Conserving costs, powering growth

5 insights for executives

Conserving costs, powering growth

Rebuild the service company operating model

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The power and utilities industry, long known for stable, predictable earnings, has become more volatile.

Cost increases tend to crowd out the value in sorely needed capital investments, like infrastructure replacement, as service company allocations to capital projects escalate.

The core challenges are simple: costs are rising, revenues are falling, and neither public utility commissions (for regulated operations) nor commodity markets (for merchants) are offering relief. Given a soft economy and the impact from shale gas, these trends are likely to continue for the foreseeable future.

For regulated utilities, the classic business model — grow earnings through rate increases — is struggling. Utilities are getting significantly less than they ask for in rate requests; in some cases, those requests are further burdened by declines in allowed returns on equity (ROEs).

At the same time, electricity demand is down. The decline in demand caused by a stagnant economy is likely to reverse itself; the decline caused by conservation and increased energy efficiency is not.

And finally, the flood of shale onto the natural gas market has permanently shifted wholesale prices. Severely depressed wholesale power prices mean sharply reduced earnings.

Companies are faced with a stark choice: cut costs or suffer the consequences. The question is where to begin.

The value chain presents a variety of opportunities, but service company costs are a good first bet. In many instances, shared services costs for functions such as finance, insurance, IT, supply chain, accounting, legal and HR are increasing two to three times as quickly as operations and maintenance (O&M) expenses in the line business units.

Our series, 5: insights for executives, explores the questions:

 


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