Pam Boschee, Managing Editor
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Puget Sound Energy’s (PSE) future looks bright. It is one of the lowest cost combined electric/gas companies in the United States in 2000. Merrill Lynch reported in August that PSE ranked third overall in 1999 in terms of cost per customer at $206 vs. an industry average of $323. And, importantly, PSE didn’t sacrifice service quality to achieve this distinction. They can prove it-and did with their annual report card. (See table).
For the third year running, PSE met or exceeded service-quality benchmarks established by the Washington Utilities and Transportation Commission (WUTC).
PSE, Bellevue, Wash., is the largest energy utility in the state, growing about twice the national average in number of customers. It provides electricity, natural gas and energy-related services to more than 1.2 million customers in the Puget Sound region.
PSE is poised for growth with its two non-regulated subsidiaries, ConneXt and InfrastruX.
ConneXt developed ConsumerLinX, a customer information system (CIS), which is Web-enabled, scalable and configurable. PSE completed installation in April 2000 in its electric service area and reports “all systems go.”
PSE is singing the praises of the system based on its early results-and is finding receptive ears among utilities interested in its implementation.
InfrastruX Group Inc. is a holding company formed to acquire providers of specialized contracting services, offering end-to-end network infrastructure solutions to the electric power, telecom, natural gas and cable TV industries, including the design, installation, repair and maintenance of network infrastructure such as electrical transmission lines, fiber optic cable and other utility distribution systems.
It recently acquired UTILX Corp., which provides its CableCure service to utilities to repair or prevent water damage and materially extends the life of electric cables.
William S. Weaver, President & CEO, Puget Sound Energy Click here to enlarge image
EL&P presents an exclusive interview with William S. Weaver, president and CEO of PSE. He shares his thoughts on the company’s achievements and its future direction and strategies.
EL&P: What do you identify as the most significant market changes in your region brought on by deregulation?
Weaver: We serve only in Washington state which has not deregulated the retail market, but we’re impacted by the wholesale markets-as is the rest of the West Coast. So, even though we serve only retail load in Washington state, we still see the volatility of the wholesale markets as a result of deregulation. In May wholesale electricity prices spiked at $1,400 a MWh, and we presently face a forward market for electricity that’s at or above $90 a MWh for the rest of the year.
Puget Sound Energy continues to be in load resource balance, so we’ve not been hurt by the high prices. I’ve thought for some time that the current state of partial deregulation in this country, where most utilities are still having to buy power at unregulated market prices and resell it to their core customers at fixed prices, is a very bad situation. If the wholesale electricity markets are ever going to rationalize themselves, it’s the end users who ultimately make the buying decisions and they’re the ones that must receive market price signals. Under the partial deregulatory scheme in the U.S. today, utilities insulate their customers from market price signals in most parts of the country. In effect, these utilities are providing their end use customers with a very valuable hedge for free.
EL&P: Is Puget Sound Energy pursuing non-regulated businesses for new revenue sources?
Weaver: Our primary focus has been and remains on growing the regulated distribution business. The predicate to success in the distribution business is going to be providing the best service at the lowest cost, and those are two concepts that have often been regarded by utility managers as mutually exclusive. Now that we have available more and better comparative data about utility performance, regulation is forcing utilities to move more in this direction; regulation is increasingly rewarding or punishing utilities based on how they compare to other companies-with respect to both service quality and cost. So, compared to traditional purely “cost of service” regulation, these developments put some upside potential into the regulated distribution business from our standpoint. Right now, we’re benefiting from that because we currently operate under a rate cap, which has given us incentive to perform.
None of this is to say that there are not great opportunities in unregulated energy-related businesses as well. We view our business as consisting of two fundamental parts: first, the assets that we own (which, in our case, are pipes and wires) and then, second, bringing certain services to bear on those assets. What is attractive about the services area of the business is selecting highly scalable services and then providing them on an unregulated basis to others. That’s exactly what we’re doing with our unregulated subsidiaries, ConneXt and InfrastruX. They both focus on services that benefit from economies of scale. ConneXt is a software developer which sells customer information systems and related services to other utilities, and InfrastruX is a design, maintenance and construction company that also sells its services to utilities. The markets they can potentially serve are absolutely huge. For example, the annual design maintenance and construction business for utilities is more than $100 billion in revenues, annually.
EL&P: Was InfrastruX a separate company that you assimilated or was it created from within PSE?
Weaver: InfrastruX, as a concept, was created at PSE, but its business proposition is to grow through acquisition of existing design, maintenance and construction firms, which provide these services to natural gas, electric or telecom companies. The annualized revenues of its acquisition companies are in excess of $100 million. It has just completed its first acquisition, UTILX.
EL&P: How long has PSE measured its service quality performance?
Weaver: We started measuring service quality performance against prescribed standards as a result of our merger with a local gas distribution company at the beginning of 1997. The regulatory order that approved the merger fixed a five-year period of no net rate increases; this meant we were going to have to manage operations and costs extremely well to perform financially because we couldn’t do it through rate increases. Our fear was, with pressures from the rate cap and the merger order that were necessarily brought to bear on the cost side, our managers might tend to slight the service quality side. So to make sure that didn’t happen-and this is where I think it took some courage-we set these high service performance goals to match the high cost reduction goals. This is a company-wide commitment-one we articulate as “highest quality service at the lowest cost”. We took that commitment and reflected it in our corporate goals, our business unit goals, our team goals and our individual goals. Then we backed up success in achieving it with our incentive pay plans for employees. By articulating this commitment, and making all of us accountable to achieve it, we produced dramatic results. We could not have met the cost and service standards if we had continued, for example, to operate the gas and electric businesses as separate divisions, which is what almost all combination companies still do. We had to change our work practices so we could operate this organization as a total energy company. It was the only way to take full advantage of the operating diversities, scalability and opportunities to eliminate costs that the merger offered. It has worked very well so far even though I believe the commitment was a substantial risk-particularly the notion of incorporating it into the merger order.
EL&P: What was the regulatory agency’s role in the establishment of these standards?
Weaver: The Washington Commission [WUTC] was integral to establishing the service quality performance standards. If we breach any one of the standards, we agree to pay large penalties. So far, we have met every commitment annually, and we haven’t paid any penalties. Certainly our intent is to never have to pay any penalties.
EL&P: Are there other state utility commissions that have incorporated this type of measurement?
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Weaver: No, because our standards were conceived under unique circumstances. One unintended but, in my view, beneficial consequence of the service standards getting forged in this regulatory crucible is that they enjoy a presumption of being appropriate standards against which to measure performance. And that’s particularly important in the Northwest where we operate in close proximity with governmentally-owned utilities, which has given rise to utilities making anecdotal and unsubstantiated claims about their service superiority. It’s been helpful to have objective commission-approved criteria to hold ourselves up against in order to end those debates. It’s been beneficial, both for managing the company and explaining to the rest of the world-against objective standards-that we do a very good job.
If commissions really do move more toward incentive regulation-and we certainly have that with the rate cap we have in place-having these objective standards are going to tell utilities how they ought to be performing if they expect to be rewarded.
EL&P: How is PSE’s switch to ConsumerLinX progressing?
Weaver: It’s now been installed at Puget Sound Energy for our electric accounts. That was done, and up and running in April 2000. And it’s going to be installed for the gas accounts by October. It’s performing flawlessly. Importantly, the people who use it, the customer representatives who operate out of our call center, love it. One thing about customer information systems that utility managers often fail to realize: Even the best system is no better than your ability to install and integrate it with your other existing systems-particularly your enterprise-wide business system. And such integration is very expensive; it typically costs tens of millions of dollars and takes around two years for large utilities to accomplish. We integrated ConsumerLinX and got it in and running for the electric accounts in only 11 months.
EL&P: What functionality does ConsumerLinX provide in real time pricing?
Weaver: To understand why we had ConneXt develop ConsumerLinX and how we see it as benefiting us, you have to understand our view of how metering and billing and call center services all work together. The model that we have is to make real time meter reading and real time pricing available to all customers. Regardless of whether the retail jurisdiction in which we operate has adopted open access or not, for each customer we can match their energy usage-say, in 15-minute intervals with the actual cost of providing them with that energy. There are three systems, all of which are necessary to have in place and operating, to make that model work. First, a fixed network real time meter reading system; second, a very robust customer information system; and third, a call center that can serve as a portal for customers to transact business with us through whatever form of communication they choose, whether it be telephone, fax, Internet. In fact, we call our call center an access center for that reason-to point out that it just doesn’t take telephone calls. Compared to conventional meter reading, real time fixed network meter reading, where you’re recording a meter read that reflects the last 15 minutes’ consumption, creates a tremendous increase in the amount of data we have to process to produce real time pricing. Consider that most utilities have one consumption input into their customer information system every month from the meter reader going out and walking around-either with a hand-held or looking at the meter and writing it down-if you’re doing it every 15 minutes, that’s four times 24 hours a day times 30 days of inputs. That’s about 3,000 inputs, just on that side of the equation, that have to go in and be processed by the customer information system. If you’re recording consumption in five-minute increments, you multiply that by another three times. To match up that increased usage data with the contemporaneous market pricing data from the wholesale markets, you need a very robust customer information system, not just an automated meter reading system.
The conventional utility customer information system won’t do this, and in my view, is obsolete today.
EL&P: Will you implement real time pricing with commercial and/or industrial customers?
Weaver: We’re not calling what we’re doing real time pricing because everybody has a different definition of that phrase. We’re calling it universal dynamic pricing because it’s going to apply to all customers-we’re trying to distinguish it from all the old concepts of peak load pricing and time of use pricing, which do not reflect actual market costs.
When we implement dynamic pricing, we will implement it across all customer classes. We are hopeful that residential customers will also take these price signals and make their buying decisions based on them. I think, certainly, in the case of the customers in the San Diego region, if they had known what they were going to pay for electricity resulting from their May and June usage, they would have changed their buying habits. With these much more volatile wholesale markets, this whole proposition becomes very relevant and useful.
EL&P: What were the results of the pilot program with residential customers?
Weaver: It’s been a success. We’re collating all the information. The next series of pilots will take place this fall, and they’re going to test dynamic pricing models. Just a short time ago we were thinking that the greatest variations in market prices would occur in our peak usage period-which is the winter. This is when we thought the pilots would have the most value. So, we’ve held them off until the winter, but the market events on the West Coast this summer changed that thinking entirely. The recent volatility has caused us to move forward more quickly and with greater commitment because we see even much greater applicability and public policy benefits to this sort of regime now.
EL&P: How would you describe your personal management style?
Weaver: Each management role that I have held has required a different management style in order to get the job done. And it doesn’t have a lot to do with any enduring personal management style, although what I’ve always tried to avoid as a manager-and I hope as a person-is being autocratic. When I became the chief executive of this company three years ago, it was clear that I was going to have to approach managing from the standpoint of being collegial and inclusive because I had a very special group of direct reports-the officers of the company-and they’re very capable people. They were not about to move in any new direction unless they were largely responsible for deciding what it was going to be. Once they committed to the direction and we were acting together, I found that kind of team becomes virtually unstoppable. So together we all speak with one voice about the strategies of the company. And together we formulate and drive through the organization the goals and objectives necessary to accomplish the strategies.
EL&P: What are your goals for PSE over the next five years?
Weaver: My response is really simple and not lengthy: It’s to be the best gas and electric distribution company anywhere, having at least two well regarded, unregulated elements,ConneXt and InfrastruX, contributing strongly to earnings. Simply, that’s where I see us headed, and where I’d like to have us in five years.