What Keeps the Utility CEO Awake at Night?


Turning Energy Strategy Upside Down, Part 3


If you are the CEO of any significant energy company or one of its suppliers you have a lot to worry about these days.  A convergence of forces is bearing down on you from the impacts of the economic recession and recovery; the change in national direction under Obama leadership, geopolitics and the implications for energy security and reliability, on top of the usual market drivers back home.  So what do you do?

Putting more “S” in your SWOT

One common approach is to gather your key managers together with some facilitation and take stock of where your company is today—the usual strengths, weaknesses, opportunities and threats and evaluate your current business strategy and goals against these four categories of opportunities and threats.

Another approach is to stress test your current business strategy and competitive position across alternative scenarios of the business future in the industry to assess your risk exposures and look for the sweet spots in the market that play to your advantage.

No matter what process you use, the result needs to be the same.  Clarify your strategic vision and get your management team aligned around that strategy to assure a laser focus on execution of the plan.  Easy, you say?  Not so fast!

Put the Geeks to Work Quantifying the Cash Flow at Risk

There is the pesky business of volatility and risk to deal with in updating your strategy and mapping out its execution.  Scenario analysis is a powerful way of rehearsing your business strategy across alternative views of the business future, but quantifying the cash flow at risk in your portfolio and strategy gives you the most actionable insight about the trade-offs between options.

If your company has spent the big bucks installing an enterprise solution to manage all this data you produce, mobilize your geeks to slice and dice it creating a consistent, actionable foundation for action across your business lines.  But what do you measure and what is it telling you about your business?  And now that you have today’s data how do you forecast it forward into the future?  And which future?

Remember, KISS!

I know it sounds corny, but the risk of unleashing your geeks is they will bury you in data all sliced and diced in perfect spreadsheet columns, but telling you nothing strategic—unless you guide them to keep it simple, stupid.

After all, the corporate strategy is what the CEO says it is, and very few really great strategies bubble up from the basement to the top floor wrapped in data.  Really great strategies are the problem of the gut!  They result from that most human of interactions between the ears—thinking!  A CEO who surrounds himself with smart people who challenge conventional wisdom, think conceptually and play “what if” with abandon about disruptive ways to defeat the strategy he is building will fine tune your strategy with a significantly better chance of success.  So surround yourself with people who will argue with you to your face!

What drives the business on your horizon?

For the typical utility CEO I would nominate a short list of ten factors that taken together are an effective stress test of any strategy.  These factors expose risks both known and unknown. They force a quantification of desired end results.  They challenge the ‘but we’ve always done it that way’ mentality of the herd. And when properly debated—I recommend a large bottle of your finest scotch to assist in this analysis with a little help from caffeine sipping geeks boiling all that data down into timely options and insights to lubricate the debate.

Here is my list of 10 horizon factors driving the energy business to put on the table:

  1. Energy Demand. How the recession affected demand and what do we anticipate in the recovery ahead?  What permanent changes or impacts will result from the failure of businesses or other disruptions?  How does this change in demand affect our competitive position and earnings potential?  What can we do to improve our performance results?
  2. Supply Adequacy, Security & the Need for New Capacity. When do we need to add new capacity to meet expected demand?  If its sooner, how do we move faster and still stay cost competitive?  If its later, how does that change our portfolio options and risks?
  3. Regulatory Uncertainty.  Will RPS standards go up?  If they do can we meet them?  What will Congress do on GHG emissions, national RPS and other cost drivers?
  4. Portfolio Strategy Options and Risks for Resource Planning. Is our IRP now outdated by the economic events?  What is the timeline for new submittals and how can we anticipate the regulatory changes we might face?  What are the “game changers” for our portfolio or our suppliers and competitors and how do we evaluate them?  Do we have opportunities to materially improve our competitive position in the midst of all this volatility?  Conversely, what are risks that our portfolio foundation could be put at risk by that same volatility?
  5. Access to Capital at Affordable Costs. Are we positioned to have access to the capital we need, when we need it, at a cost we can afford? If not, why not?  And what can we do about it?
  6. Fear of Inflation and Rising Taxes. How would inflation and rising taxes affect our strategy options and what can we do to mitigate or hedge these risks?
  7. Earnings Recovery and Growth Potential. I need to protect the dividend and keep earning growth at consensus to keep my job.  What will all this cost and how do I keep faith with investors and shareholders?  If we have to control costs to realize these results how will we do that?
  8. Ratepayer Pricing Impacts.  I don’t want an ugly fight over rate increases but I don’t want to fall behind and undermine our strategy.  We need competitive rates and satisfied customers. What’s the plan for that?
  9. Disruptive Technology. I want to use smart grid and these other emerging technologies to improve customer satisfaction, convenience and perception of value.  I don’t want to wait for these disruptive technologies to each our lunch.  What is our plan to use this stuff to get better and meeting the needs of customers so they don’t turn to someone else to do it for them!
  10. Industry Transformational Change.  I want our strategy to anticipate and plan for alternative business futures that include real-time pricing of energy, distributed generation, broad open access to transmission that makes new entrants possible, bundling of commodity energy into lifestyle and business segment bundles with other products and services.  I want to think about new business models that include the utility as an information gateway providing last mile delivery solutions to many vendors and suppliers. I want to consider a business model that moves us toward being a distributed generation company with a million solar roofs, micro wind turbines, energy storage farm and efficiency broker.  I want to beat those Silicon Valley IT geeks at their own game and transform the utility into the ‘muther of all’ digital labs to create an information utility that also delivers energy.

Taken together the conversation about these drivers or others like it will do more than inform the CEO and give him more to keep him up at night.  It will give the utility management team “permission to think outside the box” to reinvent the business.  To use technology rather than wait to be its victim.  To harness the same creative energy those venture capital firms and geeks possess to do well by doing good for their company and their customers.

And it might even be more fun than one of those digital toys!  Guitar Hero challenge anyone?