by Sean Riley and Russell Pearson, PwC
In the pre-Enron era, a power and utility industry chief financial officer (CFO) often primarily focused on increasing sales through nontraditional businesses such as trading and retail operations and unregulated nonutility ventures.
Because of the Enron collapse and other milestones during the past decade such as the onset of deregulation, however, utility industry finance departments have shifted their focus and have returned their attention to the basic business of electric and gas distribution and transmission services, as well as generation.
This shift has not been easy, particularly given today’s complex market environment fraught with risk and volatility.
CFOs increasingly are called upon to provide a higher level of strategic insight and advice about critical core operations management and financial functions, as well as to develop strategies to create long-term shareholder value.
To achieve success in today’s market, CFOs must go beyond their traditional roles and responsibilities.
First, they must develop a heightened understanding of the core utility operations business-a vital step in effectively leading decision-making around the deployment of capital and maximizing the returns on regulated operations.
Second, CEOs and boards now look to their CFOs and finance teams to drive decisions surrounding building and acquiring assets, upgrading infrastructure, implementing technology, managing regulatory and compliance issues and securing and retaining talent.
Moreover, as cost pressures continue to rise, CFOs and finance departments are expected to deliver more for less while providing critical input into the strategic planning process.
Navigating the Complexity: Four Key Areas for Success
Despite these challenges, many utility CFOs and finance departments are achieving significant success. Attributes of successful utility finance teams and CFOs include an ability to deliver sharp business insights to cut through complexity and to build credibility among key stakeholders.
They can streamline capabilities within their own functions, as well as across the wider business, apply seasoned technical financial skills and successfully engage with boards and teams across the organization.
Although it might seem extraordinarily complex, well-positioned finance teams within the utilities industry often focus heavily on four key areas:
1. Capital expenditures and access to credit,
2. Technology platforms,
3. Regulatory compliance and
4. Talent management.
Increased capital expenditure and access to credit. An increase in capital expenditures, driven by issues such as deferred maintenance, new environmental regulations and growth in renewable generation, affects most utility companies. These pressures elevate the complexity for CFOs in prioritizing and determining where and when to allocate capital.
For example, with regulated utilities, questions often arise around rate lag and the recoverability of invested capital. By effectively managing capital expenditures, however, CFOs can maximize returns for shareholders while supporting operational reliability of their companies.
An early consideration for a major capital program surrounds funding. CFOs carefully must consider the impact major projects will have on their companies’ balance sheets, assessing the impact of absorbing incremental debt and its direct impact on a company’s debt rating and cost of capital.
Technology platforms. After years of stagnant investment by the finance function, finance technology investment has been rising significantly during the past few years, allowing finance teams to improve their analytical capabilities and develop faster, more efficient processes. For example, enterprise resource planning (ERP) and other systems and tools are helping the finance side deliver more at lower costs. These technologies can help standardize processes and provide greater flexibility in how these processes are delivered.
Many finance departments, however, still rely on manual spreadsheet manipulation and other basic tools as part of their daily processes, which consume valuable time and require management attention. This is partly a result of cost concerns and cultural barriers to adopting new technologies.
Leading utility finance functions recognize that achieving breakthrough change with technology requires a collaborative approach with operations to align their systems, processes and data. Finance teams that automate key processes, improve data integrity and minimize the need for data cleansing can reduce turnaround times for budgeting, forecasting and planning. They also can spend more time on value-added functions such as business analysis and less on data gathering. These CFOs can respond quickly to changing stakeholder needs and deliver timely, insightful business intelligence that contributes to their organizations’ competitive advantages.
Regulatory compliance. Regulation plays a central part in any utility business. CFOs and finance teams must consider the daily impact of regulation across issues such as approval of investment plans to how energy is sold to consumers to how evolving regulations, such as the Dodd-Frank Act, will impact their business.
Along with evolving financial reporting requirements such as International Financial Reporting Standards (IFRS) and convergence standards, utilities must respond to energy policy mandates, climate change and emissions targets, price and tariff requirements and minimum service obligations. In addition, issues such as data regulation and security are increasingly present in the regulatory landscape.
In light of these regulatory mandates, utilities must engage effectively and confidently with public utilities commissions and protect and enhance shareholder value. Because regulatory requirements are ever-changing and energy markets are increasingly the focus of attention, utilities have a role to play in shaping the evolution of regulation alongside policymakers. How CFOs respond to the regulatory environment can directly impact the value returned to shareholders or other stakeholders. When regulations are under consideration, CFOs must assess the impact to their companies and put internal systems in place to ensure compliance and accurate reporting. CFOs also must advise their senior management teams and boards proactively on the potential impact of regulations and develop strategies to maximize the benefits or mitigate the risks to their business.
Talent management. Investors and management teams know how important it is to have the right professionals in the right jobs, particularly from a risk management point of view.
As a result, boards more frequently are asking finance teams for more active input into business decisions. CFOs are under mounting pressure to attract new talent within a fiercely competitive industry hungry for good candidates. Utility companies that can attract and retain top talent will have a competitive edge.
A talent-management strategy is crucial to meeting the increased demand for professionals with the right skills. This includes the early identification of candidates with the potential to tackle business insight roles and the development of clear career paths.
Another finance priority is helping new employees develop the business and relationship skills for success. Identifying and supporting people with potential will be important to the development and success of the utility company operations.
Demands on utility company CFOs and finance teams will remain high. The status and influence of finance teams never have been greater.
The front-runners are playing a crucial role in driving business performance and designing the future operating model.
These opportunities are open to all players; yet, successful teams will be those that recognize the greater responsibilities facing them and take the necessary steps to ensure they are prepared.
Sean Riley is a partner in Pricewater- houseCoopers assurance power, utilities and clean energy sectors. Reach him at firstname.lastname@example.org.
Russell T. Pearson is a partner in PricewaterhouseCoopers advisory utilities practice. Reach him at email@example.com.