The Energy Policy Act of 2005 makes human resource challenges even more significant.
Michael B. Brown is a senior consultant with Hay Group’s National Energy Practice, where he serves as the practice leader for the ISO/Transco and RTO sector. He can be reached at email@example.com.
As the industry struggles to address the awesome challenge resulting from the near-term retirement of the baby boomers—approximately 40 to 50 percent of the industry—a more complex and threatening storm is building that is sure to bring the industry to its knees.
Hidden in the 1,700-plus detailed pages of the Energy Policy Act of 2005 is a set of regulatory requirements that will redefine the technology, leadership, training, culture, compensation, job design, and organizational models currently employed in the industry.
The complexity of the human resources (HR) challenge can be seen in the diverse number of problems the Congress attempted to resolve through the new legislation (Congress passed its previous energy bill in 1992)—issues around establishment of energy markets (market monitoring and security constraints), repeal of the Public Utility Holding Company Act (PUHCA), liquefied natural-gas siting, national transmission corridors, nuclear plant construction, and recommendations pertaining to the blackout of 2003. Provisions also aim to overcome some of the provincial views held by certain states.
Reliability, Reliability, Reliability
Front and center are the reliability issues, which will force a major technological and human resource paradigm shift upon the industry. For instance, Congress already has directed the Department of Energy and Federal Energy Regulatory Commission (FERC) to issue a report on transmission system monitoring that will make real-time information on the functional status of all transmission lines within the interconnections available to transmission owners and regional transmission organizations (RTOs) in the Eastern and Western interconnects.
The expertise required to design and run a system that could represent the Eastern Interconnect in real time simply is mind boggling. The obvious question is, who will build and run such a venture? Should it be the electric reliability organization (ERO)? The RTOs? The regional goverments? The technology simply is not in place today to accomplish such a task. Such an effort probably would require specially designed field metering and telemetry from the tens of thousands of breakers, generating facilities, and capacitor banks.
The historical dispatcher who grew up in a regional system and relied for the most part on the transfer of tribal knowledge as the primary means of learning the job simply won’t be able to function in the future. Tomorrow’s dispatchers that oversee the mega markets will operate a vast array of engineered systems to facilitate their real-time decision making. The training and certification of these individuals and the reliability coordinators charged with independently evaluating the stability of the grid will need to take a quantum leap forward.
Historically the protection philosophy primarily was around equipment protection. The protection systems of the future will need to take into consideration both equipment protection as well as the segmentation of major grid configurations during periods of instability.
As the industry is well aware, protection engineering for a given utility is at best a black art managed by a small cadre of engineers who are evolving exponentially into the realm of endangered species. Who will design and build these systems across companies, regions, and RTOs? Where is the United States is going to find that type of expertise?
Looking for Nuclear Engineers
Global warming and the war in Iraq have put a spotlight on energy vulnerability in the United States. Congress, in response, has taken the unusual step of guaranteeing the loans on the first six nuclear plants built.
After the 1979 accident at Three Mile Island, the nation walked away from the nuclear option. Twenty-five years later this nation has a very limited nuclear design capability. The demographic challenge is encroaching on the operating units (many of whom recently have received life extensions), the Nuclear Regulatory Commission, and the Institute of Nuclear Power Operations. One must remember that during the building boom of the 1970s and 1980s the nation was in the midst of a Cold War and the nuclear fleet well exceeded 120 vessels. Today’s fleet is but a fraction of the fleet built during the Cold War.
The establishment of the ERO introduces a new set of variables. The biggest human resources (HR) challenge will be cultural. Transitioning NERC and the regions from a collegial utility driven organization into a quasi regulatory role charged with the responsibility of enforcing an entire spectrum of tough new regulations will not be a simple task. Congress recognizing the difficulties at hand, has allowed the government to take on this task, should the industry fail to realize the objectives.
Mergers to the Rescue?
Implementation of the repeal of PUHCA will challenge leadership. The recent announcement of the Florida Power and Light (FP&L) and Constellation merger will be the first real case study for the industry. Both companies are very well managed, each with their own leadership styles and related cultures.
Therein lies the HR challenge. The integration of equals can be difficult. There will be winners and losers. Organizational models and job design will be key. FP&L, which will take on the Constellation name, will need to let go of its successful branding. For the employees and the local politicians, this is no small concession. This is quite different from FP&L’s acquisition of the Seabrook nuclear plant, the result of regulators directing Northeast Utilities to sell off its assets.
Mergers sound easy to accomplish, but as we saw with the formation of Exelon, there were real winners and real losers. Leadership at all levels will be a key determinant of merger success. The huge number of industry retirements in the next few years won’t tell the whole story. Those retirees represent 60 percent of the industry’s knowledge base and 70 percent of the leadership, so many of the people who could facilitate the integration of these companies simply won’t be there.
The Transition Team is History
During the industry downsizing in the 1990s, most HR and technical training functions were reduced significantly. Today these organizations are ill positioned to address the impending challenges.
Our review indicates that HR and technical trainers lack strategic know-how. Time and again we find that theses organizations have a detailed understanding of the demographics, but lack the insight necessary to position their respective companies for the future. For the most part, they envision recruiting in a very reactive manner. Most fail to understand the future needs of the industry and have done little to secure the skills of mid-level, mission-critical personnel who will be vital in meeting their business objectives.
Recruiting and retaining key personnel will be essential if a company is to survive. The new energy bill will introduce a myriad of new start-up opportunities that may be very attractive to individuals eligible to retire, as well as to mid-career personnel. In the past, a key retention item was defined pensions. In today’s world, with the portable nature of one’s 401(k), employees are much more mobile in their thinking.
HR organization survival will require some very unconventional approaches. The HR organizations will need to become less reactive and much more proactive. To fulfill such a mission, they will need to better understand the requirements embedded in the energy bill and have a detailed understanding of corporate strategic objectives for the next 4 to 5 years. The work processes, training systems, reward structure, and HR culture, all will need to be revamped to best manage both the opportunities and the challenges at hand.
We project that the executive leadership and management-level salaries will escalate significantly as the industry competes for the limited talent that will be available. Tomorrow’s leaders will need to learn how to manage from afar as the industry consolidates across social and regional boundaries.
To preclude the financial disasters that so defined the Enron era, tomorrow’s leaders will need to be well schooled in the nuances of the energy markets. Regional transmission entity leadership will need to do more to hold on to their talent as independent transmission companies form and the volatile world of proprietary energy trading re-emerges. Degreed dispatchers will become the norm as control areas wrestle with the difficult task of managing in real time across vast regional boundaries.
It used to be information technology was all about billing systems and financials. Tomorrow it will be about advanced competitive market models and very complex electric grid contingency analysis.
Utility executives will need to come to terms with the reality that FERC Orders 888, 889, and 2000, in combination with the Energy Policy Act of 2005, will redefine every aspect of the utility industry. The old cliché that “our most important asset is our people” quickly will come home to roost. HR will rise to the top of the priority list as companies struggle to advance their business objectives with half the staff and 40 percent of today’s expertise. Those companies that survive will be those who started to address these critical issues two years ago. Throwing money at the problem will not get a company to the finish line. Instead, it will be all about building an integrated strategy that is flexible and strategic, with clearly defined contingencies.