Network Revitalization by Chris Trayhorn, Publisher of mThink Blue Book, March 11, 2004 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. Filed under: White Papers Tagged under: Utilities About the Author Chris Trayhorn, Publisher of mThink Blue Book Chris Trayhorn is the Chairman of the Performance Marketing Industry Blue Ribbon Panel and the CEO of mThink.com, a leading online and content marketing agency. He has founded four successful marketing companies in London and San Francisco in the last 15 years, and is currently the founder and publisher of Revenue+Performance magazine, the magazine of the performance marketing industry since 2002.