Future Shock:Future Shock:What Did Restructuring Uncover?What Did Restructuring Uncover?

What Will the Next Industry Upheaval Bring?What Will the Next Industry Upheaval Bring?

April 12April 12thth, 2005 , 2005

Presented by Eric P. CodyPresented by Eric P. Cody

Has utility restructuring failed? Has utility restructuring failed? What changes have been wrought?What changes have been wrought? What lessons learned? What lessons learned? Are metering and billing safe now?Are metering and billing safe now? What about utilities that didn’t have to What about utilities that didn’t have to

run the gauntlet?run the gauntlet? Who won?Who won? Who’s going to prison?Who’s going to prison? What’s next?What’s next?

Questions to be AnsweredQuestions to be Answered

Lessons fromLessons fromPreparing-for-CompetitionPreparing-for-Competition You never run half as hard as when You never run half as hard as when

someone is chasing yousomeone is chasing you

Customers want choices, not necessarily Customers want choices, not necessarily ChoiceChoice

Regulators must regulateRegulators must regulate

Competition introduces new concepts and Competition introduces new concepts and dynamicsdynamics

Differentiation ≠ discriminationDifferentiation ≠ discrimination

Metering is not easily unbundledMetering is not easily unbundled

Central ThemeCentral ThemeThe process of The process of preparingpreparing for retail for retail competition yielded important insights competition yielded important insights into how individual utilities perform their into how individual utilities perform their core customer functions, and what they core customer functions, and what they cost.cost.

…however, few utilities have capitalized …however, few utilities have capitalized on this deeper understanding of retail on this deeper understanding of retail operations. operations.

Through the Looking Through the Looking GlassGlass

Restructuringlegislation

Restructuringlegislation

Commissionaction to

deregulate

Commissionaction to

deregulate

Developrestructuring

plan

Developrestructuring

plan

Prepareunbundled

cost-of-service

Prepareunbundled

cost-of-service

Revalue assetsin market

setting

Revalue assetsin market

setting

Comply withaffiliate

standardsof conduct

Comply withaffiliate

standardsof conduct

Divest assetsDivest assets

Developunbundled bills

Developunbundled billsDevelop

unbundled rates

Developunbundled rates

Estimatefixed vs.

avoidable costs

Estimatefixed vs.

avoidable costs

Estimatestrandable costs

Estimatestrandable costs

Transfer assetsTransfer assets

Maintain assetsMaintain assets

Retailcompetition

Wholesalecompetition

File forstranded cost

recovery

File forstranded cost

recovery

File backoutcredits

File backoutcredits

Where Utilities LookedWhere Utilities Looked

More frequently—More frequently— Strandable assetsStrandable assets Overall cost structure and kWh costOverall cost structure and kWh cost Unbundled costsUnbundled costs

Less frequently—Less frequently— Customer preferencesCustomer preferences Employee adaptabilityEmployee adaptability Alternative sources for non-strategic Alternative sources for non-strategic

workwork

RegulatedMonopoly

RegulatedMonopoly

RegulatedMonopoly

RegulatedMonopoly

RegulatedMonopoly

RegulatedMonopoly

CompetitiveEnergySupply

CompetitiveEnergySupply

Re-regulatedUtilities

Re-regulatedUtilities

CompetitiveEnergySupply

CompetitiveEnergySupply

CompetitiveEnergySupply

CompetitiveEnergySupply

RegulatedMonopoly

RegulatedMonopoly

PartiallyUnbundled

Utilities

PartiallyUnbundled

Utilities

“VirtualChoice”

“VirtualChoice”

Pre-1998 1998-2001 2001-2003 2003

Structural DivergenceStructural Divergence

Load Supplied CompetitivelyLoad Supplied Competitively(% Total Electric Load Served Competitively)(% Total Electric Load Served Competitively)

Note: Data not reported on a consistent basis and therefore not directly comparable between jurisdictions; estimation required

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

TX(9/04) ME(1/05) NY(12/04) MA(12/04) MD(12/04) OH(9/04) DC(12/04) PA(1/05)

Residential

Commercial

Industrial

Total

Distinct Markets ExistDistinct Markets Exist

Major commercial and industrial Major commercial and industrial customerscustomers

Mid-market commercial and Mid-market commercial and industrial customersindustrial customers

Mass market of residential and Mass market of residential and small business customerssmall business customers

Current Utility Model ClustersCurrent Utility Model Clusters

Full retailseparation

Full retailseparation

AB, AUS, TX, UK

AB, AUS, TX, UK

• Customer base transferred to affiliate• Regulated wires company delivers energy• Retail providers issue a consolidated bill

• Customer base transferred to affiliate• Regulated wires company delivers energy• Retail providers issue a consolidated bill

Unbundled operationsUnbundled operations Cooperatives,municipals

Cooperatives,municipals

• Focus is on distribution and retail services• Generation supply is contracted, mainly long term• Customers not enabled to choose retail supplier

• Focus is on distribution and retail services• Generation supply is contracted, mainly long term• Customers not enabled to choose retail supplier

Competitivegeneration supply

Competitivegeneration supply

MA, ME, NJ,NY, OH, PA

MA, ME, NJ,NY, OH, PA

• Generation separated and subject to competition• Incumbent delivery companies act as providers of last resort• Billing, metering & customer care remain bundled utility services

• Generation separated and subject to competition• Incumbent delivery companies act as providers of last resort• Billing, metering & customer care remain bundled utility services

Non-residential choicewith portfolio of

options forsmall customers

Non-residential choicewith portfolio of

options forsmall customers

OROR• Non-residential customers may switch retail suppliers• Residential customers may choose from regulated portfolio• Small business customers may choose portfolio options or switch retail suppliers

• Non-residential customers may switch retail suppliers• Residential customers may choose from regulated portfolio• Small business customers may choose portfolio options or switch retail suppliers

Market/Market/regulatory modelregulatory model

Market/Market/regulatory modelregulatory model RepresentedRepresented

byby

RepresentedRepresentedbyby

ModelModelcharacteristicscharacteristics

ModelModelcharacteristicscharacteristics

Vertically integratedVertically integrated Most U.S.states

Most U.S.states

• Utility maintains assets in G,T, and D• Customers not enabled to choose retail supplier• Majority of load requirements supplied by rate based units• Wholesale competition increasingly used to supply load growth

• Utility maintains assets in G,T, and D• Customers not enabled to choose retail supplier• Majority of load requirements supplied by rate based units• Wholesale competition increasingly used to supply load growth

Rest

ruct

ure

d m

od

els

Est

ablis

hed m

od

els

1111

0%

5%

10%

15%

20%

25%

30%

35%

40%

AB AUS TX UK GA gas MA ME NJ NY OH PA OR

Percentage of Residential Percentage of Residential Customers Served CompetitivelyCustomers Served Competitively

Full RetailSeparation

Direct CustomerAssignment

CompetitiveGeneration

Supply

RegulatedPortfolioChoices

2003 data; underlying figure originally prepared by Plexus Research for MA Division of Energy Resources

100%

Unmet Restructuring Unmet Restructuring ExpectationsExpectations

Markets have defied ‘regulatory Markets have defied ‘regulatory prescription’prescription’

Distinct sub-markets have emerged with Distinct sub-markets have emerged with divergent requirementsdivergent requirements

Residential customers mostly left out inResidential customers mostly left out inthe coldthe cold

One model does not fit all utilitiesOne model does not fit all utilities Metering competitive in only a few marketsMetering competitive in only a few markets IT systems subject to lingering uncertaintyIT systems subject to lingering uncertainty Electricity prices have not fallenElectricity prices have not fallen

1998 Expectations Re: Metering1998 Expectations Re: Metering

Interval meters on large customers for Interval meters on large customers for settlement purposessettlement purposes

Universal interval metering was a distinct Universal interval metering was a distinct possibility possibility

Daily remote interrogationDaily remote interrogation

Enhanced metering to take advantage of Enhanced metering to take advantage of innovative pricinginnovative pricing

Metering services would becomeMetering services would becomecompetitive in some statescompetitive in some states

New metering standards would emergeNew metering standards would emerge

‘‘Then’ and ‘Now’ Perspectives: Then’ and ‘Now’ Perspectives: Metering RequirementsMetering Requirements

Meter readingMeter readingfrequencyfrequency

Meter readingMeter readingfrequencyfrequency

MeteringMeteringinformationinformationgranularitygranularity

MeteringMeteringinformationinformationgranularitygranularity

AMR technologyAMR technologyarchitecturearchitecture

AMR technologyAMR technologyarchitecturearchitecture

Ownership ofOwnership ofmetering functionmetering function

Ownership ofOwnership ofmetering functionmetering function

Daily or Daily or on-demandon-demand

Daily or Daily or on-demandon-demand

Hourly interval dataHourly interval dataHourly interval dataHourly interval data

Universal intervalUniversal intervalmetering via fixedmetering via fixed

networknetwork

Universal intervalUniversal intervalmetering via fixedmetering via fixed

networknetwork

Unbundled metering; Unbundled metering; subject to competitionsubject to competition

Unbundled metering; Unbundled metering; subject to competitionsubject to competition

All customersAll customersAll customersAll customers Residential & smallResidential & smallbusinessbusiness

Residential & smallResidential & smallbusinessbusiness

Large commercial &Large commercial &industrialindustrial

Large commercial &Large commercial &industrialindustrial

MonthlyMonthlyMonthlyMonthly

Cumulative energyCumulative energyusageusage

Cumulative energyCumulative energyusageusage

Mobile radio; Mobile radio; drive-bydrive-by

Mobile radio; Mobile radio; drive-bydrive-by

Bundled meteringBundled meteringBundled meteringBundled metering

Daily, hourly or Daily, hourly or on-demandon-demand

Daily, hourly or Daily, hourly or on-demandon-demand

Hourly interval dataHourly interval dataHourly interval dataHourly interval data

Wireless networkWireless networkor power line carrieror power line carrier

Wireless networkWireless networkor power line carrieror power line carrier

Unbundled or enhancedUnbundled or enhancedmetering services metering services

per tariffper tariff

Unbundled or enhancedUnbundled or enhancedmetering services metering services

per tariffper tariff

1998 Looking Forward1998 Looking Forward 2005 Looking Backward2005 Looking Backward

MeteringMeteringRequirementsRequirements

Cust

om

er

Cust

om

er

class

class

Why is Metering HardWhy is Metering Hardto Unbundle?to Unbundle? Physical assets widely dispersedPhysical assets widely dispersed

Integrated into electrical systemIntegrated into electrical system

Economies of scale applyEconomies of scale apply

Lack of practical know-how outside Lack of practical know-how outside utilitiesutilities

Metering communications infrastructure Metering communications infrastructure begs for single, centralized operatorbegs for single, centralized operator

Critical issues Critical issues safety, reliability, safety, reliability, regulationregulation

Billing & Payment TransformationBilling & Payment Transformation

Bill printed &Mailed monthly,

on cycle

Bill printed &Mailed monthly,

on cycle

Outsourced billprint &

distribution

Outsourced billprint &

distribution

On-line, electronicbill presentment

On-line, electronicbill presentment

BillPresentment

On-line, electronicpayment viathird party

On-line, electronicpayment viathird party

On-line ortelephone payment

by credit card

On-line ortelephone payment

by credit card

Pre-approvedbank account

debit

Pre-approvedbank account

debit

Check by mailCheck by mail

Walk-in paymentWalk-in payment

BillPayment

PaymentProcessing

Outsourcedpayment

processing(EFT)

Outsourcedpayment

processing(EFT)

Outsourcedremittanceprocessing

Outsourcedremittanceprocessing

In-houseremittanceprocessing

In-houseremittanceprocessing

Credit &Collections

Assuredpayment

(pre-authorizedEFT options)

Assuredpayment

(pre-authorizedEFT options)

Outsourcedcollections

Outsourcedcollections

In-housecollections

In-housecollections

Termination forNon-payment

Remotedisconnect

& reconnect

Remotedisconnect

& reconnect

Instanton-site

authorization ofcredit card

payment duringdisconnect visit

Instanton-site

authorization ofcredit card

payment duringdisconnect visit

Multiple site visitsto disconnect andreconnect meter

Multiple site visitsto disconnect andreconnect meter

TransformedPractices

Traditional

Outsourced

Electronic

Developments inDevelopments inCall ManagementCall ManagementCentralize CallCenter operations

Centralize CallCenter operations

Create virtualCall Centers

Create virtualCall Centers

Continuously monitorcustomer satisfaction

Continuously monitorcustomer satisfaction

Consolidate &

Centralize

Apply graphical userinterface to CISscreens

Apply graphical userinterface to CISscreens

Track & analyzecall patterns

Track & analyzecall patterns

Implement interactivevoice response (IVR)

Implement interactivevoice response (IVR)

Link AMR systemto enable instant meter readson request

Link AMR systemto enable instant meter readson request

Leverage

Existing Assets

Enha

nce

Resp

onsive

ness

Cost

Productivity

Loyalty

Extend hours of CallCenter operationto 24x7

Extend hours of CallCenter operationto 24x7

Por

tabi

lity

of F

unct

ion

Retail Services DifferentiatedRetail Services Differentiated

Strategic Value of Function

CompetitiveCompetitiveMarketMarket

OperationsOperations

RegulatedRegulatedUtilityUtility

OperationsOperations

ContinuingContinuingPressuresPressures

to Unbundleto Unbundle

OutsourcedOutsourcedCommodityCommodity

ServicesServices

SmallCustomer

Billing

SmallCustomer

Billing

MajorCustomer

Billing

MajorCustomer

Billing

SmallCustomerMeteringServices

SmallCustomerMeteringServices

MajorCustomerMeteringServices

MajorCustomerMeteringServices

MajorCustomer

InformationServices

MajorCustomer

InformationServices

SmallCustomer

InformationServices

SmallCustomer

InformationServices

CustomerPayment

Processing

CustomerPayment

Processing

CallHandling

CallHandling

Due Diligence – Retail ServicesDue Diligence – Retail ServicesCapability Scale

Customer Relationship

Flexibility Synergy

New Service Connection Service Activation Meter Installation Meter Reading Meter Lock-in/lock-out Metering Communications Bill Calculation Bill Print Bill Distribution Payment Options Remittance Processing Credit and Collections Revenue Assurance Customer Inquiry Program & Rate Sign-up Outage Reporting Restoration Notification

Operational Criteria

Reta

il S

erv

ice

Act

ivit

ies

Retail Due DiligenceRetail Due Diligence

How portable is the function?How portable is the function? Have automation possibilities been Have automation possibilities been

exhausted?exhausted? Is the function strategic to the utility?Is the function strategic to the utility? Can it be outsourced without fanfare?Can it be outsourced without fanfare? What synergies/economies are uniquely What synergies/economies are uniquely

available to an outsourcer?available to an outsourcer? What utility IT system upgrades can be What utility IT system upgrades can be

avoided by outsourcing?avoided by outsourcing? What fixed and variable costs are associated What fixed and variable costs are associated

with the function?with the function?

Continuously profitable for 30 yearsContinuously profitable for 30 years

Started a revolution; new paradigmStarted a revolution; new paradigm Transformed customer operationsTransformed customer operations Radically simplified business processesRadically simplified business processes Redefined external business relationshipsRedefined external business relationships

Pervasively lower costPervasively lower cost

Inspired and innovative employeesInspired and innovative employees

Food for Thought: Food for Thought: Southwest AirlinesSouthwest Airlines

Contact InformationContact Information

Eric P. CodyEric P. CodyCody Energy Group Cody Energy Group 629 629 Massachusetts AvenueMassachusetts AvenueBoxborough, MA 01719Boxborough, MA 01719(978) 264-9839(978) 264-9839

CodyEnergy@net1plus.comCodyEnergy@net1plus.com