April 26, 2020
Survival of the Fittest: Mastering the Changing Utilities Market Model via Strategic Partnerships
For as long as most of us can remember, the world of the utility operator seemed predictable, hindered by relatively few unknowns.
For example, utilities earned relatively predictable and often steadily growing rates of return over relatively long time horizons. Regulators often agreed that these rates of return were justified by the numerous capital projects planned to extend electric, gas or water service to new communities, or to improve reliability or quality of a service. As customers, our experience of our utility was punctuated by the major events in our lives—moving out from one place and moving into another. And for a good many of us, signing on to work at a utility in your twenties meant signing on for your entire career. Not a bad deal for the times, really. But as they say about time, if it does anything at all, it moves along, giving us the opportunity to change and move along with it.
What’s it like to work at a utility today? In a word, it’s changing.
Let’s start with the relationship with our regulators. In a world where information flows much more readily across social media apps and the “on demand” news media, regulators must manage and respond to a broader group of involved stakeholders, including intervenors, communities, energy conservation groups, and local and state government concerns. In response to that broader group of concerned parties, regulators have ratcheted up their review cycle and exertion of due diligence over utility rate cases, which has in turn led to an increase in the sheer number of rate cases and revised rate cases, and steadily decreasing allowed rates of return.
Add to that the expectation from regulators and customers that utilities develop a sort of “climatic prescience,” almost as if we expect them to channel their inner Farmer’s Almanac, predicting and responding to natural disasters before and as they occur. Larger utilities have disaster recovery and business continuity plans, and some even allocate time and resources to practice how to respond to disasters. More modestly sized utilities may not have the same resources. But the bottom line is simply this: there is an expectation that utilities have a handle on how to prepare for and respond to these types of disasters, and when disasters do occur regulators differ in how they treat utilities pursuing rate recovery.
Now let’s talk about our own expectations as utility customers. Today, we are much less willing to tolerate a customer experience that is anything less than proactive and personalized. We are used to Uber. And Amazon. And FedEx. We like that our service companies maintain contact with us. They tell us what is happening with our order, and even anticipate other products and services we may like, since we signaled something about our interests when we placed an order in the first place. We have become aficionados of personalized customer service models. And we’ll let others know about our experiences via numerous social media channels. With our service expectations now highly honed, we turn our attention to our utility service providers. Not surprisingly, we expect them to personalize their service models just like Uber, Amazon and FedEx. We demand that same “constantly connected” customer experience, from moving into a new neighborhood and activating service, to permitting new construction on our properties, to reporting an outage, to participating in new utility programs. We want self-service apps (we have them with our banks now, so why not our utilities?), and we want our utility to remember our communication preferences. If we do call in, we don’t like waiting for very long, or having to repeat information that we already input in the IVR.
Let’s recap: constrained rates of return signify utility budget constraints, while expectations from regulators and customers are increasing, and there are new market entrants and service providers nibbling at the edge of the traditional utility service model. In some rather fundamental ways, the traditional utility service model is under attack. What does that imply? The industry landscape has now become a basic Darwinian scenario, and it’s the fittest that shall survive and thrive.
So what constitutes the “fittest”?
The fittest adapt as rapidly and effectively as they are able. It stands to reason that adaptability can be fueled by some form of symbiosis. Symbiotic relationships are defined as groups that work together to bring forth the best and often complementary skills of each, to provide the greatest benefits to one another, thereby helping both to thrive. Applying this concept to the world of utilities, the fittest utilities will survive and thrive through key partnerships with complementary product and service providers who can deliver the latest enabling technologies without forcing the utility to become experts in implementing and managing those technologies. Such strategically planned and executed partnerships allow the utility to focus on the things that will satisfy key stakeholders, namely:
- Continuing to invest in and manage the service infrastructure and associated assets to ensure reliable delivery of commodity services
- Evolving to accommodate new business requirements and programs like Tesla Powerwalls or offering low income programs that support those who are in need
- Delivering personalized customer service, and new, targeted products and services that appeal to the customer base, and
- Transparently monitoring and assuring compliance with regulations and regulatory Service Level Agreements (SLAs)
And all of the above must occur within the allowed Rate of Return (ROR).
These key partnerships will allow utilities to take advantage of innovative, comprehensive frameworks for enabling core business processes. These frameworks will evolve as regulatory, customer and stakeholder requirements change. Accordingly, the partners who have…
- Demonstrated that they understand the current pain points and needs of utilities
- Established a comprehensive business process framework that can be delivered in a standard, commoditized way (and yet can meet the often specialized regulatory requirements for each utility), leveraging advanced technologies
- Attracted dedicated employees with deep experience in the associated technologies and business process frameworks, and
- Offered tailored service packages at rates that work within each utility’s funding model
…are the partners utilities should trust and leverage to assist them with surviving and thriving in the new era of providing ever-improving, advanced and innovative utility products and services.
Let’s consider some recent situations:
- A small, northern electric utility serving 50,000 customers finds its new CIS limits its ability to meet emerging business requirements. This utility implemented a new CIS a few years ago, but found the solution to be too custom, and their emerging business requirements outpaced their new system as it was implemented. The utility issued a competitive bid to select a partner to manage the application, repair functional and technical aspects of the solution, and to prepare the solution for integration to advanced technologies, like Advanced Metering Infrastructure (AMI). In this case, the utility selected a key partner who rapidly evaluated their needs and responded, delivering the missing expertise and capabilities and allowing the utility to focus on AMI and other strategic pursuits.
- Large southern utility serving over 2 million deregulated electric services and over 3 million multi-jurisdictional gas customers, with a home services division needs to assure investments deliver key performance metrics. The utility has recently completed a large business transformation, re-implementing ERP and regulatory reporting across its three lines of business and concurrently replacing a legacy mainframe CIS. The new solution includes a process health dashboard and executive dashboards that readily indicate how well the utility is meeting market transaction SLAs and includes internal process controls and auditable reporting for the regulator. The utility leverages several key partnerships to support this newly upgraded technology footprint. The partnerships provide strategic capabilities that the utility cannot readily attract and retain, and cost-effective managed services for the newly implemented technologies, allowing the utility leadership team and business team members to focus on strategic initiatives that will fuel growth.
In summary, the case for change has never been more apparent. Getting there isn’t going to be easy, but let’s face it—waiting to change won’t make it any easier. The first step is recognition and preparing the key stakeholders (executives, investors, regulators, employees, partners and customers) for the desired changes. The next step is implementing and managing the change. We at Utegration like to refer to that as “connecting a utility to its future” and we stand ready to support our customer utilities in operationalizing their strategic plans. And the final step is…well you already guessed it: leveraging that foundation and those key relationships as you continue on your path of constant evolution. It’s simple in words, less simple in practice, but all doable with the right vision, strategies, tactics, and relationships.