Envision the Utility of Tomorrow
How will the industry change in the future?
June 2004
By Keith Mueller
The utility industry of the future can be best characterized by three words: scale, synergies, and automation. Company leaders and the broader workforce will be touched by these three forces for change. We can already see glimpses of the future around us today. In response to the sweep of deregulation, many power companies no longer generate power. They have divested themselves of their generating plants, ceding that ground to independent producers to concentrate on distribution.
Formerly independent, self-sufficient, and monopolistic, utilities find themselves pulled increasingly into regional transmission networks designed to distribute and even-out the flow of power to increase both grid reliability and competitive accessibility.
And perhaps most importantly, by virtue of huge leaps forward in technology, utilities today are exploring products never before envisioned for their power lines-voice, image, and data communications, and a host of other marketing opportunities opened up by two-way communications with customers. This latter trend could well prove to be the most significant and far-reaching.
The utility of tomorrow may be one that controls connectivity to the home or business. The push toward deregulation gave birth to this vision, on the theory that competing companies would maximize revenue by offering as many products and services as possible over their lines. To date that trend has been slow to develop, but it will accelerate.
Extending the vision further, the utility of tomorrow may evolve beyond anything we know today if a hydrogen economy takes hold, as many predict. More relevant and potentially disturbing to utilities, under some scenarios, individual hydrogen units at each home and business will provide power and heat. Utilities, with their expertise in fuel and components, will be in the business of maintaining the hydrogen units and supplying equipment and parts. Power-line capacity then becomes an under-utilized asset or even eventually goes the way of the dinosaur.
Electricity as the Elixir of Life
"Electricity is the engine of prosperity and quality of life. It's not just a dumb energy commodity," says Kurt Yeager, president and CEO of the Electric Power Research Institute.
Those creating the utility of the future will be influenced by the fact that all decisions regarding electricity must be factored into what Yeager calls a "trilemma" reflecting three dimensions-economics, politics, and technology.
"A policy is doomed to failure when focused on only one area of the trilemma," Yeager says. "Electricity is viewed as a political entitlement, like air and water. Politicians will protect that right."
The current fragmentation in public policy for utilities gives utility executives a chance to help shape the industry's direction. Policy-makers need to understand the market mechanisms, and political leaders want to know that the decisions they make will keep the lights on. The industry can assist these regulators in understanding the choices.
Playing such an essential role for society, utilities will need to stay nimble-perhaps not a word associated with the power industry in the pre-deregulation era-to adapt to the rapidly changing conditions and carry out their mandate.
As with all high-performing businesses in the era of change, utilities of the future will share three characteristics:
Talent: Employees will be seen as the key to success. Clear objectives, open communications, and focused incentives will combine with enabling technology to unleash the energy and full productivity of the workforce, to quickly translate insight into action. Given the aging of the utilities workforce, getting this right becomes increasingly important.
Technology: Through pervasive use of technology to improve operations, satisfy customers, and outperform competitors, the utility of the future will seize opportunities to create environments of flexibility, speed, and mobility.
Innovation: An open-minded culture receptive to innovative new business models will be requisite. If a new approach can help achieve sustained results, it is adopted on its own merit, even if it was "not invented here." Successful utilities will have defined management practices that set them apart from the industry in how they manage their assets, their businesses, and their people. They will look for innovative strategic moves, and create their own growth opportunities. But to do so, they will need to break out of conventional thinking and accept the discomfort of change and risk.
One particular challenge will be managing both regulated and unregulated sides of the business-what Jim Rogers, chairman, president, and CEO of Cinergy calls "managing on the fault line." On the regulated side, utilities traditionally have taken a long-term view, but now they will also need a bias for the short-term.
The Future Wires Business: Controlling Connectivity
In the unregulated arena, utilities could soon find themselves with one foot in the rough-and-tumble communications industry, battling with other purveyors of information for the market to supply voice, images, and data to homes over existing power lines.
The capital investment already has been made-a direct line into nearly every home in the country. Since Internet signals travel at a higher frequency than electricity, they can share the same power lines. Modems plug into electrical wall outlets.
Today, only a few hundred consumers pay for high-speed Internet access over power lines. It's available commercially in only three cities (Cincinnati, Allentown, Pa., and Manassas, Va.) But while electric utilities across the country are testing the service, thousands of homeowners are still waiting to be connected.
Part of the push is coming from the Federal Communications Commission, which sees power lines as a way to bring new communications technology to people in rural areas. Broadband access over power lines is an alternative to high-speed access from telephone, cable, and satellite companies, and could reduce costs to consumers.
Telematics: Building the Sentient Utility Machine
Telematics and automated meter reading (AMR) are two components of a larger trend that will contribute to the utility of the future. First, telematics is silent commerce, or the use of microprocessors, sensors, radio frequency identification, and other computerized instruments that allow objects and machines to take advantage of new advances in wireless sensing to communicate with one another without human intervention.
Such equipment will be able to diagnose its own problems, guide an engineer through troubleshooting, and keep complete maintenance history records. For utilities, which rely on complex networks of machinery to prevent downtime and ensure regulatory compliance, this could create an entirely new infrastructure for data collection and delivery of services.
For example, say a transformer experiences a problem. Rather than passively waiting for the technician, the transformer's sensors communicate with similar transformers to see if the issue is a design flaw or a single aberration. The transformer can then tell an engineer what tools and parts are needed for the repair. A circuit breaker can confirm that it's been shut off before allowing the repair to begin.
The transformer also can access its maintenance history and, by rerouting certain functions, allow the system to continue operating. When the technician arrives, information can be accessed through a PDA for previous notes, past repair or service information, and possibly even a video detailing the previous service.
Real-time sensor data allows for early detection and diagnosis of potential problems or defects, ordering of replacement parts, and scheduling of repairs. Assembling data over time and range of machinery may help detect problems or defects in a particular model before it breaks down.
The implications for utilities, besides reduced downtime, include increased safety, cost savings, and improved product design.
Taking the concept one step further is AMR, potentially a major long-term source of services and revenue for utilities. Although AMR has been around for almost two decades, utilities are now realizing its full potential in load control, pricing, billing, and customer service. AMR penetration is increasing at 20 percent to 30 percent annually, although in recent times utilities have held back, primarily due to weak business cases and lack of a perceived imperative.
A widespread AMR deployment can provide actual customer usage data at the meter-level across a distribution network. This helps to reduce load-research time and to more accurately predict power purchase needs and selling opportunities.
It also facilitates demand-side management programs in which consumers monitor real-time power usage on their AMR meters, and then make decisions on the most cost-effective use.
For instance, customers can decide to turn down an air conditioner to uncomfortable levels during premium time-of-use periods by monitoring their usage through Web-based tools and signalling the utility. Or, a customer may program his/her thermostat to make these adjustments based on pre-defined "high price" time windows.
Some AMR solutions also can notify the consumer via pager, phone, fax, or e-mail when usage is nearing pre-targeted load amounts or spending levels, to permit educated decisions about usage.
This two-way interaction through AMR, combined with data collection capabilities, could form the basis for greater marketing opportunities for utilities, based on customer usage patterns.
If a customer's usage drops during a particular month every year, for instance, it could indicate an annual vacation period. The utility could combine with a dog kennel or lawn-care company to offer such services while the homeowner is away.
Reliability as the Cornerstone
Such advances in technology will assist the utility of the future in meeting the challenges of powering an expanding economy. The demand for electricity will only grow as the population increases and becomes ever more reliant on computers, appliances, and other energy-hungry, technology-based devices.
A key element of the challenges awaiting utilities will be maintaining reliability in the supply of power. Reliability perhaps was a given in the pre-deregulation days, when monopoly utilities were responsible for maintaining supply, transmission, and distribution systems within their own service territories. But deregulation ushered in a whole new era, as was graphically and emphatically illustrated by the great blackout in the Northeast and Upper Midwest in August 2003, and by disastrous occurrences in California electricity markets a few years back.
Whether or not these events can be fully ascribed to deregulation, it is clear that opening the grid to interstate commerce, and diffusing lines of responsibility, against a backdrop of major utility mergers will make reliability a prime issue going forward.
An Accenture survey of consumers affected by the August blackout found in February that more than 70 percent had doubts about the stability of the nation's electricity supply. Nearly 60 percent did not believe enough had been done to secure the grid after the blackout. Half of those surveyed expected another blackout within the next six months, or weren't sure, and 27 percent thought the electricity supply would be less reliable in the future.
Mandatory reliability standards could very well be a part of the future for utilities, whether imposed and enforced by government or the industry.
As was suggested earlier for the industry's future, utilities can approach the reliability issue with fear and uncertainty, or they can get out in front of it and help direct the response-their own, and that of government. If political leaders want to be reassured that the decisions they make will keep the lights on, the industry can help by providing facts and a clear explanation of the options.
Utilities also may need to keep in better touch with their customers. The Accenture survey found that 60 percent of utility customers believed their utility company and the government had not done enough to inform them of the blackout's causes, and that 85 percent said their utility company should provide more information on the electrical system and supply.
Interestingly, 43 percent of consumers said they would be willing to pay up to 5 percent more in electricity rates if it would help improve the reliability of the electricity system, while another 9 percent said they would pay 6 to 10 percent more. Fewer than half (44 percent) of respondents said they would not be willing to pay any increase.
To help improve reliability, a fact of life for the utility of the future could well be participation in a regional transmission organization (RTO).
Information Technology as a Driver
The utility of the future will rely more and more on information technology to complete its mission and compete in the marketplace. But high-performing utilities will go a step beyond. Increasingly, they will move IT officers from the back room to the boardroom, and incorporate them in long-term business strategy. They will recognize that there is competitive advantage in IT.
Evolving technology demands an organizational response. The technology organization will become the hub of a network that includes internal systems, outsourced processes, and interconnections with external parties. Internal systems, because of standardization and commoditization, will require much less of IT's time.
However, the technology group will have operational responsibility for human resources, customer service, and accounting processes, most of which will have been outsourced to specialist providers, and for scalable networks that link to other firms or industry consortia. CIO will change from "chief information officer" to "chief interrelationship officer." The CIO will have to screen out the strategically important from the merely fashionable. From time to time, an idea seizes the popular imagination and makes its way to the boardroom, and there can be great pressure to climb aboard without full analysis. The CIO will focus on innovation that can create enormous value. IT investments that don't drive value will be wasted. Technologies that improve a utility's response to developments and interaction with its customers, vendors, and employees-such as through the work of the field staff and others who perform basic operations-can produce significant profits.
A CIO with an innovative outlook that is shared by the rest of the company can become a value creator. This is a major departure from the conventional view of the CIO as primarily a steward of assets.
Across the business world, studies show that high-growth enterprises put 45 percent of their IT investment into innovation. Their counterparts with low profit growth put only 20 percent toward innovation and 80 percent into operating existing technology.
A recent survey showed that only 28 percent of companies tie IT investment to their business goals, and only 12 percent accurately measure the impact of their investment on the business. The most effective IT executives feel their leadership and understanding of the business are more important than technical know-how.
They also point to the need for a shared language within the company. In utilities, there can be poor dialogue between business analysts, policy-makers, and IT people. Until they have a common lexicon, they will be like ships passing in the night.
Taking Charge
Whatever specific developments govern the utility of the future, the industry's leaders today clearly have two choices: to merely react to the forces of change, or to climb into the driver's seat and shape their destiny.
Utilities have been through 15 years of experimentation with alternate industry models, yet there is still no consensus on which is best. On the question of deregulation, for instance, the process in North America has stalled. Are utilities really happy with the hybrid model that is out there today? How does it help employees and customers?
Consider this fact: In 2002, in states where restructuring was active, average revenue per kilowatt-hour was 22.91 cents, compared to 26.8 cents in states where restructuring was delayed, suspended, or inactive.
For the industry to take charge of the future, we must first make our companies great examples of high performance by taking management to new levels of sophistication, by shifting the culture of our organizations to more readily accept new technologies, and by constantly striving for continuous improvements in scale, synergies, and automation.
Keith Mueller manages Accenture's North American Utility industry group, which includes more than 3,000 North America personnel in operations and consulting. Contact him at 703-947-3303, or at keith.h.mueller@accenture.com.
Three Pillars of Change
Explaining the three forces that will change the industry forever.
Scale: The march toward optimum cost structures and world-class delivery capability will lead the industry into searching for scale opportunities in every aspect of business operations. If an enterprise is not large enough to devote the resources and funding to develop these scale capabilities, they will then be delivered by providers who can deliver top world-class performance levels on a contractual or partnership basis. This quest for scale also could drive another wave of M&A activity.
Synergies: The interplay between talent, technology, and innovation will provide the high-performance foundation for tomorrow's utilities. With an aging workforce (in some cases averaging in the mid to late 40s), and future projections pointing to the decreasing size of the available workforce pool, the need for more sophisticated means of attracting, training, motivating, and compensating people will be at the forefront. Technology-enabled connections between utility and customers, utility and suppliers, utility and other utilities, all will be dramatically transformed as a result of enriched networks of "inter-"and "intra-" connections between industry stakeholders. The landscape suddenly becomes ripe and supportive for synergies.
Automation: To provide reliable and continuous energy product in a cost-competitive manner, any process that can be effectively automated will be. In field-service-oriented businesses like utilities, we are only now at the beginning of pervasive wireless, mobile, high-powered digital links across the entire enterprise. The ubiquitous application of RFID technology will dramatically change the perceptions and processes of how functions as diverse as inventory management and human safety procedures can be performed. -K.M.
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