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How to get informed about your competing investor-owned utility.

The primary target of the great general is the mind of the opposing commander.

Sun Tzu, The Art of War

Successful strategic planning requires the participants to put themselves in the minds of their competition's strategic planners. To do this, one must become knowledgeable about the competition and their strategies. This article will focus on the ways a rural electric system can increase its knowledge of its competing investor-owned utility and of its strategies.

John E. Hayes, Jr., is chairman of the board, president and chief executive officer of Kansas Power and Light Company. In his article in the April 15, 1992, Public Utilities Fortnightly, Hayes states, "Competition is the foundation of our economic system, and the sooner management recognizes that the natural monopoly marketplace is dying and embraces the world of competition, the sooner that company will be positioned to be successful."|1~

Hayes also describes Kansas Power and Light's eight components of their utility survival guide. One component of the survival guide is to "embrace competition"|1~ as opposed to resisting the inevitable forces of change.

How does increasing competition relate to strategic planning? Hayes states, "A competitive environment places a much larger premium on strategic planning than does a non-competitive one."|1~ Therefore, another component of the KPL utility survival guide is to "assign strategic planning a much higher priority than it probably holds currently."|1~

Increasing numbers of rural electric systems are engaging in strategic planning in order to prepare for increasing competition, as well as a host of other issues including new demands placed upon the system by the consumer, changing regulations and environmental restrictions, financial stability and organization structure.

During your strategic planning process, your system will analyze its strengths, weaknesses, opportunities and threats (SWOT analysis). A good SWOT analysis will include considerations of both the external and internal environments in which the rural electric system operates so as to prepare for the uncertain parameters with which the system will be forced to deal. Part of this analysis must include a focus on your competitors and their strategies. To do this effectively, you must put yourself in the mind of the competitor. The neighboring investor-owned utility is the major source of competition for many rural electric systems. If one is to put oneself in the mind of the officers and management of the IOU and to embrace the competition from the IOU, one must get informed about the IOU and its officers and management. Where can you acquire this information?

Information attainable from the investor-owned utility

1. The IOU's Annual Report will include audited financial statements, auditor's opinion and notes to the financial statements; financial highlights; a letter to the shareholders; a review of operational activities; a listing of all officers and directors; shareholder information, including stock book values, market prices, dividends and earnings per share history.

2. The IOU will also prepare Securities and Exchange Commission Form 10-K containing financial results of both regulated and non-regulated activities and discussions describing the financial condition and results of operations, properties held, legal proceedings, business relationships and related transactions. It will also address changes in, and disagreements with, auditors on accounting and financial disclosure.

An examination of these documents will help you evaluate the IOU. Having started a collection of the documents for a major midwestern IOU, several significant trends and strategies have emerged.

Financially, this utility has experienced a 50% decrease in their cash position and level amounts of net income, but increased their declared common dividends per share by ten cents over the past three years. One may conclude that this decrease in cash was due to an increased use of internally generated funds for plant construction and capital acquisition and lesser amounts of cash generated from the sale of debt securities. Additionally, the utility has felt the need to declare increasing amounts of dividends per share even though the trend of net income has remained level in an attempt to satisfy the shareholders demand of a competitive return on its investment in the IOU.

The IOU's integrated resource planning strategy is also quite clear. It has no plans to construct any base load generation in the next ten years but is constructing two, 100 megawatt peaking plants to be brought on-line in two to three years. Their demand side management goals are very aggressive. Currently 650 MW are under load control. By 1995, the goal is to offset the peak by 1,100 MW and 1,700 MW by 2000.

The IOU's non-regulated subsidiary appears to be driven by obtaining generation efficiencies. The subsidiary owns and operates three steam lines to provide steam from the IOU's power plants to private businesses; it operates two refuse-driven fuel plants; it plans to build the first privately owned uranium enrichment plant and has part ownership of co-generation plants.

These documents clearly stated that the IOU feels it has three major problems which its strategic planning must address:

* Increased competition for customers from other IOU's, cooperatives and municipalities.

* Increased construction costs, delays and uncertainties in the regulatory process.

* Costs of compliance with environmental laws and regulations.

One can see the relationship between these strategic problems and the financial, integrated resource planning and non-regulated subsidiary activities.

Information attainable from your state's regulatory commission.

1. The state statutes which detail the regulatory process and the public information regulated utilities must file with the commission.

2. Public information attainable includes rate case filings, least cost plans, certificates of convenience to add generation and transmission plant.

Information attainable from the Federal Energy Regulatory Commission (FERC)

1. FERC Form 1 contains general corporate information, financial statements and supporting schedules and engineering statistics. Many municipal electric utilities file FERC Form 1-M.

2. Other public information includes: applications, petitions and other pleadings for FERC action; commission orders, opinions and decisions; environmental assessments and impact statements; commission publications and staff reports; transcripts of hearings, hearing exhibits and prepared testimony; and annual, quarterly, monthly or other reports required to be filed by regulated companies.

This information attainable from the state commission and FERC is important because you will know how the utility must operate to ensure state regulatory compliance. Also, commission filed documents should agree with and expand upon annual report and 10-K information. For example, the least cost plans data relates not only to the utility's strategy to meet future demand but shows the strategy the IOU is using against your system and neighboring municipalities.

Obviously, some of this information is gathered annually and other information is amassed continually. This information will allow you to perform an effective SWOT analysis of the IOU. "One of the most effective strategies in business competition is to understand the establishment, development, current positioning and overall thought processes of the competitor."|2~ Part of your strategic planning process actually becomes a strategy. Your analysis will allow you to perform factually based positions and opinions regarding the IOU's short term and long term strategies. It will then lead you to possible strategies to implement at the rural electric system to prepare for and combat IOU strategies which threaten your system. You may have to directly confront some strategy or position your system to avoid others and you will want to exploit the IOU's weaknesses.

Some of these IOU strategies may relate to:

1. Financial condition: Examine trends in profitability, capital structure and cash position. Financial strength may be considered the backbone required to implement strategic initiatives. A financially sound utility will have the fiscal strength to aggressively implement strategy.

2. Integrated resource planning: Properly blending supply-side and demand-side management strategies to meet the customer's total energy needs. As the above case suggests, the competing IOU will be investing significant amounts of money in new generation and incurring the financial and regulatory impacts of new generation. It will also be promoting load management programs which will compete with the cooperative's marketing rates.

3. Future generation capacity requirements or plant additions: Tied to integrated resource planning; as we have seen in recent years, generation construction can severely impact the financial condition of the IOU, lower bond ratings and reduce the ability to pay dividends.

4. Rate changes and rate structures: Rate increases will lessen your possible rate disparity; examine rate structures for new methods to stimulate KWH sales.

5. Acquisition of utility or non-utility properties: Determine if the IOU is expanding its available resources or branching into other businesses as additional sources of revenue.

6. Transmission access: The key to accessing the markets required to obtain needed generation capacity or sell excess capacity is through transmission.

7. Territorial expansion: A direct threat to the existing customer base or potential future customers of the rural electric is loss of service area. The IOU may be initiating public or legislative strategies to which the rural electric must understand and react.

8. Corporate image: Determine the IOU's position in the communities in which they serve and the electric utility industry, and what has resulted in a successful community or industry standing. A positive standing will be leveraged by the IOU politically, legislatively and from a public relations standpoint. However, a negative position can be leveraged by the rural electric in a similar manner.

Your analysis may also provide you with strategies the IOU has successfully employed to improve their position to deal with a changing industry. Don't re-invent the wheel if you can learn from the competition.

Some of these IOU strategies may relate to:

1. Ideas for meeting increased demands of the customer: In the form of rate alternatives or services provided on the consumer's side of the meter.

2. Compliance with environmental regulations: A cooperative, joint activity may ease compliance burdens and reduce costs for both utilities.

3. New technologies applicable to the industry: The IOU may be employing new types of assets, such as low loss transformers, computer or SCADA technology which your system may want to use.

4. Integrated resource planning: IOU ideas may be applicable for the G&T and its member systems to consider.

5. Corporate and community image: Rural electrics fight the IOU for standing in the community but can learn from their applicable strategies or may jointly work to enhance the industry's image.

6. Human resource management: Rural electrics may learn from trends in personnel needs related to the qualifications positions require today which were not an issue in the past, such as those current curriculums related to the environment.

Two other groups must also be analyzed and characterized. These groups are the IOU's shareholders and your state's utility commission. The sources of information previously discussed will apply with these analyses.

The shareholders demand a competitive return on their investment in the form of stock appreciation and dividends. As we know, it is the utility commission's responsibility to balance the shareholders return on their investment with the consumers' desires for a reasonable cost/value relationship. IOU shareholders have filed lawsuits against the utility for actions which the shareholders believed have jeopardized their receipt of a competitive return on their investment. An example would be a lawsuit filed over the perceived mismanagement of the construction of a nuclear generation facility. An analysis of the shareholders could show a weakness in the IOU armor. One method to further analyze the shareholders is to become a shareholder. Consider purchasing a share of the IOU's stock, or each type such as common and preferred. This would allow an individual additional access to information and attendance at stockholder meetings.

An analysis of those individuals comprising the utility commission and their decisions impacting the IOU is important as well. You may determine the commission's overall opinion of the IOU or a particular facet of their operations, or you may learn about the commissions' attitudes towards issues related to the emerging utility industry paradigm. In any event, you will increase your system's ability to analyze IOU strengths and weaknesses and discover strategic initiatives.

The primary focus of this article was to emphasize the need to put yourself in the mind of your rural electric's competing investor-owned utility planners and to list public information available to facilitate this part of your strategic planning. As we found, it becomes not only a part of the planning process, but is also a strategy of itself. Additionally, we concluded that this public information will help us analyze the IOU's shareholders and the attitudes of the public utility commission toward the IOU and the changes to the industry. Lastly, this information needs to be analyzed and used to counter threatening IOU strategies or to learn from successful IOU strategies to improve your rural electric's position for continued success in a competitive electric utility industry.


1 "Surviving in the '90s." Public Utilities Fortnightly, April 15, 1992, pages 17-20.

2 Competing Effectively in the 1990's: An Executive Forum for Rural Electric Directors and Managers. NRECA. Page 4.

Scott Luecal is a Senior Management Consultant with the NRECA based out of the Lincoln, Nebraska office. Scott coordinates the Management Internship Program and all other NRECA programs conducted at the University of Nebraska. He instructs portions of these programs dealing with accounting, finance, P.C. applications and strategic planning. Scott conducts other NRECA accounting and financial seminars and training programs. Scott also serves as editor of the Management Quarterly.

Prior to joining NRECA, Scott was with Coles-Moultrie Electric Cooperative, an Illinois distribution cooperative, for nine years and served in the capacities of accountant, office manager and general manager.

Scott received his bachelor of science degree in business administration in 1981 from Millikin University in Decatur, Illinois, and his master's degree in business administration in 1985 from Eastern Illinois University in Charleston, Illinois. Scott is also a 1987 graduate of the Management Internship Program.
COPYRIGHT 1992 National Rural Electric Cooperative Association
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Copyright 1992 Gale, Cengage Learning. All rights reserved.

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Author:Luecal, Scott
Publication:Management Quarterly
Date:Dec 22, 1992
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