape

The third horseman of this potential apocalypse is new technology, particularly
disruptive technology that changes an industry in such a way that current competitive
and business rules no longer apply. In the past, we saw how distributed computing
and the laptop superseded mainframe computers and how digital technology transformed
the recorded music industry. In such cases, businesses have to embrace the
new technology, or be swept aside by it. Although much of the technology of
the network utilities has remained unchanged in the last two centuries, the
environment is changing rapidly. New micro-power technologies include fuel
cells, Stirling engines, micro turbines, solar, hydro, wind, and biomass (energy
from the burning of organic wastes, standing forests, and energy crops).

Of course, not all new technologies have a disruptive effect. Some will enable
network business to operate in ways that were previously impossible. For example,
placing embedded sensors at critical monitoring points will give the network
business access to real-time operating data for the first time. Intelligent
electronic devices, such as smart, programmable logic controllers, start to
act as the distributed intelligence hubs that become the conduit between the
operating environment and the business management systems that are needed to
monitor and manage the health of the network business.

Domestic combined heat and power (DCHP) units are undoubtedly disruptive technology.
Some, based on Stirling engine technology, will be commercially launched in
2004. Like conventional boilers, these units produce heat and hot water, but
they also use natural gas to generate electricity. This solution is more efficient
than traditional domestic energy solutions as it avoids the electrical losses
associated with power station conversion, transmission, and distribution, and
makes use of the heat generated as a by-product. Any excess electricity generated
can be exported to other local sources of demand.
In the longer term, similar DCHP units based on fuel cell technologies could
become commercially available. It is not yet clear which fuel cell technology
will dominate, but in general these would typically offer a higher power-to-heat
ratio and therefore extend the market to smaller homes with a lower thermal
demand, and offer greater opportunities for the export of excess electricity.

But When?

Although the trends are clear, the time frames are not. However, as an approximate
guideline, fuel cells in cars could be a daily fact of life by 2010, and General
Motors estimates that it will have a million fuel cell cars in production by
then.

Traditionally, startup costs and economics hamper the acceptance of new technologies,
but government pressures and incentives are starting to change the underlying
economics of some of these technologies.

Not all governments have ratified the Kyoto Protocol, but the target is to
reduce all emissions to 5.2 percent below the levels of 1990 by some time between
2008 and 2012. The EU is aiming for a target of 8 percent below 1990 and is
introducing carbon trading schemes accordingly.

It’s not necessarily traditional utility players who are going to capture
the new market space. Shell is heavily involved in wind energy with projects
in Spain, the UK, Germany, the US, the Netherlands, and Morocco. BP has roughly
one-fifth of the world’s solar market and is also involved in hydrogen
and wind energy. Sharp has been working in solar cells since 1959 and is now
the world’s largest manufacturer. Mitsubishi Corporation has a joint
venture on the development of hydrogen fuel cells with Shell and Johnson Matthey.
Motor manufacturers have invested billions of dollars on the development of
hydrogen fuel cells and now have concept cars and buses being tested.

With a lack of clarity on the timelines, utilities have to drive costs down
and maintain their options for flexibility by preserving their existing investment
in their network assets and technology. To do this, the utility needs, at least,
to know its intended strategic direction for both the evolution of its asset
base and supporting technology. To deliver on this, they need ever more information
about their individual assets, and that calls for the pervasive collection
of data through both mobile and remote monitoring devices. As we have seen,
the introduction of new technologies will result only in more and more devices
being put on the network.

To record the condition of assets, and to advise utilities of work that needs
to be done, information has to come back into a central repository where it
can be used meaningfully. And that can only happen if the utility’s business
applications are integrated closely to each other.

Only by getting these issues right are utilities going to get the relevant,
accurate information that they need if they are to have high-quality analytics
that will enable them to make the right strategic decisions for the business.
Utilities can then understand how to build, invest, or change their network
within acceptable levels of risk, delivering higher standards of service
at significantly lower cost.