The utility industry has witnessed a variety of consolidation scenarios over the last 20 years. In a certain sense, the consolidation of the utility vegetation management industry we are seeing today is a logical extension of consolidation of the electric utility industry itself. The same business principles have influenced both industries, namely economies of scale, small to moderate returns, significant capital requirements and a shortage of qualified workers.
While the electrical-contracting market appears to have been relatively stable since the late 1980s, consolidation of the vegetation management industry during the same period has left only one tree-trimming contractor with a true national presence, while the number of regional or local vegetation management contractors has continued to dwindle. This phenomenon has not gone unnoticed. In a recent survey, 80% of the responding electric utilities said consolidation was an issue affecting their vegetation management programs.
What does this mean for utilities? The natural reaction is to be concerned about issues such as reduced competition leading to upward pressure on cost, and a simultaneous decline in work quality and service levels. Indeed, several utilities have seen these market forces at work already. Companies that have single sourced in the past but now seek to add competition to their vegetation management program are finding their options increasingly limited.
Not all utilities share this concern. Some are moving from multiple competing contractors to a sole-sourcing strategy, building a long-term alliance with a single contractor to leverage the significant resources and expertise made available by that contractor. The consolidation of the vegetation management industry presents both risks and opportunities, and they should be understood and considered as vegetation management strategy is developed and implemented.
Perhaps the most obvious benefit of a single contractor with a large resource base is the contractor's ability to provide large numbers of crews on short notice in the event of a major storm or other urgent need, an option not available from smaller contractors.
A large contractor with thousands of skilled employees and a diversified equipment fleet can more easily secure additional resources for the utility as business requirements change because the contractor has a significant labor pool from which to draw. Such a contractor can readily adjust the number of bucket trucks and manual trucks on relatively short notice should it be necessary to do so.
A dominant contractor enjoys a significant competitive advantage in terms of purchasing power of equipment, which enhances the quality and appearance of the equipment. The utility benefits through a reduction in lost productivity because of equipment down time, and often sees increased customer satisfaction as a result of attractive, well-maintained vehicles operating on customers' property. Ultimately, the reduced labor and equipment costs may translate into lower contractor costs for the utility.
While industry consolidation offers certain benefits to the contracting utility, some risk factors should be considered. However, all of these issues are manageable if the utility devotes sufficient attention to them.
Competition in any industry stimulates vendors and suppliers to develop and maintain positive relationships with customers. Under such scenarios, there tends to be a high level of responsiveness to customers' needs. As competition is reduced, remaining vendors are less likely to lose market share, and there is less urgency for them to concern themselves with addressing performance or quality issues with their customers in a timely fashion. The customer has considerably less leverage than would be the case in a market where multiple suppliers exist.
Perhaps the most significant downside to market contraction is the cost side of the equation. When a single player dominates the market, that player has less incentive to control costs, most of which are simply passed through to customers. Thus, utilities may see vegetation management costs increase at a faster rate than would be the case if significant competition were the norm.
While cost is important, it is not the only factor on which declining competitive options have negative implications. In the contracting arena, factors other than price affect vendor selection. Criteria such as quality of workmanship and equipment also should be considered during the bid-evaluation process. As utilities seek to satisfy the demands of an increasingly sophisticated customer base, quality of work and equipment become increasingly important. Historically, it has not been unusual for a utility to award work to contractors whose hourly costs are high but who are able to provide a safe, skilled and productive workforce that produces work at a lower unit cost. A fundamental question that needs to be asked is whether a single provider will continue to provide highly skilled, productive workers in a market where competition is minimal.
The equipment dimension is easy to overlook, but it is important. Vegetation management tends to be highly schedule sensitive, which becomes problematic if equipment downtime continually eats into the workday.
In a monopolistic environment, the utility has less ability to hold the contractor accountable for overall equipment quality, meaning that down time may increase, schedules may slip, workmanship may decline and customer satisfaction may suffer.
How should a utility respond to a market contraction such as that currently underway in the vegetation management industry? There are, in fact, at least four viable options that are not necessarily attractive in the short term but may make sense over time:
Partner with competing regional vegetation management providers to help them gain a mutually profitable presence in your area. It is in all utilities' best interest to reasonably assist new suppliers to overcome barriers to market entry. To a large extent, the market conditions that exist today are a direct result of contracting decisions that utilities have made in the past. Consequently, utilities must take the lead to inject additional competition into the market, creating an environment that facilitates success of new entrants.
Explore the possibility of aggregating your vegetation management contracts with those of other regional utilities. It may prove beneficial if neighboring utilities were to procure vegetation management services under a consolidated contract or through a strategic partnership.
Seek unconventional vegetation management providers. At least one major electrical contractor with national scope is working to penetrate the vegetation management market.
Consider performing a portion of vegetation management work with internal resources. While most investor-owned utilities have transitioned away from this approach over the last two decades, some companies are presently exploring the possibility of using their own employees to perform vegetation management work in the future.
Proper vegetation management is critical to the success of our business. Let's not limit our focus to the specifics of the next contract. We must take a longer view. It is time to work together to come up with common sense solutions that will assure utilities access to reliable, low-cost vegetation services.
Mark Schuler joined KCPL in 1984, presently serving as director or resource management. Schuler is responsible for all activities associated with work management, project management and contract management, the latter function including line clearance. Schuler has earlier held management responsibility in customer services and line clearance. With 20 years experience in utility vegetation management, Schuler holds several degrees, most recently an MBA from Baker University in 1996. Mark.Schuler@kcpl.com