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Releasing the Value of Hidden Assets
As energy utilities complete their retreats from unsuccessful
deregulated ventures, their financial statements contain less
debt and suggest a higher-quality earnings outlook. Divesting
assets identified as “discontinued operations” has shored up
earnings across the sector. In fact, the power and gas sectors
currently trade at record P/E multiples. However, there is a
major earnings challenge on the horizon. Aging Transmission
and Distribution (T&D) infrastructure and generation
capacity shortages are now forcing many utilities to
confront a major new build-out cycle.
Global competition for natural resources means this cycle
will occur at a time when construction costs are high and
still climbing. The pressure to squeeze earnings and cash flow
from existing assets in order to fund this build-out is greater
To address this challenge, energy utilities should look at large,
untapped sources of hidden value: their portfolios of what we
call hidden assets. Unlocking the latent potential within these
exploitable asset pools can yield major earnings contributions.
This white paper suggests how to mine hidden assets within
the T&D sector for electric and natural gas utilities.
Uncertain growth prospects
During the 2003-06 period, the Dow Jones Utilities
structure, capacity needs to support new generation,
Index posted a healthy run-up, as shown in Exhibit 1.
and increased expectations for service reliability.
However, as the infrastructure build-out cycle takeshold, energy utilities will be hard-pressed to create the
Rate freeze extensions coupled with utility com-
next wave of shareholder value, for several reasons:
missions’ desire to buffer consumers from rateshocks make the rate-setting process more risky.
Power generators face large and growing capital
needs from environmental retrofits, costs of new
Population migration to the Sunbelt and con-
capacity (especially nuclear), and an impending
tinued retrenching of the U.S. manufacturing
base is reducing load growth in Northeast andMidwestern states to a trickle.
T&D franchises are contending with aging infra-
Utility M&A strategists, seeking growth throughconsolidation, are adapting to recent setbacks in the
Exhibit 1 Utility investors have been pleased
in recent years
Exelon/PSEG and Constellation/FPL transactions.
Dow Jones Utilities Index
Within many energy utilities, financial planning
teams are growing anxious over the lack of compelling
stories for sustained earnings growth in the face of the
most expansive and expensive capacity build-out in
March 11, 2002
Utilities thus are approaching an inflection point con-
cerning value creation, which raises several questions.
Will utilities be content to accept lower P/E multiplesand deliver shareholder value largely through promises
of impending rate relief? Do rising interest rates andsuperior returns elsewhere suggest that investors willmove to other sectors? Will energy utilities relinquish
their recent run-up in shareholder equity?
A Universe of Hidden T&D Assets
Our research and work with utilities suggest that a
growth in demand for products, services, assets, and
significant source of earnings growth, contained a
technologies held by T&D providers. In fact,T&D utilities
focus on hidden assets within existing operations,
have expended billions of dollars and thousands of
remains untapped. We’ll focus here on the T&D sector
person-years over many decades building their hidden
as an example of the potential for capturing millions
asset portfolios––a natural byproduct of developing an
of dollars annually in new, highly profitable revenues.
infrastructure and delivering energy to customers. Oliver
Finding and deploying these hidden assets centers on
Wyman’s client work suggests that demand growth (esti-
the latent value in non-metered revenues. Every U.S.
mated at 6-12% per year) in many of these non-metered
energy utility has extensive customer interactions not
areas is three to five times that of the typical T&D fran-
associated with the meter point. By “non-metered rev-
chise. Demand has accelerated for several reasons:
enues,” we mean revenues from the array of products,services, or assets not directly tied to the sale of
Customer needs are proliferating in areas such as
growth-related expansion, options for higher
Although the energy utility equivalent of “call waiting”
service reliability, and advanced meter sets and
or “voicemail” has never materialized, there is surprising
and Texas set the stage by allowing these cap-
advancing, including BPL, Wi-Fi, and broadband
For many T&D utilities, demand for these services is
Under-used real estate and rights-of-way have
beginning to crowd out more traditional activities tied
increased in value, including cellular towers, bill-
to operating, maintaining, and refurbishing the net-
boards, grazing rights, storage facility sites, and
work. Yet, many still tend to view these demands as a
nuisance that distracts line crews, creates unreason-able customer expectations, saps budgeted resources,
Core offerings are in growing demand, ranging
and undermines the brand. Our experience suggests
from everyday applications like temporary elec-
that a T&D utility serving 3-5 million customers has the
tric service or joint pole maintenance to more
potential to realize between $40 million and $80 million
exotic high-voltage construction work.
in new revenues over a two- to three-year improvementcycle. Moreover, the costs to capture these revenues is
negligible (as the labor needed is already employed)
products and services is emerging as California
with gross margins in the 60-80% range.
Exhibit 2 The universe of hidden T&D assets
Revenue leakage from non-metered operations
Claims and other
+ carnivals, etc.
such as billboards • Inaccurate billing
The Operational Barriers
To date, T&D utilities have not fully realized non-
operations with limited focus on the business, its
metered revenues or turned these opportunities into
size, customer value, growth potential, or contribu-
a growth business. Most of the reasons for this neg-
tion to earnings. No general manager has a P&L
statement here and no one has a clear incentive togrow contribution.
Nobody is in charge.
ness cuts across the entire franchise; customers
Business development resources are in short
request these services all the time. Yet, the standard
Simply put, there are no “deal sharpies”
daily work––thousands of transactions involving
in this crowd. Every time a customer asks for
linemen, real estate agents, field technicians, and
access to real estate, an upgrade to service, or the
engineering staff––is performed in the context
relocation of equipment, the request is handled
of maintaining or expanding the network. Non-
locally with limited oversight. Discussions about
metered revenues are viewed as a “step-child” of
cost versus market value rarely occur. Worse, the
service often is viewed as part of “good customer
Exhibit 3 Revenue cycle characteristics
service.” As a result, utilities perform many trans-
• Many locations across the service territory
actions for no charge or at well below cost. From a
• Constant flow of high-value customers
revenue realization perspective, this lack of com-
• Customers care deeply about the experience
• Served by many employees, so many of moments of truth
• Heavy reliance on first-line supervisors to make it work
A flawed revenue cycle
. The revenue cycle
• Employees view as a lower priority; nobody owns results
• Complex, paper-intensive billing process
process for these services is complex, for the rea-
• Training focused on safety and operational procedures
• Limited financial and performance reporting
• Undefined performance metrics and benchmarks
This complexity, coupled with a lack of dedicated
• Regulatory strategies disconnected and ad hoc
resources, makes for weak process flows.
Typically, we find the revenue cycle is under-mined by four factors:
mantra. Yet, when it comes to non-metered rev-enues, most utilities get stuck on the first verse.
– Lack of acknowledgement that a process with
Lack of meaningful financial or managerial
well-conceived roles, responsibilities, and com-
accounting data makes it extremely difficult to
track performance. Our experience is that theserevenues are among the least understood line
– Inadequate attention to simplifying and
efficiently routing necessary data to generatean invoice. For instance, billing triggers are
Lack of regulatory strategy devalues the oppor-
often missing, leading to completion of field
. Bringing these many opportunities, from
billboards to gas leak checks, to the bottom linerequires regulatory acumen. While some utilities
– Lack of automated tools that would make event
have adopted strategies tied to recovery (e.g.,
contributions in aid of construction) and others
rely on a wide variety of tariffs (e.g., temporaryservice), no utility has positioned these busi-
– Lack of a revenue assurance function, as rev-
nesses for a clear upside. Instead, many wind up
enue cycle transactions occur without a team
abandoning these lucrative businesses in the
devoted to stopping all the process leaks
face of General Rate Case pressures. When the“earning between the regulatory lags” is over,
Back office systems don’t like complex billing.
they fold up shop. However, these are valuable
a utility does recognize the need for an invoice,
assets, services, and capabilities that lend them-
producing the bill can be difficult. Customer
selves to a regulatory solution where all parties
information systems handling millions of meter
can benefit––utilities can be rewarded for innova-
points are not well-suited for these types of
tion, and customers can share in the gains.
transactions. For the most part, these are com-plex “bills of one” that are unique to particular
Utility cultures favor engineering and opera-
circumstances, such as a large public relocation
Not surprisingly, utility staff would rather
job. Full realization of these revenues would sug-
build or fix anything rather than trifle with even
gest the development of a complex billing unit.
the most lucrative commercial terms or invoicedata. Most field forces abhor the type of revenue
Financial accounting systems are fragmented.
cycle work-outs advocated here. Hence, the cul-
Establishing metrics, setting targets, monitoring
ture does not embrace the opportunity and many
performance, and benchmarking performance
continue to give away the store in the name of
levels all seem like a well-chanted corporate
How to Make It Work
With all these tough issues, how does one simply
2. Quantify how much can be captured and the ROI.
get the cash in the door? In our experience, the most
This is an exercise in revenue cycle process work-
effective approach runs along four straightforward
outs coupled with a sound financial model. After
steps summarized in Exhibit 4 and elaborated below.
unearthing the details of a revenue cycle process,even when processes are sketchy or haphazard, you
1. Identify the leakage and its root causes.
are in a good position to determine what the value of
mine the financial system for transaction values
making investments will be. As one example, Exhibit
and types. Like a divining rod, most ERP financial
5 lays out the type of work needed for pole attach-
systems extend their reach beyond company walls
ments. Most utilities recover a fraction of their
to customers and partners. This data not only iden-
attachment revenues, much less the costs of making
tifies transaction volumes and revenue dollars by
available jointly owned poles. We routinely find a
region and district, it can also offer intra-company
host of issues in this type of arcane process.
benchmarks to reveal, for instance, why it is thatRegion A bills three times the pole attachment rev-
3. Capture the revenues by devising tailored solu-
enues as Region B. Coupled with diagnostic inter-
This is a multi-dimensional issue and it
views of field staff, a number of hypotheses for root
requires solutions on a variety of fronts, including:
Exhibit 4 Getting to the earnings
Exhibit 5 Pole attachment process checks
• Recover lost revenue• Protect against over-billing• Ensure cost recovery
• Streamline record-keeping, reporting,
the field for the execution of core work. Rather, it
means focusing on the organization that does not
exist, namely, the Front Office––the classic busi-
ness development functions associated with con-
ceiving and executing market strategy, such as
Concerted efforts to free up linemen from
product development, pricing, promotions, and
paperwork and insert administrative resources
distribution channels. Assemble a function
accountable for revenue realization and create a
formal business-within-a-business structure.
Infuse this business with a profit and loss (P&L)
financial reporting for tracking purposes
statement and name a general manager. This
includes working carefully with legal, credit, risk
and regulatory disciplines to effectively position
Closely proceeding along these four steps will help
to avoid the inevitable turf wars and boundary dis-
putes associated with a cross-functional process
that has no owner. The trick is to not allow the sys-tematic realization of quick wins to get bogged down
Given the level of organizational change required
by overly complicated, perfect fixes. It’s critical to
and the amount of potential upside, we advocate
break through the culture with rapid execution.
pursuing these changes in waves as opposed totrying to attack every revenue cycle simultane-
ously. This may mean working on three to five rev-
Any CFO or CEO should be delighted to find an
enue cycles at a time (e.g., start with billboards,
unexpected $50 million in new earnings contribu-
pole attachments, and damage claims). Look for
tion from a latent source, particularly since the
high value, simple changes that don’t have
investments needed to realize the revenues are
already in place. The energy utility equivalent of“call waiting” is a viable growth strategy. It just
4. Form a revenue-responsible organization.
needs to be recognized as such and released from
does not imply rethinking core responsibilities in
the operational limitations that bind it.
Oliver Wyman is building the leading global management consultancy, combining deep industry
knowledge with specialized expertise in strategy, operations, risk management, organizational
transformation, and leadership development. The firm works with clients across a range of industries
to deliver sustained shareholder value growth. We help managers to anticipate changes in customer
priorities and the competitive environment, and then design their businesses, improve their
operations and risk profile, and accelerate their organizational performance to seize the most
Oliver Wyman’s Energy Practice
Our dedicated consultants have significant experience in the energy and utilities sector.
Previous clients include more than 75 electric and natural gas utilities in North America and Europe, as well as a range of unregulated service providers to energy companies and utilities.
For additional information, visit our website at:
Copyright 2006, Oliver Wyman All rights reserved
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