Like a physician with her stethoscope at the outset of a check-up, astute shareholders and directors should use the level and trend of a utility’s market-to-book ratio (MtB) as one of the first...
Navigating in the Age of Uncertainty
Business models are evolving to suit a shifting industry landscape.
the ability to deliver a desired outcome—such as a level of service, safety or quality—in the most cost effective and efficient manner. The regulatory framework in the U.S. hasn’t encouraged companies to drive operational excellence within regulated operations. The industry doesn’t benchmark well against other industries or against utilities in countries that have implemented a performance-based regulatory framework, such as the UK utility industry—which some argue has led to excessive cost cutting.
Given supply and demand pressures, plus the need for increased capital expenditures and growing downward pressure on allowed ROEs, consolidation alone can’t guarantee the levels of operational excellence and capital efficiency that will be required to keep consumer rates low. Utilities will need to focus both on O&M and capital efficiency by optimizing processes, improving their use of technology, and re-prioritizing and improving the way they deploy capital. In addition, consolidators will need to be aggressive in driving synergies and moving merged organizations onto common process and technology platforms. Although most utilities are primarily focused on maximizing their regulatory allowances, a number of utilities have successfully implemented operational excellence or business transformation programs and worked within the regulatory compact to balance shareholder and customer benefits.
Regulators will need to play a very active role in this necessary evolution of the industry and encourage performance-based regulation and incentives to drive O&M and capital efficiency. This will allow utilities and their shareholders to reap the benefits of efficiency efforts.
The second dimension for industry focus is the ability to embrace new and disruptive technologies. Over the past two years the industry has benefited from an injection of federal stimulus dollars in the form of grants or tax incentives to support the development of new technologies, such as electric vehicles, solar power, smart grid and smart metering and many others. This support from the federal government will be significantly reduced, and in many cases nonexistent, over the coming years. The industry will have the responsibility for driving innovation and maintaining its leadership position in smart grid technologies.
Many in the industry assume that new technologies are a passing fad—for example electric vehicles were favored by Thomas Edison in the early part of the 20th century, and moreover, that the trend toward distributed generation has been discussed for more than a decade and yet hasn’t materialized, and that the utility will always own the relationship with its end customers. The fact remains that no company or industry has escaped technology disruption—including sectors that were thought to have a monopoly over their market, such as the post office or telephone companies. The utility industry will be no different; it’s a question of “when,” not “if.” Utilities that fail to embrace new technology will find their role in the value chain diminished as new entrants seek to capture the customer relationship and bypass the utility.
Successful utilities will need to embrace new technologies either as a first mover, or most likely as a fast follower. They will seek partnerships, invest in new technologies and treat this evolution as an opportunity to drive new revenue growth. They