Mark Hirschey, Ernst & Young LLP
In years past, growth was a given for electric utilities: Spend capital, build the asset base and grow the top line.
But this formula does not apply today when electricity demand is down, costs are rising, rate cases are risky and regulators are cautious. In 2012, for example, utilities were awarded about half the recovery they sought through rate cases, and the average return on equity dipped below 10 percent. With major investment requirements’ looming as critical assets age and new environmental regulations come online, utilities must find innovative ways to grow the top line.
A growing number of utilities are turning to data analytics as a means to improve financial performance. Thanks to advances in technology, such as the smart grid, utilities are collecting an unprecedented amount of data about their operations. Through analytics, utilities can dig deep into this flood of information and develop fact-based, objective insights that help drive growth and mitigate risk.
How might the use of analytics work in practice? Consider a utility that goes before regulators to make a case for the need-to-invest-in new infrastructure or to win cost recovery for critical assets and system components. Analytics can help a utility bolster its argument, potentially leading to more favorable outcomes.
Moving the needle even slightly produces meaningful results. A 1 percent increase in authorized rate base, for instance, equates to $10 million in earnings for the typical U.S. investor-owned utility.
Utilities that fail to adopt a strategy that makes the most of this explosion of data will be challenged to take advantage of broader growth opportunities that analytics can help identify and validate. Utilities must build the capability to turn data into actionable information, reducing the time from ask to answer while fostering a culture of knowledge among the employee base.
Specifically, analytics can strengthen the three key, interconnected parts of a utility’s business that fuel top-line growth: the asset base, the customer base and the regulatory process.
Utilities are using analytics in creative ways to improve the performance of their assets.
Some utilities have developed predictive analytical models to proactively monitor asset health and optimize work and asset management. Others are using advanced metering infrastructure data to predict and proactively replace transformers that have a higher probability of failure.
Analytics can help improve the speed, efficiency and overall success of a capital project.
And as utilities expand into new technologies and implement new service delivery models, they can use analytics to target investments more accurately.
Utilities are mining data to develop lower-cost delivery models through predictive models to improve asset maintenance.
Similar analytic models can be used to optimize field operations and work management.
Money saved in operations and maintenance can be reinvested in assets.
Technological advancements have enabled utilities to develop a range of new products for customers, including energy efficiency programs, demand-side management services and electric vehicle offerings.
Acquiring customers for these new, optional services requires a completely different approach from the traditional utility model. Utilities are grappling with questions they’ve never had to address: What types of customers are most likely to sample these new products and services? What’s the best way to reach them?
Analytics can provide critical insights that help utilities evaluate their customers and develop robust marketing strategies. For example, long-tenured utility customers that participate in auto-payment programs have different adoption profiles from those that do not.
Utilities also are using analytical tools, such as journey mapping and regression techniques, to better understand and harness the drivers of customer satisfaction. Such understanding is critical because satisfied customers are more apt to buy new service offerings.
In today’s regulatory environment, utilities must present as clear and compelling a case as possible when seeking cost recovery of capital investments, as well as approval for operations and maintenance expenses. Analytics can provide the data needed to garner the factual support necessary to reduce ambiguity and make a strong argument.
For example, electric utilities can prioritize asset investments based on a risk-informed evaluation, an analysis mechanism that drives better decisions around asset planning and regulatory recovery.
Utilities also use analytics to model enterprise information, industry economics and business intelligence to provide fact-based support for regulatory filings.
The Way Forward
Utilities must find innovative ways to use analytics to drive business growth. Each utility has different needs and circumstances that will shape how it uses analytics. But utilities should take some steps to maximize the power of analytics:
- Define an analytics strategy to focus efforts. A well-planned approach to building analytic solutions will increase return on investment and reduce risk. Utilities should start with the business issues and opportunities that drive growth, not the technology.
- Execute analytics in a portfolio of pilots or projects. Utilities need to identify their functions and processes that can benefit most from investment in analytics.
- Integrate analytics into business processes. The success of an analytics program is determined by the integration of the analytic solution into business processes and adoption by business users.
- Build internal capabilities. The goal is an automated, self-service model.
In a challenging economic and regulatory environment, utilities need to develop a comprehensive strategy for sustainable top-line growth.
Through focused analytics, utilities can leverage the rapidly growing amount of data at their disposal to develop responses across the asset, customer and regulatory pillars of growth.
Utilities that focus on analytics to drive business insights prepare for future opportunities and help bolster their top lines today.
Mark Hirschey is a principal in the Advisory Services Power & Utilities practice of Ernst & Young LLP.
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