The time-honored discounted cash flow method for determining appropriate utility returns falls short when interest rates are low. Inadequate ROEs ultimately increase cost of capital and wipe away...
Strategies for surviving the industry’s transition.
induced by the smart grid.
A related complication concerns the attributes of many utility employees. They often exhibit a high sense of social purpose and enjoy the opportunity their work provides to serve the community. They also tend to be long-term employees, with low turnover rates, and they’re willing to accept more modest salaries in exchange for retirement security.
Further, it’s common to find that many utility employees have hired into locations where they have grown up, making them often resistant to relocation or other disruptions in their lives. All of these factors contribute to the formation of very strong social networks and institutional memories that serve to impede change.
Finally, the deliberate style of decision making in most utilities tends to put a brake on, rather than stimulate, change. The need to manage risks associated with investment recovery invites a cautious approach, but given the level and extent of changes that lie ahead, much more invention will be required—and with it an acceptance of more risk taking and timely decision making. Importantly, though, this risk taking will need to occur in the context of substantially greater attention to the customer experience than utilities typically provide.
An example is found in the personal characteristics likely to be most important in driving adaptation in a smart-grid environment ( see Figure 2 ). Yet, the issues discussed seem to undermine each of the characteristics by promoting stability, predictability and social cohesion.
Can utility leaders help their organizations overcome these (and perhaps their own) conservative natures? Are they prepared to establish metrics and development programs for their leadership teams to promote greater adaptability? And will regulators be able to reframe the need for a return on investment to include also the value of learning? These critical questions need answers to help shape boardroom and national energy policies in a smart-grid world.
The very factors that have helped create integration and adaptability barriers would be less serious if not for the fact that they have become embedded in the organizational cultures of most utilities. In this context, “culture” means the values and habitual behaviors organizations develop to promote successful actions. In other words, many of the new behaviors needed will not just be difficult to achieve, but often will appear to be just plain wrong and unacceptable.
The three most significant underlying cultural values are reflected in the geographic-centric focus, policy-caretaker orientation, and hierarchical nature of utilities.
The geographic orientation of locally based employees warrants special attention. Most utilities, in the United States at least, were formed through a series of mergers. Generally, the level of integration is low, however, and most continue to operate today more as a federation of regional field service operations than a corporation with common processes. This often leads to antipathy toward all that is corporate and an us-versus-them attitude ( i.e., local area versus headquarters) when new programs are introduced. Smart-grid programs won’t be successful, however, where employees aren’t enthusiastic promoters with customers regardless of geography.
Customer relationships tend to go one way in most utilities. This