Pressure in the Pipeline, Tension in the Wires
- 06 June, 2001 12:13
Electricity and gas. Suddenly it's risky business. Deregulation is forcing utilities to define themselves in new ways and sell themselves to new customers. And the shock of this newness is falling on the power company CIOs.
In the bad old days before privatisation and deregulation, utility companies enjoyed strong monopolies and treated their customers like dirt. Australians expected to wait days to have their gas or electricity supply connected or the leaking meter fixed, and would grudgingly resign themselves to taking an entire day off work in anticipation of a visit from the telephone repairman.
Or in the words of ACTEW AGL CEO John Mackay, five years ago in Australia most utility companies had victims, not customers. Most didn't even recognise people as their customers, so meeting customer demand wasn't even the lowest of low priorities.
Any utility company that played the same games today could confidently expect a massacre.
"We've all dealt with plenty of big organisations before. How long does it take for them to come and connect the gas or the electricity or to fix the leaking meter and in what state do they leave the front yard?" Mackay says. "All of those kinds of things, five years ago, just weren't as important as they are now when we've suddenly found that customers can buy their product from somebody else. It dawned on all of us that if we kept treating our customers like that, we'd be out of business."
With energy markets buffeted by new and irresistible external forces like competition, convergence, technology, globalisation and capital, Australian utility companies are living in dread.
They know they're in for a huge and painful shakeout over the next few years. Continued consolidation is inevitable, experts agree, the likely end result being just five or six trans-Tasman utilities offering not only gas and electricity but also a larger range of services including telecommunications and financial services. "There's going to be a bloodbath," one industry watcher told CIO.
In response, utility companies are changing - and they're changing fast. No longer swaddled by the monopoly status that once let them luxuriate in bureaucracy and inefficiency, utility companies are joining the real world. Now for the first time, says Sydney Water CIO Vicki Coleman, they're facing the challenges other kinds of businesses have known for years.
Coleman says many of the issues confronting utilities today - lack of IT infrastructure, lack of customised systems, cultural issues - are common to every business.
"I think the challenges that we face are no different to those facing other organisations, whether they be utility or in other industry sectors. [Sydney Water is] now recognising that we are a knowledge organisation and no longer only dealing with our physical assets, and I think this is something that is being recognised right across the corporate world," says Coleman. "The challenges that we face are involved with maintaining our position in the value chain and how well we impart information to our regulators, to our stakeholders and to our customers. Like others, we face the challenges of becoming truly customer-focused and making that information available."
However, utility companies also face some special pressures not bedevilling organisations in other industry sectors. Increased competition from established and new market players has forced retailers to reconsider their efforts to participate in Australia's energy market. Margins are slim and getting stiffer as competition really bites.
For Sydney Water, one answer is seen to be the need to become more entrepreneurial in terms of being commercially savvy, thinking outside the square, and being innovative in finding the technical solutions that will assist it to better meet its business drivers.
"It's a matter of making those changes and being flexible and grabbing on to both technology and the process that will enable us to meet the challenges of the future," Coleman says. "We needed to be flexible and dynamic and moving from more of a silo-based organisation because Sydney Water was preparing for deregulation. With deregulation off the agenda, we've recognised the importance of looking at our business processes and that our business processes go right across any part of the organisation."
In response, Sydney Water is currently battling with system integration and has defined an enterprise architecture that is intended to achieve seamless integration of systems and information-sharing.
Living in Doubt.
For utility companies around the globe, it seems uncertainty is the name of the game. "Virtually every aspect of the utility business is in flux," reports Deloitte Research in The Utility Executive's Field Guide to the Future. "Regulatory policies, corporate strategies, and share values provide conflicting clues as to how the sector might evolve. Underlying the contradictions are divergent opinions about the industry's dynamics. Yet despite the lack of clarity, utility executives must make decisions about mergers, divestitures, reorganisations, and capital investments - decisions that fundamentally impact their companies' fortunes."
That uncertainty is as evident here as anywhere else in the world, not least because doubts are mounting about the market reform program that has been under way nationally for about three years and in various states for about five years as it starts to stall.
One problem is that the national electricity market just isn't working effectively as a national electricity market, says Matthew King, PricewaterhouseCoopers energy sector leader management consulting.
"Basically, the national market isn't truly national, either in a physical sense or in a financial sense, the way energy trading works," King says. "In a physical sense there are what the engineers call transmission restraints between various state markets. So you can't flow electricity around the country freely and, the way the national wholesale market works, there are risks in individual state markets and prices in individual state markets that make it very difficult for participants in the market to manage their risk. So they become state-bound and much more risk-exposed."
That high degree of uncertainty makes it extremely difficult for executives to make the strategic decisions now which are vital for their survival into the future. Not only is the way the market is currently set up constraining corporate decision-making, but it is also creating great uncertainty about investment decisions in new energy capacity.
"There are some important strategic decisions that the individual utilities, whether they be state-owned or investor owned, need to make," King says. "Like what business am I in - am I in a retail and network business, or should I get out of the retail business and only be in the network business? If I'm in the generation business, how am I going to grow and manage my risk? Should I be looking to get into retail as well or should I just be expanding my generation portfolio? How do I do that across state borders so I can still manage my risk in this national market?
"Each time they [the utilities] pose those questions internally, there are still so many questions unanswered externally that they are unable to [get a realistic] view."
However, not everyone sees the uncertainty as a problem. For some it is providing a welcome relief.
"The entrepreneurial spirit is alive and well at United Energy, so that's [uncertainty] not a big problem. And the delay in full retail contestability (FRC) has just given us an opportunity to better understand how we want to adapt to the market," says United Energy CIO Ron Hinsley. "We never stopped getting ready for FRC, but we did become more methodical and we will deliver better products because of this.
"The biggest problem we face is choosing which opportunities we want to pursue. The market in Australia is great for those who would like to lead and are comfortable in that position. That environment excites us, but it does put more burden on information services to deliver."
Utility companies' survival depends on their becoming market- and customer-focused leaders in technology-enabled customer relationship management, marketing, selling and customer care. They will also increasingly have to become "multi-utilities", offering a huge portfolio of products to an increasingly demanding customer base.
"The whole of this indus-try has come out of a situation where everyone has been a monopoly, and now, progress-ively at the retail level, they'll all be trading in an open retail market," says Bill McLaughlin, group general manager corp-orate affairs AGL. "Dealing with the market changes is the most significant issue at the retail level."
Nonetheless, utilities are reportedly living in fear, "scared to death", as one industry watcher puts it, not least because, after under-investing in IT infrastructure over most of their lives, they're finding solutions are scarce and their costs prohibitive.
"These organisations don't have the dollars to spend," the analyst told CIO. "You'll see a Telstra go out and spend hundreds of millions of dollars on a CRM system. These guys [the utilities] just don't have the bucks or the inclination to spend that kind of money. Yet they know they have to do something."
In the words of Australian Energy News, there is pressure in the pipeline and tension in the wires.
"The power industry may be firmly associated with the old economy'," Chris Jenkins, KPMG's global segment leader for power and utilities wrote recently. "However, a closer look reveals how much is new and changing. In different ways across the globe, power and utility companies are reinventing themselves to meet unprecedented challenges in their business environment. The industry winners are increasingly agile and have a clear view of their corporate competencies and customer requirements. These companies are at the forefront of business change in the developed world - and of vital infrastructure investment in developing countries." The changes, apparent everywhere, show organisations desperate to survive in a new world order that has pulled the rug out from under their previously comfortable feet and left them feeling vulnerable and exposed. Take Mackay's own organisation, the ACT Electricity and Water Authority (ACTEW), formed in 1988 by the amalgamation of the Territory's water and electricity authorities, and already a corporation by July 1, 1995.
"Of the utilities that put their infrastructure in the ground, some are laying fibre cable along with their pipes and wires. Those that have got it above the ground are looking at ways of hanging more things off their poles," Mackay says.
"As a small utility, ACTEW realised that if we stayed small we could never hope to compete," he says. "Technology was one of the driving issues, here. We knew that we could never hope to afford the kind of next generation of technology that we would require to compete if we stayed as we were."
To address the problem, ACTEW set up a joint venture with Australian Gaslight Light Company (AGL). This has the twin benefits of getting someone else to share costs while adding gas to the lists of services ACTEW provides to the people of the ACT and region. But sensing that even providing water, gas, electricity and sewage services wasn't enough, AGL's spin-off specialist infrastructure, management and services company, Agility, soon entered into a contract with Canberra-based TransACT Communications to construct the broadband fibre-optic cable network in the ACT.
As a result, TransACT has become the first company in Australia to offer its customers a completely "open" broadband network allowing a greater choice in high-speed Internet access, television, video and telephone services. Meanwhile, ACTEW AGL is about to set up its own ISP.
Indeed, numerous energy retailers are opting to "bundle" services like energy, telecomms, e-commerce and fuel purchases into the one account.
For example, Hydro Tasmania is using its extensive telecommunication network and the skills of its people to build a new telecommunications venture in Tasmania. The utility has joined electricity retailer Aurora Energy and telecommunications carrier AAPT in the new joint-venture telecommunications company Aurora Energy AAPT to provide competitive telecommunications services to the Tasmanian community. And the organisation is investing heavily in wind-farms and hydro-power services to add to its stable of offerings and pushing aggressively into other states.
"We're certainly looking at establishing a bigger presence in places like Melbourne and Sydney," says senior management accountant Robbie Lehman. "We're just opening our offices in Melbourne, so we certainly need to be able to change our infrastructure so that we can allow other areas - Melbourne, Adelaide, Sydney - access to our financial systems and network."
Meanwhile, AGL was Australia's first energy distribution company to include natural gas, LPG and electricity in its energy portfolio. In partnership with some of the world's biggest energy companies, AGL has acquired assets designed to strengthen its position as an energy market leader. Today it is one of the few Australian companies able to provide the network, infrastructure, transport, distribution, expertise and experience required to service a diverse customer base with all three main sources of energy: natural gas, electricity and LPG.
"The whole market is moving towards at least some sort of convergence between gas and electricity," AGL's McLaughlin says. "Everyone will travel along this way because there won't be room for people who think they'll be able to just sit there and just sell electricity or gas.
"We're well placed to grow in that market and we've got over two million customers in Australia and over two and a half million customers across Australia and New Zealand. So we're working to prepare ourselves for the situation where we can sell multiple energy products of gas plus electricity to our entire customer base."
All three organisations call themselves innovative. In fact, all are simply moving with the times and responding inevitably to the new market pressures. Utilities all around the globe are extending beyond simple electricity provision and offering telecommunications, cable television, broadband Internet connection, newspapers and security services through a single point of contact and with just one bill to pay.
"All utilities are trying to become more and more what we call multi-utilities," Mackay says.
According to Deloitte's The Utility Executive's Field Guide to the Future, Australian utilities put customers as the number-one issue facing them over the coming decade. Respondents believe that in the coming decade the utility business will be heavily influenced by customers' preferences regarding what they want to buy, who they want to buy it from, and how they want to buy it. Under the old monopoly regime, customers would never have been credited with this degree of influence.
Deloitte's in-person interviews and other research show that utility executives emerging from the monopoly tradition are uncertain how to read and respond to the market, and therefore they regard customer demand as a perplexing issue. They are also plagued by a lack of commercial software tailored to suit Australian market conditions.
King says all the players he can think of, bar one, that have made significant investments in huge commercial software have had to customise it to various degrees. "Commercial software is still getting a go, but the projects are big and they are costly," he says. While margins in the retail business are not high, he says, the investments required to achieve greater sophistication in customer relationship management and billing are. Most utilities must also add an entire new layer of IT infrastructure to connect to new national systems that will manage the switching of customers once competition comes in.
"CIOs are being asked by their MDs how much it will cost for each one of those things. When they add them all up, it is seen as too much so they have to work out which ones to do first or find ways to do all three cheaper," King says. "CIOs are being squeezed to make some either long-term strategic decisions or some short-term ones to meet immediate requirements while the organisation works out what it is going to do [in terms of strategy]."
The many rounds of acquisitions many utilities have undergone are complicating the picture even further. For instance, McLaughlin says AGL has acquired energy businesses in Victoria, South Australia and New Zealand recently, each with its own call centre system. "Basically, we have the luxury of having just about every one of them in one way or another in our suite of products. What we're doing at the moment is evaluating all of the systems that are available and we'll ultimately move towards one.
"We're very keen on customer service," he says. "We believe that levels of customer service you've got to offer through the whole interface between us and our customers has got to be key to how we do business. So any system has got to be not just extendable but also got to be selective in how you deal with different sectors of the market. You have to be able to do all sorts of things with being able to represent the level of service you want to the different customer bases."
But if CRM software is available, readily usable billing systems are not. Mackay says there is effectively no billing software available that has been written and customised for the utility market. Billing for utilities is extremely complicated and even telecommunications software doesn't really suit, he says.
"And that's particularly because we're moving into the stage, certainly for larger energy users - and that's electricity particularly, where we're going to charge them different amounts of money for power depending on the different times of day. We buy electricity now in half-hour lots and it's a lot more expensive to buy electricity at 8am than it is at 3am. We need to pass those costs on. So we're now using much more time of use' tariffs. That's the key."
Sink or Swim.
Utilities are also having to move fast on e-commerce systems. Mackay says Canberra's citizens use the Internet more regularly than anyone else in the world. They now expect to not only be able to pay their bills online, but also to get their bills online and to be able to find out much more information than ever before.
Deloitte finds the pressure to master e-business is growing. Optimistic predictions of a year ago are being revised dramatically upward. Utilities are already making use of the Internet for many purposes, but the full impact of e-business on this industry has yet to be felt, Deloitte says. E-commerce is enabling new routes to market for utilities and, through industry specialist portals, allowing improved management of the supply chain. Some utilities are at the forefront of the new economy; others are still watching from the sidelines.
But infrastructure issues are an equally pressing concern. Sydney Water considers itself well placed in regard to IT infrastructure. Coleman says she was recruited a year ago to create Sydney Water IT, in part to consider how the organisation could better use IT in pursuit of its goals.
"One of my key priorities in determining our IT strategy is to define an enterprise architecture. We've been working quite solidly on that and moving that into place so that we can progress in terms of, in particular, the areas that we want to move forward on: knowledge management and e-business. Knowledge in particular is something of great importance to us that we've perhaps been a little behind in utilising, but now we're best positioned to move forward on that," she says.
Meanwhile, as Hydro Tasmania faces its major strategic business issues for the years ahead, it has implemented the JD Edwards OneWorld product with a view to ensuring its financial systems are capable of managing the new business environment. It has also replaced Hydro Tasmania's e-mail system with Microsoft Outlook and implemented the Electronic Document Management System to manage more than 300,000 drawings and other business documents.
"Utilities have to learn new skills, and deploy new systems and processes, to survive and prosper," Deloitte says. "Speed and successful execution are vital. Branding and bundling of domestic services - where several industry winners are stretching the traditional concept of a utility - are crucial success factors."
As the industry shakeout continues, only the IT fittest can hope to survive.
Once highly regulated and stable predictable businesses working in a mature environment, frequently as government business enterprises, utilities these days operate in a market environment that is extremely volatile and cut-throat competitive. They know that they need management vision, robust and effective IT systems, a vastly different culture and a new and responsive relationship to customers in order to survive.
It's just achieving some of those things that has them stumped.
As monopolies, few had much incentive to invest heavily in IT, which was typically seen as largely related to accounting. So the changing face of the industry has huge implications for IT investments, Matthew King, PricewaterhouseCoopers energy sector leader management consulting, says.
"The IT impacts have been most felt in the retail and network distribution parts of the business," King says. "At the moment there is one organisation that runs the power into your house. With the introduction of competition, your relationship in future could be with two organisations - the one that actually supplies the power and manages the wires, and the one that actually sells it to you - a retailer and then the network. And the regulators are breaking up those two parts of the business.
"So by separating those two parts of the business, you're immediately creating a whole new bunch of IT issues because currently that is all served from one set of systems under one set of business rules."