Future Shock: Future Shock: What Did Restructuring Uncover? What Did Restructuring Uncover? What Will the Next Industry Upheaval Bring? What Will the Next Industry Upheaval Bring? April 12 April 12 th th , 2005 , 2005 Presented by Eric P. Cody Presented by Eric P. Cody
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Future Shock: What Did Restructuring Uncover? What Will the Next Industry Upheaval Bring? April 12 th, 2005 Presented by Eric P. Cody.
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Future Shock:Future Shock:What Did Restructuring Uncover?What Did Restructuring Uncover?
What Will the Next Industry Upheaval Bring?What Will the Next Industry Upheaval Bring?
April 12April 12thth, 2005 , 2005
Presented by Eric P. CodyPresented by Eric P. Cody
Has utility restructuring failed? Has utility restructuring failed? What changes have been wrought?What changes have been wrought? What lessons learned? What lessons learned? Are metering and billing safe now?Are metering and billing safe now? What about utilities that didn’t have to What about utilities that didn’t have to
run the gauntlet?run the gauntlet? Who won?Who won? Who’s going to prison?Who’s going to prison? What’s next?What’s next?
Questions to be AnsweredQuestions to be Answered
Lessons fromLessons fromPreparing-for-CompetitionPreparing-for-Competition You never run half as hard as when You never run half as hard as when
someone is chasing yousomeone is chasing you
Customers want choices, not necessarily Customers want choices, not necessarily ChoiceChoice
Regulators must regulateRegulators must regulate
Competition introduces new concepts and Competition introduces new concepts and dynamicsdynamics
Metering is not easily unbundledMetering is not easily unbundled
Central ThemeCentral ThemeThe process of The process of preparingpreparing for retail for retail competition yielded important insights competition yielded important insights into how individual utilities perform their into how individual utilities perform their core customer functions, and what they core customer functions, and what they cost.cost.
…however, few utilities have capitalized …however, few utilities have capitalized on this deeper understanding of retail on this deeper understanding of retail operations. operations.
Through the Looking Through the Looking GlassGlass
Restructuringlegislation
Restructuringlegislation
Commissionaction to
deregulate
Commissionaction to
deregulate
Developrestructuring
plan
Developrestructuring
plan
Prepareunbundled
cost-of-service
Prepareunbundled
cost-of-service
Revalue assetsin market
setting
Revalue assetsin market
setting
Comply withaffiliate
standardsof conduct
Comply withaffiliate
standardsof conduct
Divest assetsDivest assets
Developunbundled bills
Developunbundled billsDevelop
unbundled rates
Developunbundled rates
Estimatefixed vs.
avoidable costs
Estimatefixed vs.
avoidable costs
Estimatestrandable costs
Estimatestrandable costs
Transfer assetsTransfer assets
Maintain assetsMaintain assets
Retailcompetition
Wholesalecompetition
File forstranded cost
recovery
File forstranded cost
recovery
File backoutcredits
File backoutcredits
Where Utilities LookedWhere Utilities Looked
More frequently—More frequently— Strandable assetsStrandable assets Overall cost structure and kWh costOverall cost structure and kWh cost Unbundled costsUnbundled costs
Less frequently—Less frequently— Customer preferencesCustomer preferences Employee adaptabilityEmployee adaptability Alternative sources for non-strategic Alternative sources for non-strategic
workwork
RegulatedMonopoly
RegulatedMonopoly
RegulatedMonopoly
RegulatedMonopoly
RegulatedMonopoly
RegulatedMonopoly
CompetitiveEnergySupply
CompetitiveEnergySupply
Re-regulatedUtilities
Re-regulatedUtilities
CompetitiveEnergySupply
CompetitiveEnergySupply
CompetitiveEnergySupply
CompetitiveEnergySupply
RegulatedMonopoly
RegulatedMonopoly
PartiallyUnbundled
Utilities
PartiallyUnbundled
Utilities
“VirtualChoice”
“VirtualChoice”
Pre-1998 1998-2001 2001-2003 2003
Structural DivergenceStructural Divergence
Load Supplied CompetitivelyLoad Supplied Competitively(% Total Electric Load Served Competitively)(% Total Electric Load Served Competitively)
Note: Data not reported on a consistent basis and therefore not directly comparable between jurisdictions; estimation required
• Focus is on distribution and retail services• Generation supply is contracted, mainly long term• Customers not enabled to choose retail supplier
• Focus is on distribution and retail services• Generation supply is contracted, mainly long term• Customers not enabled to choose retail supplier
Competitivegeneration supply
Competitivegeneration supply
MA, ME, NJ,NY, OH, PA
MA, ME, NJ,NY, OH, PA
• Generation separated and subject to competition• Incumbent delivery companies act as providers of last resort• Billing, metering & customer care remain bundled utility services
• Generation separated and subject to competition• Incumbent delivery companies act as providers of last resort• Billing, metering & customer care remain bundled utility services
Non-residential choicewith portfolio of
options forsmall customers
Non-residential choicewith portfolio of
options forsmall customers
OROR• Non-residential customers may switch retail suppliers• Residential customers may choose from regulated portfolio• Small business customers may choose portfolio options or switch retail suppliers
• Non-residential customers may switch retail suppliers• Residential customers may choose from regulated portfolio• Small business customers may choose portfolio options or switch retail suppliers
Market/Market/regulatory modelregulatory model
Market/Market/regulatory modelregulatory model RepresentedRepresented
byby
RepresentedRepresentedbyby
ModelModelcharacteristicscharacteristics
ModelModelcharacteristicscharacteristics
Vertically integratedVertically integrated Most U.S.states
Most U.S.states
• Utility maintains assets in G,T, and D• Customers not enabled to choose retail supplier• Majority of load requirements supplied by rate based units• Wholesale competition increasingly used to supply load growth
• Utility maintains assets in G,T, and D• Customers not enabled to choose retail supplier• Majority of load requirements supplied by rate based units• Wholesale competition increasingly used to supply load growth
Rest
ruct
ure
d m
od
els
Est
ablis
hed m
od
els
1111
0%
5%
10%
15%
20%
25%
30%
35%
40%
AB AUS TX UK GA gas MA ME NJ NY OH PA OR
Percentage of Residential Percentage of Residential Customers Served CompetitivelyCustomers Served Competitively
Full RetailSeparation
Direct CustomerAssignment
CompetitiveGeneration
Supply
RegulatedPortfolioChoices
2003 data; underlying figure originally prepared by Plexus Research for MA Division of Energy Resources
Markets have defied ‘regulatory Markets have defied ‘regulatory prescription’prescription’
Distinct sub-markets have emerged with Distinct sub-markets have emerged with divergent requirementsdivergent requirements
Residential customers mostly left out inResidential customers mostly left out inthe coldthe cold
One model does not fit all utilitiesOne model does not fit all utilities Metering competitive in only a few marketsMetering competitive in only a few markets IT systems subject to lingering uncertaintyIT systems subject to lingering uncertainty Electricity prices have not fallenElectricity prices have not fallen
Why is Metering HardWhy is Metering Hardto Unbundle?to Unbundle? Physical assets widely dispersedPhysical assets widely dispersed
Integrated into electrical systemIntegrated into electrical system
Economies of scale applyEconomies of scale apply
Lack of practical know-how outside Lack of practical know-how outside utilitiesutilities
Metering communications infrastructure Metering communications infrastructure begs for single, centralized operatorbegs for single, centralized operator
Due Diligence – Retail ServicesDue Diligence – Retail ServicesCapability Scale
Customer Relationship
Flexibility Synergy
New Service Connection Service Activation Meter Installation Meter Reading Meter Lock-in/lock-out Metering Communications Bill Calculation Bill Print Bill Distribution Payment Options Remittance Processing Credit and Collections Revenue Assurance Customer Inquiry Program & Rate Sign-up Outage Reporting Restoration Notification
Operational Criteria
Reta
il S
erv
ice
Act
ivit
ies
Retail Due DiligenceRetail Due Diligence
How portable is the function?How portable is the function? Have automation possibilities been Have automation possibilities been
exhausted?exhausted? Is the function strategic to the utility?Is the function strategic to the utility? Can it be outsourced without fanfare?Can it be outsourced without fanfare? What synergies/economies are uniquely What synergies/economies are uniquely
available to an outsourcer?available to an outsourcer? What utility IT system upgrades can be What utility IT system upgrades can be
avoided by outsourcing?avoided by outsourcing? What fixed and variable costs are associated What fixed and variable costs are associated
with the function?with the function?
Continuously profitable for 30 yearsContinuously profitable for 30 years
Started a revolution; new paradigmStarted a revolution; new paradigm Transformed customer operationsTransformed customer operations Radically simplified business processesRadically simplified business processes Redefined external business relationshipsRedefined external business relationships
Pervasively lower costPervasively lower cost
Inspired and innovative employeesInspired and innovative employees
Food for Thought: Food for Thought: Southwest AirlinesSouthwest Airlines
Contact InformationContact Information
Eric P. CodyEric P. CodyCody Energy Group Cody Energy Group 629 629 Massachusetts AvenueMassachusetts AvenueBoxborough, MA 01719Boxborough, MA 01719(978) 264-9839(978) 264-9839