Ken Silverstein EnergyBiz Insider Editor-in-Chief

The pressures are constant. With rising energy prices, utilities are challenged to keep a lid on price increases. And with credit rating agencies more vigilante than ever, they are trying to squeeze every dollar out of operations. The dynamics have required utilities to try new ideas and technological innovations. The aim is to improve with performance and to maximize efficiencies for the betterment of shareholders and customers.

"Utility workers need to measure their aspect of the business with the overall objectives of the enterprise,” says Drew Rankin, energy supply manager for Colorado Springs Utility. “To do this, they need to implement performance metrics. A lot people look at this as a hindrance and not an enabler. But if you expose inefficiencies, it can help everyone grow and produce.”

Driving efficiency is paramount. The first step for many is to implement a system that measures whether goals are being met. It’s not easy. Companies are forced to make choices daily as to what gets prescribed to improve productivity: Utilities could add field personnel in an effort to service all residents in a timely manner. But doing so would be more costly than maintaining current staffing levels.

Decisions are a function of corporate priorities. Colorado Springs Utility, for example, has implemented a system whereby it can track everyone along the chain of command during an outage using a software program. As a result, it says that response times are 40 percent faster than before -- making the investment worth the price.

It is management 101: What gets measured gets managed. It’s about holding managers and workers accountable. And with today’s technological innovations, many criteria can be evaluated on a real-time basis. According to Interliance that helps utilities analyze their productivity levels, companies are currently only measuring 40-50 percent of the items that are most critical to the organization.

The goal of any investment is to receive a timely payback. Return on investment tells utilities what they are getting out of the capital they are employing. The use of benchmarks tied to shareholder value and customer service are therefore vital and critical to attracting capital.

“The success of any system depends on correctly identifying what needs to be measured,” says Brad Kamph, executive vice president of Interliance. “Companies need unique success metrics if they want to affect radical change and depart from business-as-usual.”

Some Metrics

Productivity metrics vary. But every utility producing power wants to adopt strict cost controls. When measuring a utility company’s ability to control its production costs, the best indicator is its average production cost per unit, or heat rate. That is, companies want to use less fuel to produce energy. By maximizing those efficiencies, companies can increase revenues.

Prior to restructuring, utilities did not have any incentive to maintain those costs because any savings had to be passed on to ratepayers. With new laws now on the books, however, some utilities can keep those savings. It may require new capital expenditures. But, such out-of-pocket items may end up reducing maintenance costs and improving processes, which is why managers must be rewarded to make decisions that serve the best interest of the company. About 80 percent of the costs to run Colorado Springs power plants are tied to fuel. Increasing the “heat rate” is therefore essential.

Southern Co.’s diverse power fleet has worked to its advantage and helped it achieve economies of scale. Southern has been operating its generation units at higher annual capacity thereby increasing revenues and decreasing its costs. That’s because it is focused on capacity utilization, or measuring how much energy it is producing against how much it could be producing. The company says it is operating at capacity because it has learned to control output and to keep its equipment better maintained.

Productivity in the distribution business is measured differently. If firms can increase the amount of electricity flowing through their existing wires, revenues increase but expenses don’t jump inordinately. As a result, many utilities invest in economic development in their communities. Some companies such as the National Grid Co. are focused on buying transmission systems throughout New England and New York because the London-based company knows how to maximize throughout.

To be sure, companies can’t be so immersed in increasing productivity that they forget about reliability and customer service. The 2003 blackout that spread across the eastern United States and parts of Canada is a good example. Maximizing output should not come at the expense of maintaining infrastructure. And the cost of doing so is high both in terms of public ridicule and regulatory oversight.

Much has also been said lately about the graying of utilities and the potential shortage of certain skill sets now in the pipeline. Certainly, the overarching need for a utility is to maintain a qualified workforce. But that objective runs headlong into the need to cut expenses. An effective metric might narrow the scope as to which skills are specifically at risk and then allocate the resources to solving that need 10 years into the future.

“Utilities need to actively manage all the variables to achieve objectives of the company,” says Rankin with Colorado Springs Utility. “If you are aggressively and actively managing the variables that contribute to productivity and efficiency, then you can avoid austerity programs. Without the tools in place, you see this cyclical behavior.”

Competitive pressures are causing utilities to fine tune their business processes and the methods by which they measure results. Customers, shareholders and regulators expect nothing less. The goal of any evaluation is to look at the most critical factors affecting an enterprise and to make those processes more efficient -- without sacrificing quality and reliability. The class leaders understand how to balance those objectives while continually improving their performance levels.

For far more extensive news on the energy/power visit:  http://www.energycentral.com .

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