Strategic Optionality
By Brian Peace, Chairman and CEO, Peace Software

The North American energy industry has reached a crossroads. Signposts are difficult to decipher and seem to point in opposite directions: continue toward experimental deregulation; take a new route in hope of reaching workable retail markets; or turn back toward re-regulation. One thing is certain—deregulation is not the inevitable and immediate force it once was.

As a result, many utilities find themselves in a quandary. Do they embrace new business strategies and technologies in preparation for competition, which may not materialize in their market in the near future? Or do they retain their legacy systems for the time being until the industry has a clearer map to navigate forward?

From a business strategy perspective, standing-still is not an option. The expectations of regulators, customers, and shareholders are changing and a new, restructured industry is swiftly emerging with intense emphasis on improved customer service, operational efficiencies and cost-savings—in other words, “competitive” best practices.

So, while deregulation is taking a back seat as a business driver in North America, the focus on competitive best practices is still very much alive and seeping into Regulated markets. More and more, we are observing utilities applying the disciplines and technologies of competitive markets to realize efficiency and growth benefits in regulated markets.

A recent Chartwell Inc. study, for example, found that utilities are offering more choices in bill payment options as part of the push to improve customer satisfaction measures. Outsourcing is also on the rise according to SCIENTECH's 2002 Research and Intelligence Report, which found that 29 per cent of the 300 utilities surveyed entertain outsourcing as a viable alternative.

An emerging driver for adopting competitive best practices is performance-based regulatory schemes, whereby utilities can earn extra profits above the allowed rate of return, conditional on improvements in performance. The rationale is that even under regulation, the same economic principle that makes competition work—the profit motive—can create more efficient utilities, resulting in improved service and lower prices. At last count, 23 U.S. states had instituted some form of performance-based ratemaking.

Times are changing and forward-thinking utilities are forging ahead with plans to replace or upgrade their legacy applications to drive efficiencies, thereby winning favor with regulators, customers and shareholders. At the same time, advanced technology solutions offer a host of growth opportunities for regulated utilities now, and well into the future.

One such opportunity is merger and acquisition activity. META Group forecasts that mergers and acquisitions will continue to Increase during 2002/03 as utilities attempt to gain additional economies of scale and enter new markets. Technology is a key enabler for capturing merger benefits across millions of consumers in multiple jurisdictions.

Further, technology is an enabler for up-selling and cross-selling additional products and services in regulated markets that allow this type of activity. Already we see a number of innovative utilities seizing on this growth opportunity. Enbridge Services expanded into the Ontario home services market, servicing 1.3 million water heater rental customers. Another example is Xcel Energy which sells its Windsource® wind energy program at a premium price to the environmentally conscious customer in Colorado" and New Mexico.

A projected growth area for utilities is wholesale trading. The U.S. Federal Energy Regulatory Commission (FERC) is rapidly moving ahead tore frame rules requiring utilities to turn control of their power-grid assets over to independent management. This ongoing effort to assign the nation's electricity system to control of four or five regional transmission organizations (RTOs) is predicted to pave the way for active wholesale competition in all U.S. states. Utilities with static customer bases will have the advantage of a predictable demand curve against which to trade on the wholesale market. Using the right technology tools, they can more accurately forecast, manage risk and negotiate the best possible prices for increased profit.

Utilities that upgrade their IT systems today also are equipping themselves for the future. Evidence to date indicates that deregulation continues to spread in the U.S. Competitive retailers currently supply more than nine million U.S. energy consumers, compared to3.3 million consumers in 2001 and 2.6 million in 2000. Utilities are wise to prepare for competition well ahead of time so their IT systems are in place and proven, their business processes have been adjusted, and their teams have had a chance to adopt new working styles and requirements.

Although the future structure of the industry may be unclear, utilities that put their businesses on hold may be creating unforeseen dangers for themselves. Forward-thinking utilities today are reevaluating their business strategies and implementing new systems or system components to reap immediate benefits in the regulated world, while gaining the flexibility to manage a variety of business models in the future. We call this “strategic optionality”—the ability to drive efficiencies and exploit growth opportunities today and adapt to change as the future dictates.