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Pre-Webinar Overview

“Winning” in any industry these days, especially mature, highly regulated ones is a most difficult task. Whether it is trying to beat your traditional competitors, expanding services and scope, or addressing pesky disruptive rivals, finding the best strategies and tactics that allows you to exceed industry norms remains challenging to most executives. In this webinar, led by electricity and utilities sector veteran strategist Kathryn Valdez, she suggests there are numerous opportunities for intelligence practices and processes to move strategy, thinking and action forward. She examines the importance of corporate assumptions, building subject matter expert (SME) networks, taking a preemptive approach to regulatory intelligence, and how companies can engage in social exercises like scenarios to stay a step ahead of the competition and to better align and engage with stakeholders.

 

Learning Objectives

  1. Understand that strategy development processes must be constantly and consciously aligned with industry contexts, which is even more meaningful when those contexts are mature and highly regulated industries like the electricity and utilities sector
  2. Recognize many practical and helpful ways for intelligence practices and processes to drive strategy forward in companies that frequently haven’t been prominent beneficiaries from intelligence
  3. Review examples of how companies can be more preemptive in facing disruptors and innovative rivals emerging in their market spaces or who use unusual business models

 

Post-Webinar Summary

In the past, electric consumption was on a steady growth curve that allowed for utilities to continue to invest in large central clients and their surrounding infrastructure, collect a regulated rate of return, and grow slow and steady.

Everything has changed in the past five years. The fossil trend has reversed and consumption of fossil fuels is decreasing; solar and wind generation has grown 55%; and new players are pursuing their own energy investments have flooded the energy sector. Residential electric customers are putting pressure business on the business model to respond to the sustainability and environmental issues they care about. Finally, energy storage is still evolving and will certainly be a big factor in the future of the utilities sector.

The energy sector and utilities sector faces these unprecedented challenges in a highly-regulated industry, and there have been many reports of the impending death of the utilities sector, but Valdez says this is an opportunity to improve strategic intelligence. One of the most important functions for a strategic intelligence function in the energy sector is to be able to keep executives informed about only the most business developments, providing context and answering questions when possible.

The intelligence collection process needed to not only teach the employees how to collect the information that matters, but how to assess it, how to report it, and how to recommend company changes based upon that information to the executive team. One of the best ways to determine what the top issues are to executives in the energy sector is to establish some strategic assumptions: the really core beliefs of the company that it needs to hold true over the next five to ten year period, so that the areas in which it is investing or developing would pay off. For the utilities sector, the assumptions should include thoughts about customers, should reflect the regulatory landscape, and should be measurable.

  


 

How the Energy Sector & Utilities Sector Must Adopt Intelligence Best Practices to Compete Against Disruptive Technologies: Webinar Transcript

INTRODUCTION

CRAIG: Welcome everybody to today’s Intel Collab webinar from Aurora WDC on how the energy sector and utilities sector must adopt intelligence best practices to compete against disruptive technologies. My name is Dr. Craig Fleischer; I’m Aurora’s Chief Learning Officer and I’m thrilled today to be able to bring an expert provocateur – as we always do in the series to you – to talk about this particular topic.

Our provocateur today is Kathryn Valdez and she’s an advisor to clients in the energy and utilities sector. She’s also the principal and founder of Mapleton and Sloan, LLC which is an energy consulting company which focuses on energy issues for the electricity and gas sectors. Kathryn has a really interesting and broad background; she’s done everything from strategy development implementation, worked in environmental policy, done work in energy technology strategy, fuel supply management and logistics, and been involved in the topic of our session today ”strategic intelligence gathering and assessment.” Before heading over to Mapleton and Sloan, Kathryn was with Xcel Energy for 11 years in a variety of different leadership positions where she was responsible for things ranging from managing corporate strategy development, to being expert for a number of regulatory filings, and being involved in the development of innovative clean energy programs. She also had task of leading strategic planning for compliance with new environmental regulations, so again wide range of interactions with a changing environment in an industry that, again, is generally viewed to be quite mature.

If you think about industries like energy and utilities, it’s tougher than ever today. It’s a mature highly regulated industry and when you’re having to try to be a traditional competitors or trying to expand services and scope, trying to address pesky disrupted rivals or finding the best strategies and tactics to allow you to exceed in industry norms – that’s a big challenge to most of our executives. That’s why in the webinar today, Kathryn is going to talk about a number of opportunities for intelligence practices and processes to actually move or drive strategy, thinking, and action forward. For those of you who haven’t been with us on our webinars before let me just walk you through a couple of the ground rules that apply to it, so you’ll at least know how to interact. Our webinars are about an hour long, they’re essentially split half-and-half. The first half, Kathryn will be talking to us and sharing her experiences and insights; the second half is an opportunity for you to interact. For those of you who have questions, if they arise any time during Kathryn’s comment, you can use your questions pane on your go to webinar control panel and we will answer those questions in the second half of the hour. For those of you that enjoy tweeting and part of the tweet-verse, you can also use tweetchat.com/room/intelcollab. We normally have a few folks out there that are tweeting out about our webinars on a bi-weekly basis.

For those of you who want to revisit or review or actually maybe share these slides with some of your colleagues that were unable to make it today, we’ve got a slightshare.net\intelcollab.com, you can go there and not only find today’s webinar in due time, but you’ll also find well over 80 other interesting webinars that we’ve been doing in this series for a little bit over four years now. For those of you who want to view the recording and download the PowerPoint files, you can do that via registering for a trial membership at intelcollab.com.

On that note I’m going to hand this over to today’s provocateur Kathryn Valdez and I’ll let her kind of walk you through her views of what’s happening in this what is now arguably a very exciting industry. Kathryn we’re looking forward to hearing your comments today.

START OF PRESENTATION

KATHRYN: Thank you very much Craig, it’s fun to get to participate in Intel Collab series and I look forward to sharing my perspective and to interacting with everyone that signed on today, so please don’t hesitate to send in your questions to Craig and I. Today I’ll be giving you a little bit of my perspective on the utility business landscape primarily focused on the electric utilities that are applicable to gas utilities as well, and how it’s highlighting the growing need for strategic intelligence. Then more specifically in the second part, my experience with forming a strategic intelligence, function and some of the methods and tools I see as particularly important to the industry to position them for a future success. I hope that the landscape portion is informative and interesting to those that aren’t in the energy space so you can see and learn a little bit more about this newly dynamic area, and for those that are, it’s always kind of fun to see the data points and the new perspective on that as a refresh. I know that some colleagues of mine that I’ve worked with in the past are logged in today and I’m happy for you to share your continuing perspective and post that in as well, so please do so.

Just stepping back more broadly and thinking about the electric utility sector in the United States and its performance, we’ll see this is a slide from Fidelity investments – just a general index of utility stocks, it’s been a nice place to have your money for the last decade in a low interest rate environment. The companies are earning a regulated return and they generally pay pretty nice dividends so I think that is been a great benefit to the sector overall and nice stock-price appreciation. When you look at this chart it might not be evident that there is disruption in the sector and that there are significant changes afoot. If I overlay that utility index slide with the general performance of the S&P 500 you’ll see that, in fact, while you have more money in your pocket having stock with utilities, they are actually underperformed at a general S&P 500, so maybe that is a little bit of foreshadowing that change is afoot.

Today it is definitely not your dad’s utility. When I started working in the electric utility sector space, my father, who’s now in his late 70s, was very surprised and frankly I think a little bit disappointed. He began his career and the early part of it in the electric sector in Michigan in the 60s and he describes his experience is totally boring, sitting around and smoking cigarettes, because there just wasn’t a lot of complex problems to solve. This electric consumption chart on the top right really highlights that. It was a good business of the time. You’ll see the blue line is our fossil fuel generation, essentially consumption, in the United States over that period. That’s the utility companies dream; it’s a steady growth curve that allows for utilities to continue to invest in large central clients and their surrounding infrastructure, collect that regulated rate of return, and just grow slow and steady and keep it going.

Reflect that on the last five years and you’ll see that it really is changing and I don’t see anyone sitting around smoking in the office anymore as you already know. The fossil trend has actually reversed in fossil generation as part of the consumption in the US is decreasing; maybe 6% doesn’t seem dramatic, but even in low commodity price environment it’s still going down so that it’s noticeable. You’ll see the green line at the bottom representing renewables. I’ve excluded hydro-generation so it’s really reflecting on solar and wind generation. They’ve grown from 55% in the last five years, so in a sector that already has huge paid for and established infrastructure, that is notable.

Something that line doesn’t show you, which is an additional challenge to today’s utilities sector, is that the green line is really representing a lot of new players. In 2015, half of all the new win contracts that were signed were by non-utility players including Facebook, Google, Walmart, Amazon, Dow Chemical. All of those organizations are pursuing their own energy investments for several reasons not just to reduce the volatility in their energy costs, which are significant in their operations, but also to respond to their customers’ desires that they improve their environmental performance. Now with Google being the largest non-utility purchaser of renewable energy, the companies that are involved in electric generation, distribution and consumption have changed quickly in the last few years and electric utilities are not used to thinking about competitors in that way.

A little bit more showing the acceleration of this business evolution that wasn’t evident in our chart where fossil generation kind of jumped to that 55% growth, here you’ll see some specific data points regarding solar. Obviously in the last five years the dramatic increase in the number of solar installations in the United States obviously connected to the rapidly declining price of solar photovoltaic systems.

It’s not just this technology developments that are causing the changes in the business. The customers, they have new preferences. I mentioned that those large corporations are responding to their customers; well, residential electric customers directly have a greater awareness and focus on sustainability and environmental issues, and are not necessarily sure that their incumbent electric utility is the company that is responding to those concerns and able to address them. There is just a lot of pressure on the electric utility business model, a system built and established to generate power in a central location and push it out through transmission and distribution lines to that end customer with a meter, has now seen a lot of disruption in that pathway. Customers wanting to have more direct control and management with the types of energy they use, how they use it in their home, how that is automated and how they send that signal and information back to their utility. It’s not just solar that is changing; when I was working on environmental policy issues, we were waiting for that dramatic price decrease in solar and just knew that there’s renewable energy technology breakthrough that would really change the landscape for the utilities sector. Well there was a huge technology breakthrough and it was the natural gas production technology breakthroughs that have led to our phenomenally low natural gas prices. While that is beneficial to many electric utility customers and their fuel costs passed through in their bills, it is also challenging to electric utilities, because now a lot of their larger customers that have industrial loads and perhaps use a lot chips and etcetera in their processes, they have the opportunity to think about perhaps self-generating. Maybe these gas prices are attractive enough that they would take on that operation, self-generate, and be able to have that benefit of a combined heat and power operation.

And then later on then the evolution of energy storage, a technology that has phenomenal investment going into it, because it’s not only a benefits to electricity markets but to transportation markets. That double focus is rapidly expanding its evolution and I don’t think anyone knows yet where that will land or the electric sector. Is that going to be a technology deployed by individual consumers and residential and businesses? Is it going to be something that the utilities own and operate and as a service? The regulatory landscape is unclear and the customer preferences on that are unclear, so I think that’s just sort of a shadow that everyone is rapidly trying to analyze.

Couple this with many years now discussion of utility death spiral and you are well-positioned to need to improve your strategic intelligence. I don’t think that anything should be more motivating to an electric sector employee today than reading that their business is approaching death. I can’t count the number of times that I have seen that phrase in bank reports and other news sources over the last several years. Couple of those trends which are all challenging with some new market fundamentals. Obviously in that earlier chart where you show us the steady growth with fossil, that was coupled with the expectation that electric sales would grow at a nice rate of 3% to 4% a year or so. It could be planned for accordingly in a nice conservative and financeable way. And now, you’ll see in this chart here, this is the change in electric sales in the United States year-over-year. It’s pretty hard to draw a trend from this line. There was a little bit of increase in early 2000 and then obviously the recession flipped back and rebounded, but now in three of the last five years, even as the economy in many areas has started to strengthen, electric sales are actually down. Couple that with what consumers are willing to pay for electricity and it makes strategy development a lot harder for electric utilities. We’re going to have to be comfortable with a lot less certainty and be comfortable planning and investing with much shorter time horizons. This bottom chart you’ll see the price of electricity in the United States. This is a blended price of all customer, bosses, residential, commercial, industrial. Obviously there’s been price increase over the last decade, but compared to the price of other commodities in the CPI, it has been moderate. Everybody that works in electric utility side of things feels really good about that. Our price increases have been moderate, we’re rapidly trying to transform our technology, invest in the distribution system which hasn’t seen a lot of upgrades in several decades, and so you customer should appreciate that investment and understand that it will result in a slight price increase. The expectation of regulators and of customers is even that which is perhaps moderate increase is too much and they would rather take on the initial sum cost of perhaps a self-generation system and TV or something that will provide them with price that they believed to be price certainty in the future for their energy.

That is just a little bit of the complexity and changes in the electric sector and landscape today over the last five years or so that make working in the electric space that I think to be really fun and challenging and thought-provoking and not the boring, slow and unchallenging environment that my father thought I had chosen to pursue.

Now I’ll step into the second part. I hope that if you’ve any questions on that landscape information that you are sending those in. I’ll like to share a little bit with you about my experience in helping to develop a strategic intelligence function to try to position on the electric utility with a new way of thinking about those challenges. Obviously even outside of the energy area, any business that is experiencing a lot of change, you have a lot of executives reading a lot of news and throwing a lot of business developments out there and asking questions.

How do you keep those executives informed of those business developments, which ones matter and why they matter when so many things are changing. Who do they always ask for answers to those questions and are those people able to chase down all those answers and still focus on what is obviously supposed to be kind of their daily duties within the corporation. And then how do you make answering those questions more efficient so that you are not always answering a similar question for a different executive. That you’re collaborating on this answers, because so many of these developments now are broader than just one sector or one space within the utility business. How do you make it certain that your answer is complete.

Well it was evident that a more thoughtful process was needed. The electric utility can really be viewed, many of them in this country, as six distinct businesses: generation business; the transmission business; distribution; customer product development and marketing; gas processing; and gas distribution for the large integrated companies.

So with change happening in all those areas, it was time to really align how that was being evaluated. The process needed to not only teach the employees how to collect the information that matter, but how to assess it, and then how to report or recommend company changes based upon that information to the executive team. When we started out, it was just too much. Suddenly you have every employee on the street that have heard about some kind of battery technology or some other widget that was created, feeding that information in and then the mass scramble to evaluate its effects on the company’s future. It was clear that not every development was a critical business development and we really needed to create some more filters or lenses through which to evaluate those changes and figure out what was core to the company’s medium term success, and use that to decide which business development really require the deep dive evaluation.

To do so, we determine that we really needed to establish some strategic assumptions. The really core beliefs of the company that it needs to hold true over the next five to ten year period, so that the areas in which it is investing or developing would pay off. As I mentioned, it’s a large company with six distinct and complex businesses so it’s easy to come up with a really long list of what you think is true about those businesses. We began with a list of over 46 beliefs about the business. So what to do; they were sort of swirling around – yes they were interesting and yes they were true – there was no way that 46 items were going to be evaluated with any frequency that would be beneficial. We tried to narrow them down and connect them to some cultural initiatives within the company. That was important and I think that culture change is developing industry of its own with large corporations. It was really too vague and so aligning the beliefs with that didn’t really work. We tried to connect them to financial goals of the corporation, but I think a lot of times those had two short of a time horizon to address strategy development and how that would evolve, and they were really encompassing enough of the changes in the business.

So then it was determined that they could be aligned with four new focus areas of the company and the corporate strategy, and narrowing down the 46 or so beliefs to those areas resulted in 20 assumptions for further evaluation. Those 20 assumptions were presented to the CEO and the executive team and it was probably the best business conversation that I have ever participated in. It was fascinating. The healthy and fierce debate that ensued around those 20 assumptions and which ones were actually true versus which ones were perhaps desired to be true. Obviously it’s nice to pick the one that you really want to be true that might make your strategy easier to execute or more profitable, but you really needed to focus on the ones that were core to that strategy success. The executive team further narrowed down that list to four assumptions; one link to each of the large corporate initiatives and growth areas, and then two that were a span this broad business and were more underlying assumption.

I’m looking back at that list of 46 or more initial beliefs and then narrowing it down to just six, I thought that was useful to think about what finally made the cut. The assumptions that were believed to the core to the business’ success in the next 5 to 10 years, as I said, prior to the company strategy and its goals. They included the beliefs of our customer preferences and I think this is an area where an energy companies and the utilities sector can really improve. Utilities aren’t that good at understanding their customers. They really never had to win the customer in the first place so they don’t really know how the customer may choose or evaluate their provider. Most of the time have their customer by geographic default, so it’s useful as that evolves and customers are set to do more independent things in energy, that they have beliefs about those preferences in their core assumptions.

It’s obviously important that those final assumptions reflect on the regulatory landscape that is changing rapidly and I think that it will continue to do so. Having an expectation of those changes in the next 5 to 10 years is important. I talked earlier about technology, performance and cost so that’s useful to be reflecting in the assumptions, and that the assumptions are externally focused. Utilities is in the United States which historically have the service territories given to them by regulators and defined geographically, never really looked too far outside. Now, as I mentioned, their competitors and their other energy providers are non-utility entities. It’s really important that they be looking a little bit more externally than they were used to and comfortable with the past.

And lastly that the assumptions be measurable, since so often they can be nice feeling, but perhaps too vague and if you can’t quantify, you really can’t prove or disprove the belief. One thing we struggled with when we talked about assumptions within the company was that the company has assumptions. It has interest rate assumptions. It has sales assumptions. It has sensitivities in that embedded around weather, obviously an important factor when you’re generating energy. That’s not really a strategic assumption, those I would say are sensitivities and really important in your financial modeling, but they’re not foundational assumption on how you would change your business course. It’s too hard to stick to an initiative around culture and obviously it can’t be too obvious. Sometimes it’s fun to pick the obvious assumption, because it might be easier to validate, but for example something that focuses on product energy efficiency and its continued improvement is perhaps too obvious. I don’t think there are a lot of product manufacturers that are going to be creating anything that plugs in and have the desire to use more energy, so expecting that their energy continues to decrease is valid, but perhaps too obvious. With those assumptions, we are able to create subject matter expert networks aligned with them. I felt when you’re thinking about company culture that this was perhaps the best way to connect this effort with culture. It’s a really nice talent and development opportunity to use these subject matter experts and to align the know, company go-to people that executives ask tough questions of with new employees, up and comers, people that are perhaps coming in with the outside perspective and really integrating their work. It also makes answering the questions less work for any one individual and allows them to rely on their previous analysis to answer similar questions. With those teams formed, they were each given a project plan and desired frequency of validation of the assumptions.

Briefly, a few challenges around assumption-proving that continue and I think many of you may have may have experienced, is:

  • What measurements do you use to assess the impact of changes in that landscape that are affecting the assumptions? Is it something narrow within the assumption itself or does it only really matter if you can quantify its change effects on the company bottom-line and profit and loss and operating expenses?
  • How do you measure that and how do you get agreement on that?
  • Timeline expectations obviously can be up for the debate.
  • Utilities really like certainty over the long-term. They’re trying to get more comfortable with shorter time horizons. So what horizon is appropriate for each assumption?

And then the continued challenge when you’re looking at any of these complex issues is the balance of a thorough answer and avoiding analysis paralysis. Where do you stop with an answer that is good enough, that is something an executive can act upon without spending so much time analyzing it that you start to miss the reporting when we know and your information is sort of old news to act upon.

A few other tools in the intelligence area that I see of increasing importance to electric and gas utilities is around assumptions connected to them, but more specifically, include the business model, analysis skills set and regulatory intelligence. I think a unique challenge for utilities are that their business models are generally very transparent. They are filing all their plans with a defined frequency, with their regulators, and with phenomenal detail; whereas a non-utility participant can act with much greater proprietary in what they’re doing.

New entrance into the regulated footprints really causes a lot of discomfort. The utility has to share its plans which can be analyzed and dissected by the competitors which don’t have to do so. And these regulatory compacts are changing; the tweak so far has been small, but this is an area of huge national focus because these small changes are compounding. Take Colorado for example, it was one of the first states to establish what is called net metering where a customer that has solar on their roof is able to sell back that electricity to the utility at full price. That can be argued as fair or unfair, but it was an established practice.

Now what if I’m going to have an electric vehicle, I should have to even have more solar on my roof. Okay we will tweak the rules so that you can add solar or expand that system to accommodate your vehicle. Well, I don’t have the vehicle yet; well we will tweak the rules so that if you are anticipating buying electric vehicle, that will still be on the regulatory compacts. All of those compounding tweaks are really working against the utility, but are in favor of the customer. Regulatory compacts and regulators are going to default to become taxi drivers to what is believed to be in the best interest of the customer, not of the incumbent company, whoever that may be.

In my experience, business model analysis and some of the regulatory intelligence was not an area of strength within the company, so it was helpful to turn to some professional services firms and consultants for some initial support in figuring out how to really dissect some of these new business models that were unfamiliar to electric utilities. You can take NRG for example; several years ago they were rapidly expanding, their solar and electric vehicle customer efforts. They were already an established large wholesale and retail utility, but their solar an EV focus was outside of their regular footprint, and they were popping up across the country. Some business model analysis reflected that while that may be the vision of where they wanted to go, their balance sheet was really at odds with those decisions. They were probably weren’t going to be able to move as quickly and be as successful in those areas. Then just six months ago, the CEO that was pushing that, he stepped down and those offices supporting their solar and energy initiatives of service have started to close down. I think that incumbent utilities had a collective sigh of relief with energy having to really step back and refocus on how they transform their balance sheet to be the utility of the future they may want to be, they were quite ready to do it.

Other business model analysis that is really useful in the technology area you could take a company known as Sonnen. This is a battery technology company that no one was looking at, because everybody was focused on the shiny plastic case surrounding test loads power wall unit and they’re new battery system. Sonnen opened up shop in the United States and suddenly they are outselling Tesla and it’s really interesting to observe their growth, because they were not on anybody’s radar, but they were having success in Europe, so they brought that business model over the United States. It’s interesting, because in Europe, they are doing things that regulatory construct in the United States does not allow, but utilities, which really rely heavily on the regulatory compacts, are starting to realize that those are not cast in stone, that they will evolve, and that some of their evolutions are not going to be favorable to the company.

Speaking about Europe and the Sonnen developments, I just got back on Sunday from a trip to Europe and I think it’s really helpful when you’re thinking about regulatory intelligence to reflect on German perspective from 2011 to today. I don’t know if any of you are familiar with what the Germans have called their energy bender, the German way for energy. It was their initiative which started back in 2011 to transform their entire energy landscape, focused on reducing imported fossil fuels, reducing and ending nuclear generation because of their safety concerns around it, and increasing their renewable generation with the establishment of significant tourist allowing independent renewable energy generators to sell their electricity into the grid. Well the German utilities sector really misread the regulatory landscape and did not deploy effectively any regulatory intelligence; they really didn’t anticipate that this transformation would happen so quickly and that the citizens of Germany would be willing to absorb the cost of the transformation. As a result, if you look up RWE or Eon with large German utilities, you’ll see that they have lost tremendous market cap. In 2000, the retail price for electricity in Germany was about $.14 kilowatt hour; for perspective, if you aren’t looking at your bills in the U.S., it’s equivalent so that price today – it’s $.11 in Colorado, Now Germans are paying $.30 a kilowatt hour for their electricity – phenomenal increase. Americans can’t believe American utilities that they can charge that, but I was just with my uncle in Germany on Saturday and I was asking him how they feel about this transformation now that it is five or six years along, they’ve generally accepted it, the prices are high, they’ve adapted their lifestyles accordingly, they feel the solar energy that they have paid for has really been their gift to the world in helping to decrease the price of solar to fund solar technology development. They describe the Stephen Terrace; he said at least the money is going to the farmer, so even though I’m not sure his perspective on who’s profiting from the wind turbines that have sprung up across the German landscape, it is clear that the cost of that energy is not going to the incumbents German electric utilities, so a useful international perspective on regulatory intelligence.

Obviously disruption is not providing something that will replace electricity. This isn’t Kodak where they are making film and suddenly everyone was using digital cameras. If anything, everyone today is relying more and more on the reliability of that plug to provide the clean, affordable electricity that they need to power their lives. Business model and regulatory intelligence, aligned with corporate assumptions, can really position, in my opinion, electric utilities to compete and to continue to be successful businesses. I think that a lot of the focus has been too much on technology evaluation. It is changing quickly and I think that a lot of utilities are participating in the technology evolution by doing demonstration projects. There are some really useful and interesting energy storage demonstration projects across the country, but I don’t think understanding those technologies is all that you will need for competitive success if you are not carefully managing the regulatory landscape and understanding how. Though you may know how those technologies work, how the business models of those technology providers are perhaps a little bit more sophisticated and allowing them to take some of your profits. A thoughtful process around intelligence will help any U.S. utility act little bit more quickly than their peers. And lastly, don’t forget to look internationally; it’s something that’s actually really difficult for U.S. utilities. I remember one of my colleagues taking a trip to Spain when they were starting to do their massive solar expansion. Then the absolute pain and agony that came with the plane tickets associated with that when the regulator saw that there were international flights booked for intelligence gathering for utility, you know that’s outrageous and should all be disallowed. It’s a global market for energy and so if you can’t travel abroad to meet with some of those new technology providers or see how these utilities in other countries are adapting to technology perhaps more quickly, will definitely have to think about how you participate and observe and learn through other research means. How those international changes are coming, because being a domestic utility in the United States will not protect you from those developments.

I think that’s about it. Talking quickly but I appreciate your interest and I would love to hear from some of you.

Q&A SESSION

CRAIG: That’s great Kathryn, it’s funny, I’m hearing you go through all these changes that are happening in this industry and I would think for somebody who isn’t living it and breathing it every day, it’s remarkable with what only has happened in the last years, but arguably what’s happening today and what should continue to happen in the future. Actually that’s where I’m going to start with the first questions right where you left off. We get a question in from Justin and he wanted to ask about what you thought was happening in the U.S. compared with other countries, of course you talked about what was happening in Germany, but this question says, “do you think the U.S. is ahead of the curve or is it actually behind the curve in terms of how this particular industry has been disrupted?”

KATHRYN: That’s a great question, I think that the U.S. benefited directly from being a little bit behind the curve initially. The fact that the European investments in clean energy really did bring the cost of those technologies down, so conveniently that was a benefit. I think that they have an advantage here in that that so far the utility’s opportunity to bring scale to some of these technologies has proven itself. There is still chances for the domestic utility to compete in larger renewable deployments, but I think they are behind in understanding the desires of customers, perhaps younger customers particularly, to pursue technologies that might not always be the least cost. I think that while they don’t call their resource plans these cost plans anymore, the fundamental attitude and perspective of the utilities is that, you know, the consumer wants the least least cost solution and there is some glitter and shine around these distributed solutions that makes them really appealing. I think that they may be ignoring that and in Europe they definitely recognize that fact, so we’ll see if they can adapt to that customer perspective quickly enough.

CRAIG: Absolutely, and that kind of leads to a question a couple of people actually asked us: the areas of things like technology and understanding and evaluating, that’s something utilities needless to say, they’ve been doing for a long time, they’re probably pretty good at it. But you brought up a couple of others that not only utilities, but I’ve actually argue as someone who studies the industry, other industries don’t really focus on things like business models, regulatory intelligence. Help us out here. The questions that we got in around this idea of if I want to start doing business model analysis, and obviously that’s something that you recognize was important in your background, where do you start? What do you look at? What kinds of tools? Do you use business model campus and try to drive your intelligence collection around that? Could you give us a little insight as to how you’d suggest, or maybe provide a little bit of roadmap of what you did to try to understand the business models that were emerging in your industry?

KATHRYN: I think something that a lot of utilities are struggling to get comfortable with is the ability to really communicate, work handedly and directly with some of these companies that are developing these new models, and asking them questions directly. In my experience was surprising once you start to have those kind of primary conversations with how much they’re willing to share about how they are approaching their product development, who they see buying it, how it really works, and what problems they are specifically solving. I think really being out there and communicating with the companies that you think are disrupting and developing something new will be really enlightening and will either provide you with either the comfort that their business model is not as threatening as you thought or get you really moving, because you think it is. I think that you’ll also see the importance of understanding that the regulatory context of their business models dependent upon. If you are researching their materials and listening to the news and information that they’re sharing, and it’s evident that their greatest value that they can receive would be realized through a regulatory change. I think for a long time utilities felt that was sort of their coat of their armor that the regulatory change would protect them, and really I think it may delay some of these things and so you really have to think about the regulatory protections you are experiencing are gone, how would you also play and are you in position to be a fast follower in some of those areas if you’re not willing to step out and pursue it directly at first. I think that some of that is probably the most useful. Craig, feel free to add if there are some specific tools or techniques that you have seen effective in that area.

CRAIG: I like what you are referring to and admittedly, this is an area that I think a lot of companies and lots of industries will have conversation about these days, and again when you’re not used to doing a regulatory intelligence be a good example of this. This is an area that is you mentioned earlier, of course you’ve got lots and lots of information about your traditional players in that particular realm. The problem is you’ve got folks that are not traditional players, frankly are not utilities, and yet they’re now playing in that sandbox. So it often requires something that I like what you did. I actually want to ask you a question about the commitments from one of the webinar listeners today; it’s about your subject matter expert network. So obviously you developed this ability to start systematically kind of gathering human intelligence, primary intelligence. The question that they ask is, “is this something that was easy to set up, is it something that you continue to use in an ongoing fashion or not, how did you get people willing to participate particularly if and when they were outside of your company?” I’ll leave those questions to you first and I’ll let you walk through them and I realize that there’s probably three of them embedded in that and I apologize, but they’re all related.

KATHRYN: Craig good question, it was the very interesting process that I’m happy to elaborate on. So that subject matter expert network formation received mixed reactions; some executives really felt that their network was kind of proprietary and it was really giving them their own edge and so that was frustrating since it’s not really a team environment there, where others recognize that you know some of their best employees were obviously the go-to people to answer these questions and then they were being sucked into special projects all the time and not really able to develop their creative thinking to their specific business challenges, so they embraced the formation of the network, because they felt it would actually, once it had kind of gained some traction, it will be more efficient use of their time. The subject matter experts themselves were happy because they found that they were answering the same questions over and over or just slightly different questions and they really didn’t have a way to refer back on how to really establish a way to refer back to previous answers or to build upon those. They were often sort of re-creating their answers over and over or they were providing an answer to a question that was perhaps outside of their real realm of expertise, because they didn’t really know how to expand upon it.

They might have been an engineer that provided a really thoughtful evaluation of some kind of distributed generation technology and about how it’s costs might not have included the true or in them and it was to breakdown the functionality provided, and then they felt obligated to provide the regulatory context with which you know that might be perceived, when regulatory perspective wasn’t really their expertise. Once they knew they were in a network, they were like okay, I’m going to give you the engineering evaluation of this technology and now the regulatory team member could reflect on how that technology fits within today’s rules. Can a customer use it to its highest use or do we have rules in place that might prohibit that and making it a less attractive purchase in the income utility service or desirable and handing it off. So once they recognized that, it provided them some relief I think in what their real obligations were. It continues to evolve and I think people generally like to be a part of a creative team, so it made it desirable.

And lastly something I discovered as I went to the art part of that recognition for that contribution is really important. It sounds simple, but I think making sure that the participants that were providing their insights to these evaluations have been those developments that were included in the report and their name and organization was provided, because a lot of this reports were read by the executive team. They might not have regular interactions within a large corporation spread across the geographic footprint.

CRAIG: I can see how much of the challenge is. One of the questions I want to ask and I think it’s just a natural follow-up. How long did it actually take you from the time that you decided to initiate those networks to actually where they were starting to provide what you’re looking for getting out of them, which was again good data information into your insights center?

KATHRYN: Maybe over a year, two years, 18 months, or someone like that. It’s not something that happened quickly.

CRAIG: I’m glad you said that, it rarely does by the way, so I know companies are thinking about doing that. It deals with culture and that can be a real issue, and the history like yours where again culture can take decades to form, it’s not going to be changing dramatically as you begin to un-form or reform it.

Here’s an interesting question that’s kind of related to this and I like it, it’s coming from one of our participant Richard today, he says, “how do you feel about utilities actually doing intelligence techniques like conducting psychological analysis of regulators and/or regulatory decision-makers?”

KATHRYN: That’s an interesting question. I think that right now, they don’t go that far into so that maybe it evolves that way. I think right now it’s very focused on political perspective in reflecting that and looking at the individual’s history in the political arena to try to deduce how they may react. But I will tell you from personal experience that commissioners in states that I have worked or have testified and whatnot have had a political perspective that might have helped get them into their position as a commissioner, and that they really react opposite to once they’re in that position. Certainly some of the perhaps progressive beliefs that you knew they held, they slow down on and they start to hear more from advocacy groups that are focused on disadvantaged populations and whatnot. So I don’t know how that would proceed, I’ve haven’t seen it used, but it could be beneficial if it was possible.

CRAIG: Great, it just may be actually. Staying with this cultural theme and again our contributor Justin here asked, “I hope this doesn’t get viewed as a stupid question, but being an outsider to your industry, how could they not have seen some of the developments you were mentioning in the first part of your presentation? Do they possibly see these but just didn’t know how to put together and connect the dots or is it that they just didn’t realize that the underlying business models themselves was changing at a fundamental level?” What’s your view of that?

KATHRYN: I think it is surprising they didn’t see it. I think a lot of it has to do with their internally-focused history and nature. Candidly in my opinion, perhaps it has to do with some of the senior leadership of the company coming in at a time most of them have grown up within the business and stepped in when they were coming off of that early chart I showed of slow and steady and easy growth. You know, providing reliable lease cost service was what would always win the day, so I think maybe they were bit naïve that societal desires were changing more quickly than they change. I said they are big ships; they don’t turn or change very quickly. I think some of the technologies changes did happen more quickly than expected. Fear – they are extremely conservative company, the regulations are set up and such service failures are very painful. Gas service, electric service disruptions occur. There are regulatory proceedings of questions about why that event happened for years after any failures have occurred, so they’re reluctant to put a lot of new technology into a system that they have running perfectly today. I think that getting comfortable with the fact that they all have to do that and then getting regulators comfortable perhaps with some of the risks that those technologies may bring to system operations is hard to do and it will take some time, but I don’t know if that’s the answer. But I also think that with incentives around the taxes, the production tax credits benefiting solar and wind, those really did accelerate the development of those technologies and it happened quickly, so perhaps not expecting that.

CRAIG: Actually that’s a great segue way before I get back to a couple of more questions for the time we have remaining; those of you that are interested in what we’re doing in two weeks’ time. We’re going to be having our next webinar on how leading indicators keep you ahead of the curve in emerging markets which will be led by provocateur Joel Whitaker who’s global head of research at the Frontier Strategy Group. Again for those of you that are interested, I certainly encourage you to get registered just as quickly as you can. You’ll notice there’s a URL for you to do that in your chat box.

Kathryn here you go, I’m going to go back to the questions. Again, another couple of interesting once that I see just came in. One of these just came from David over in Canada, he says, “how does the current political environment leading up to the November 2016 U.S. election affect our webinar topic today? Is this something that utilities and electric companies ought to be concerned with and is it something that might allow for intelligence to be applied to?”

KATHRYN: Absolutely, I was just meeting with an executive of the utility that runs federal affairs and they said couldn’t have made up a stranger situation than what is happening with the upcoming elections in the United States, and how hard it is for them to figure out how to prepare the company. Again these utilities are making billion-dollar investments that have really long time horizons and a lot of regulatory and policy uncertainty around that, but I think that they’re starting to see that regardless of the policies that may be pushing some of the transitions to renewable energy and things, that outside of that is what a lot of their state law and state politics which are perhaps a little bit more predictable than federal politics right now, are kind of leading the way. You know what is unique in the United States compared to Germany and many other parts of the world, is that energy policy while there is a federal overlay particularly in the environmental issues, it is really determined at the state level that the renewable energy requirements and activities that have some of this transition were driven by the states individually, and I think that they’re recognizing that regardless of what happens in Washington, they know what direction their states want to go and they’re paying a lot more attention to that.

CRAIG: Great, I’ve got more questions than we have time to answer, so before I just ask you the last couple of those that I have, for those of you who we don’t have the time to get to the questions unto our webinar today, you’ve got Kathryn’s email address on your screen right now, please don’t hesitate to reach out to her. I know she’s always interested to hear from folks and she’ll be able to respond to you off-line actually after our webinar today. Here’s an interesting one and I hope pronounce the person’s name right, it looks like Angie, she asked “what diplomatic skills would you recommend somebody that was in the positions you had for actually getting through with the kinds of analysis that you’ve talked about?” They gave a little bit more context here, it says, “some situations I find that executive teams might be the firm and the strategy as a (French), because they are not looking long-term enough at disruptions and towards the implications. How do you recommend starting conversations about business models, about regulatory affairs and intelligence, about dealing with these pesky disruptors with executives that just aren’t used to having these kinds of conversations?”

KATHRYN: I think that we also struggled and I struggled with that as well. The assumption development effort was really useful and finally some of those conversations and really writing down the statements and being able to communicate that they were vetted and discussed and reviewed by various levels of management within the company that these are the things that this company is acting like are true. They might not be true and we should probably make sure they are, because we would really like them to be. I think that was a really useful and a diplomatic way to begin that conversation and then provide that framework for some of the harder discussions about disruptors to sort of fall into place. I think that the assumptions don’t always have to be so hard and focused on some of the disruptions. They can have some of the business as usual expectations. Just to really write it down, I think that was eye-opening. I had that belief held inside and I think we all share it amongst the executive team, and then we all put it out there and say well, okay it turns out four of the six really do think that’s true and two of them think that proved false a few years ago. I think that was effective for me.

CRAIG: That’s great, here is the last question that we actually have time for today and it kind of builds time where you are just leaving off. One area that this particular listener Justin noticed you didn’t talk about much today was utility security, especially things like infrastructure and cyber security and the possibility of somebody actually hacking grids and things like that. Do you feel that these kinds of topics are on utility strategic radar or at least in the electric side of the equation?

KATHRYN: Yes, that was very important to mention that, and I’m happy somebody did. Absolutely security is probably utility executive’s greatest fear, but I’m not sure that it’s something that they see as a disruptive opportunity necessarily. It really falls, I think in their mindset, as just a huge risk management issue, so there is a lot of collaborative work with utilities in the United States on addressing security risks and preparing and trying to figure out the balance of proactive risk reduction and then obviously response and restoration, recognizing that they won’t be able to prevent all risks. I think that’s a huge opportunity and that the technology development there is something utilities probably need a lot of help understanding and are starting to realize and work on. The IT systems at electric utilities are old. Those are big investments that don’t necessarily deliver energy to the end customer in an explicit way, so they don’t necessarily come to the top of the investment stack. I think they’re recognizing that that’s not going to last.

CRAIG: Outstanding, I’m glad we addressed that as well too. We have come to the end of our time together, on behalf of my colleagues and all the listeners in the webinar audience, I want to thank you Kathryn for joining today and sharing your perspectives.

KATHRYN: Thanks, it was a pleasure and don’t hesitate to contact me, anyone that wants to discuss anything further. I’d love to have a conversation.

CRAIG: Thanks again, for those of you who want to join us in two weeks, again it’s how leading indicators keep you ahead of the curve in emerging markets, on the same channel at the same place. Thanks again to everybody in the audience we wish you all the best and we look forward to seeing you in the near future. Have a great day, bye bye.

  

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