A new day is dawning for utilities. Old paradigms are collapsing. New business models are emerging. Utilities are searching for ways to prosper in increasingly chaotic times. The threat of deregulation in the electric-utility industry has impacted every aspect of the business.
Over a 10-year period, we've seen staffing in electric utilities decline by 30%. At the same time, regulators have turned their microscopes away from generation to focus on T&D, particularly after the spectacular power-delivery failures in California, Chicago and New York.
After a tumultuous decade, it is becoming clear that only generation and retail will be open to competition. T&D will remain regulated, although the form is changing. Regulators are more inclined to cap prices than let utilities recoup costs incurred in maintaining infrastructure. Utilities respond by squeezing extra capacity out of existing T&D infrastructure, while pushing employees to the point of exhaustion.
Over the long term, I expect state regulators and the FERC will realize the damage inflicted by this under-investment in infrastructure, but in the meantime, utilities must adapt to severe financial pressures while providing an appropriate level of service.
We must find better ways to run the business. We need to access shared systems and processes to hold down costs and speed innovation. If functions are not core to the business, maybe we need to jettison that function. If functions are key to the business, consider insourcing work from other utilities through a for-profit subsidiary.
I met Bill Downey, president of Kansas City Power & Light (KCP&L), a couple of months ago. Downey and his counterparts are squeezed to please two masters. States Downey, “Regulators demand that prices be contained. At the same time, Wall Street pushes for higher returns.” Downey and his counterparts find they must cut costs in the regulated T&D business while seeking additional profits through non-regulated ventures.
On the regulated side, KCP&L was a pioneer in moving toward automatic meter reading (AMR). By contracting to Cellnet (now Schlumberger) to provide services on a transaction basis, KCP&L didn't shoulder the costs to build out the system. Schlumberger now offers similar or enhanced services to electric, water and gas utilities, including Puget Sound Energy (PSE) and Ameren.
Utilities looking for enhanced returns are leveraging existing skills by spinning out staff and equipment into for-profit services companies. In the late 1990s, Central Maine Power Co. decided to make a small cautious entry into the unregulated utility-construction market. Now On Target is one of the largest utility contractors in New England.
Other utilities have decided that outsourcing will enable them to meet financial targets. PSE commissioned a task force to establish a service provider model with the goal to deliver energy in the most cost-effective manner. States COO Gary Swofford, “By outsourcing all aspects of routine distribution work that requires a crew, including engineering, permitting, maintenance and construction, we could significantly reduce costs.”
New York's state-owned Long Island Power Authority has gone a step further. With a staff of 62 employees responsible for the delivery of electric power to 1.1 million customers, the utility decided to outsource the majority of its planning, engineering and O&M functions to Keyspan, while reducing electricity rates by 20%.
Of course, making major strategic moves impacts employees. In PSE's case, the company worked with the IBEW to address the contentious issue of transitioning union employees to the local infrastructure services companies now contracted to do the work.
Employees are often faced with major career decisions whether they ultimately decide to retire early, move over to a for-profit subsidiary, join an infrastructure services company or get out of the industry entirely.
In the United Kingdom, ex-utility personnel are creating their own services companies. Andrew Webster, with former colleagues from Yorkshire Electricity, created the Freedom Group, staffed predominantly with individuals coming out of existing utilities. The shape of T&D is changing. We need to watch the initiatives taking place that will impact out industry for decades to come.