TXU electric delivery is significantly restructuring its traditional business model. The company has been working tirelessly to find ways to create value, including taking unprecedented steps to outsource business service functions. Our new approach is achieving the expected results, but we have encountered unexpected challenges and, even today, continue to learn lessons that we will apply to future deals.

Electric Delivery (Dallas, Texas, U.S.) intends to be among the best in the nation at delivering electricity. The heart of the company's strategy is to achieve industry leadership in reliability, cost management and technology. We are taking innovative actions to achieve this goal through initiatives that create operational scale, efficiency and deep technical expertise.

Electric Delivery currently is in the top quartile in a number of key performance metrics, and we believe our future performance can be in the top decile. To reach these goals, we are focused on our primary role: delivering electricity reliably, safely and efficiently. That means owning and operating 100,000 miles (160,000 km) of distribution lines and 14,000 miles (22,500 km) of transmission lines with laser-like intensity to create the most value possible for the business, the consumers who rely on us every day, our shareholders, the retail electric providers we serve, the power generators that provide the electricity we deliver and our employees.

We believe achieving these goals also requires taking bold actions to manage some significant portions of the business. Our core competencies will never include information technology or back-office human resources functions. Outsourcing is increasingly a key part of the structure of many successful businesses, from financial institutions and airlines to telecommunications, paper companies and electric utilities.

Our industry hasn't changed much since it was created during the industrial revolution over a century ago. We find ourselves in the midst of a digital age. Technical advances that have revolutionized most industries, and created many others, have yet to make an impact on our industry. Electric Delivery plans to take full advantage of the opportunities technology offers. We are building the power grid for the next generation, and our intent is to partner with service providers that can enable our transformation.

STRONG ALLIANCES

Since mid-2004, TXU Corp. and its subsidiaries, including Electric Delivery, have created relationships to manage critical, but noncore operations. We have been aggressive and are among the utility industry leaders in this area. Our partners are some of the best in the fields they serve. Electric Delivery has also proposed a key joint-venture agreement to better manage some of the businesses that are truly core operations.

TXU and Capgemini in 2004 formed Capgemini Energy (CGE; Dallas), a company dedicated to providing business and technology services to the U.S. energy industry. CGE also performs business process and support functions throughout TXU. About 2700 TXU employees and 300 contractors were offered jobs there. CGE now provides call center, billing, supply chain, finance and accounting, and information technology services to TXU and its subsidiaries. Back-office human resources, payroll services and telecommunications services are provided to TXU through Hewitt Associates (Lincolnshire, Illinois, U.S.) and Lucent Technologies (Murray Hill, New Jersey, U.S.) as alliance partners of CGE.

BENEFITS AND CHALLENGES

The CGE joint venture helped TXU reduce certain operating costs by 30% in the first year of the alliance, but not without some challenges to overcome. For example:

  • Recognizing that many CGE employees possessed specialized knowledge regarding TXU's proprietary applications, and that retention of such knowledge was crucial to our continuing operations, we reached agreement with CGE that movement of jobs to areas outside of Texas would be done with adequate advance communications and with an approved knowledge-transfer plan to address operational risks.

  • One of the projects not included in our agreement with CGE was installation of equipment for our automated meter-reading initiative. We purchased the system from a third-party vendor and found ourselves unexpectedly mediating disagreements between CGE and the vendor about which company was responsible for installation. We have been able to successfully establish accountabilities for such situations as this, where TXU purchased equipment from third-party vendors, and both CGE and the third-party shared responsibility for installation and operation. This has served as an important test of both the contractual model and the working level TXU-CGE relationship. TXU recognized and CGE responded to the fact that, for complex and large projects, there was a need in some cases to recruit project and program managers with technical and managerial skills that go beyond those of some of the staff initially hired by CGE from TXU.

In each of these cases, as well as others, we worked together closely to solve the problems, and as a result have strengthened the effectiveness of our partnership. These were internal issues, and resolving them quickly kept them from becoming problems for our customers. Each step down the outsourcing road and each lesson we learn along the way will help us craft better deals in the future. That's important because Electric Delivery now is finalizing several agreements that will enhance our ability to manage the state's largest electric delivery system and achieve industry-leading reliability, efficiency and innovation.

GROUNDBREAKING BUSINESS ARRANGEMENT

In June 2006, Electric Delivery signed a US$8.7 billion service agreement with InfrastruX Energy Services (IES; Bellevue, Washington, U.S.) to provide system design, construction, maintenance and operations for 10 years. This is a significantly different type of agreement that will keep Electric Delivery as a key part of the customer service equation and will be more inclusive than any other of its kind in the utility industry.

IES is a new joint-venture company created by TXU Corp. and InfrastruX Group Inc. It is a utility services business and initially will employ 5500 people, including about 2100 former Electric Delivery employees and about 3400 InfrastruX employees who are moving to the joint venture. This venture is expected to create a business with the scale to provide distinctive services in utility design, operations, maintenance and construction to Electric Delivery and other utilities across North America. Under this type of arrangement, Electric Delivery can be smaller, nimbler and focused on ownership and management of assets. Electric Delivery will continue to be the certificated utility and remains responsible for developing the design, standards, construction and maintenance to be implemented by IES and will have full oversight and control of the key utility operations.

Electric Delivery will remain one of the nation's largest transmission and delivery companies, focused on achieving top-level reliability and safety performance. The company will continue to be regulated by the state of Texas, through its Public Utility Commission (PUC), and remains committed to managing the transmission and distribution grid in the west, east, central and north central areas of the state.

The support of sister utilities in the aftermath of 2005 hurricanes is indicative of the kind of ingenuity, resourcefulness and work ethic that has made Electric Delivery employees such a vital part of the communities the company serves, and it is one of the key ingredients that will make IES equally successful. This is just one of the many reasons Electric Delivery is confident that the pending agreement with IES will bring benefits to customers and shareholders.

The company also knows that it will have a world-class partner that is singularly focused on the business of maintaining and repairing power lines. We will continue to have some of the best utility workers in the field, and customers and end users will continue to receive the best possible service from dedicated specialists. To ensure that Electric Delivery customers' needs receive the same priority they received prior to the IES transaction, Electric Delivery has the ability to assure that any decisions that temporarily reallocate resources that typically serve Electric Delivery customers don't jeopardize service reliability.

Employees who move to the joint venture are going to be part of a winning team. They will add tremendously to the skills, expertise and know-how of IES. Most of them will continue to support the same customers they do today; however, some will be able to apply their skills and expertise to other utility clients throughout the United States.

This combination of talent, greater resources and a broader operating environment will create a platform that allows the companies and employees to deliver high-quality services. It also will allow them to grow in new ways and new directions that are unavailable in the current model. It will provide a key feature to enable Electric Delivery to move forward with our work to develop the electric smart grid of the future.

SMART GRID

Electric Delivery is partnering with Current Communications (Germantown, Maryland, U.S.) and other leading vendors to deploy the world's first smart grid over an upgraded electric distribution network. This 21st century grid relies on the deployment of a number of advanced technologies on the electric delivery system to improve reliability, increase customer satisfaction and enable the provision of advanced services to consumers.

Current Communications plans to market broadband technology to consumers. It will build the network using a combination of fiber-optic cable and broadband signals over Electric Delivery power lines. Devices at transformers near customers' homes then will transfer the data signal to lower-voltage lines that feed through new digital electric meters into homes and businesses.

This initiative will revolutionize the way electricity is delivered and delivery assets are managed. The new system will allow the company to read meters remotely, obtain time-sensitive data to facilitate energy-efficiency programs, predict network outages before they affect customers, detect and identify specific locations for outages and other network problems as they occur, which will speed restoration and repairs.

A key enabler of the smart grid is advanced data communications. For Electric Delivery, broadband over power-line (BPL) technology will provide the high-speed data communication capability for a majority of the customers we serve, while providing the utility a vast data network to support a host of new, advanced meters. This new technology transforms ordinary electric power lines into a vast data network.

REALITIES OF OUTSOURCING

We have faced challenges as we partner with other companies for services and we will again in the future. Outsourcing or joint-venture deals are complicated and involve tradeoffs, tough decisions and unpredictable schedules.

For example, inquiries have been filed at the PUC of Texas about the IES transaction. PUC officials are examining questions of reliability, assurance of workforce availability and safety. Electric Delivery believes that the transaction will result in improved service, reliability, cost and safety performance or we would not have chosen this new business arrangement.

We are certainly aware of the risks associated with these transactions. We are confident that the IES alliance, as well as the CGE alliance and the good governance practices we have pioneered, offer the best way forward for our customers, our employees, our company and our shareholders. We are moving toward a business model of increasing our focus on what will become our core competencies — owning, managing and operating the distribution and transmission system and associated assets — while ensuring that we have the highest levels of support and expertise available on our system.


Rob Trimble is president and COO of TXU Electric Delivery.

Brenda Pulis currently is senior vice president of Transmission & Distribution Asset Services for Electric Delivery. She will assume the role of president and COO for InfrastruX Energy Services. brenda.pulis@txued.com

LESSONS LEARNED

When TXU Corp. decided in 2004 to turn over six business service functions to an external provider, it was joining a growing number of companies and organizations striving to reduce costs and focus on core competencies. TXU partnered with Capgemini to create a new joint-venture company for the work. Capgemini Energy now handles call center, billing, supply chain, finance and accounting, and information technology services for TXU and its subsidiaries. Human resources and payroll services are also provided through an affiliate agreement. More than two years into this alliance, we have learned some vital lessons about contracting services that are enabling us to build a stronger relationship with InfrastruX Energy Services and other partners, and enhancing our ability to transform our business model.

  • Communication is an ongoing, vital component of the relationship

    We now are intentional about communicating with and understanding each other and reaching consensus when problems arise. Few issues are black and white, and we work together over time to solve them. Not much gets accomplished without mutual respect and robust communications at all levels of the organization. This requires sustained effort. We communicate on a regular schedule: through phone calls, e-mails and routine face-to-face meetings.

  • Mutual success depends on true collaboration

    Our alliance has evolved from what initially was an adversarial relationship into a true partnership. Unlike a merger and acquisition transaction, where each party goes its separate way after closing, in a joint venture the parties must maintain a relationship. Today, everyone involved realizes that we all succeed when we work together.

  • It takes time — sometimes up to 18 months or longer — for the organization to reach a steady state after the initial turmoil of a new deal

    All the employees for Capgemini Energy transferred from employment at TXU to the new company. It took time to define roles. The service provider may introduce innovations that the client would have been reluctant to take on. In our case, some support functions were transferred from centers near our base in Dallas, Texas, U.S., to locations in Houston, Texas, and some to Poland and India. It took effort to ensure that we didn't lose valuable knowledge about systems and processes during that transition.

  • Implementing a robust governance structure requires effort

    The alliance between TXU and Capgemini was created relatively quickly, and unexpected issues arose. The formal contract is a good starting point to describe how to handle those concerns, but it can't answer all the questions. Teams must collaborate to address and solve problems.

  • A service level agreement (SLA) is crucial for defining expected performance

    The SLA describes specifically what the service provider will do and the level at which that work will be accomplished. It may include consequences when work isn't up to par as well as rewards when expectations are exceeded.

  • The old saying that “the customer is always right” isn't true

    We evaluate decisions based on whether they support our strategic direction and how they will affect our cost structure. Capgemini Energy sometimes raises questions and concerns about our ideas. Because we formed this alliance in large part to bring in CGE's expertise, we, as the customer, have to be willing to listen and interact with them.

  • Successful contracts are based on the need for routine services and the provider's ability to meet its obligations efficiently

    Special requests require a significant amount of management and oversight.

  • HURRICANE AID

    When Hurricanes Katrina, Rita and Wilma struck the Gulf Coast in the fall of 2005, TXU Electric Delivery utilized almost 1700 employees and contract support personnel to help restore electric service to some of the devastated areas.

    Crews worked for weeks along the hurricanes' paths, and they completed their assignments with the highest levels of quality and safety. When they realized there was a shortage of transformers, the teams even relocated an Electric Delivery transformer repair shop to Louisiana instead of waiting for deliveries of new equipment. The Edison Electric Institute recognized these efforts with its Emergency Assistance Award.