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The future is spelled CONSUMER.

Participants at NRECA's 1992 Advanced Management Program developed a set of ideas as to a possible formulation to the paradigm shift currently underway in the electric utility industry. Steve Collier's article will provide you with an understanding of the shift's evolution and current status.

The previous article, "Restructuring in the Electric Utility Industry: Old and New Paradigms" by Steve Collier, gives you an understanding and insight into the paradigm shift which is now evolving in our industry. What will be its final form? Let's see if we can provide a composite of the future of our industry. We will do this through two vehicles:

1. An extraction of key ideas from Joel A. Barker's new book, Future Edge--Discovering the New Paradigms of Success, will provide you with an understanding of what a paradigm shift is and the implications of a shift.

2. An explanation of the insights and ideas of the Advanced Management Program participants' responses to questions in three categories: What is necessary for the success of our industry, our individual rural electric systems and ourselves as the leaders of our industry and our systems.

Joel Barker explains a paradigm as "a set of rules or regulations that establish or define boundaries that tell you how to behave inside the boundaries in order to be successful."(1) A paradigm shift, therefore, is "a change to a new set of rules."(1) As Steve Collier explains, the old electric utility paradigm was based upon a natural monopoly, cost-plus regulation and an obligation to provide service, operating effectively because of economics of scale and substantial growth. "A new paradigm seems to be competition for retail customers, resources, and return for investors."(2)

The "regulatory bargain" states that the utility regulatory commissions seek to balance the interests of the investor and ratepayer in order to promote the public interest. Calvin Manshio, a former Illinois Commerce Commission member, states in his article, "The Realpolitik of Regulation," that "technology, law and regulation have all contributed toward creating a new paradigm based on market economics. Timely responses to market conditions and customer attitudes is what makes commercial success. Unfortunately, the regulatory bargain does not reward or even provide timely response."(3)

This article appeared in the May 1, 1992, issue of Public Utilities Fortnightly, and makes for informative reading.

It is difficult to envision this shift, and therefore more difficult to competitively position your rural electric. Why is it difficult to see the shift? Barker explains that the answer to this question is a concept called the "paradigm effect." "Paradigms act as physiological filters and we view the world through these filters. Data that exists in the real world that does not fit our paradigm will have a difficult time getting through our filters."(1)

What is the most important point to remember regarding paradigms? When a paradigm shift occurs, everyone goes back to zero. Joel Barker's example to support this concept is as follows:

In 1968 the Swiss had more than 65% of unit sales in the world watch market and more than 80% of the profits. Today, their market share is less than 10% and profits less than 20%. What happened? The Swiss invented the electronic quartz movement at their research institute, but the Swiss manufacturers rejected it because it didn't fit their paradigm, it didn't have a main-spring. Seiko, and Japan in general, had less than 1% of the market in 1968. However, they led the shift to the use of this new technology and, as Paul Harvey would say, we know the rest of the story.

As this example shows, competitive advantages are lost and competitive disadvantages disappear when everyone goes back to zero. With regard to increased competition, Manshio further states, "In the past the regulatory bargain shielded public utilities and ratepayers from the turmoil of the marketplace. That shield not only kept competition out, but also created an artificial reality in the midst of free enterprise. The resulting isolation from a competitive world created a regulatory mentality unable to cope with the reality of the marketplace."(3) Steve Collier stresses the need for rural electric systems to be willing to embrace competition.(2)

Now that we have established the concept of the paradigm and our previous article established the shift currently underway, what will we see as the composition of the electric utility industry? According to the program participants, it spells CONSUMER.

Consumer choice Opportunities beyond the meter No territories Satellite communications Uninterruptable supplies of power Materials for construction of plant will be different Excellence (TQM) Retail wheeling

The customer wants the freedom to choose, choices, zero outage service, and the best possible cost-value-mix for electric service (this does not mean the lowest rates, rather the lowest total cost or best possible value). Manshio states, "Market competition is shaping utilities into being responsive to market segments, prices and reliability."(3) This means that more and more decisions are going to be made on the customer's side of the meter.

For example, the negawatts concept contends that "the U.S. could reduce its consumption of electricity by up to 70% without the loss of quality of life by applying the appropriate and presently available energy-conserving technologies."(1) The per-unit rate would be higher, but the total bill to the consumer would be lower. Existing and new technology, and zero outage service will give the customer more for less total cost.

The future may be significantly different from the past. The customer will make their selection of an electric utility in a manner similar to the method we use to select a long distance phone carrier. There will be no territorial boundaries. The lack of boundaries must be viewed as a means to secure more customers, not as a way to lose customers. The customer's desire for choice will also challenge the all requirements wholesale power contract. Why? The existence of the distribution system will be based on its ability to compete. The consumer will purchase from the low-cost provider and, therefore, the provider must have access to many sources of power, including its existing G&T. Another theory contends that the consumer would be buying electricity directly from a G&T, not a distribution system. The G&T is the true source for electricity. The distribution system is merely the vehicle over which the electricity will be wheeled to the retail consumer.

Technology from the telecommunications industry will link via satellite the customer's meter to the utility which acts as the customer's retail wheeler and place of payment. Numerous automatic payment methods will be available to the customer through which payment will be made to the collecting utility. That utility will retain its fees for wheeling and any costs of direct purchases of electricity, and forward the appropriate amounts to the other providers of electricity. Those other providers may be investor-owned utilities, municipalities, independent power producers, or retail merchandise stores. This meter would be a computer that not only lets the consumer choose their supplier, but also allows them to monitor usage on a per-appliance basis. This metering/communications technology will provide the utility with real time load control capability, real time service quality monitoring, and allow direct customer feedback.

What will be the major changes to the physical plant which carries electric service to the customer? The industry was essentially technically mature by the early 1900s. Some type of innovation is inevitable. Our systems will be composed of primary feeders and conductor which will have significantly increased capacity to carry electricity, similar to the change the telephone industry saw with the conversion to fiber-optics.

Joel Barker contends that plastics is a product whose potential has only just been scratched on the surface. Plastic poles, transformer housing and even conductor are not just possibilities. Imagine the potential for equipment with longer lives and lower cost. Remember, we are a very capital intensive industry. We invest between $2.00 and $2.50 in plant to realize $1.00 in revenue. Think of the possible reduction in environmental concerns--no treated poles or transformer leaks due to rust-produced holes in the housings.

All of these changes will be driven by unprecedented competition. Can we continue to price our service at cost plus when the customer operates in a competitive, free market? The cost-of-service study may be a verification tool, but certainly not the guide to rate-making. We could be selling heating, air conditioning, and water heating at a flat rate based on the level of comfort desired by the customer. The market may require a utility to have hundreds of rate schedules based upon the different characteristics of the consumer or the consumer's load composition.

If central station electric service remains as our future source of generation with customer access to retail wheeling, aren't our rural electric systems in the right position? We have been successfully accomplishing this task for almost 60 years. However, the consumer demands zero outages, uninterruptable service, and so will the appliances and equipment requiring electricity to operate. What if this market-driven change causes these appliances and equipment to have their own source of energy? The group's answer to this question rests with the idea that we can't relinquish service at the retail meter. Rural electrics must be seen as the energy source to the application, not to the meter. The system could provide solar panels or photovoltaic cells to consumers, and provide for service and upgrades. Our systems could also be viewed as the source for the appliance or equipment relying on solar panels or photovoltaic cells. The consumer may have individual generators supplying all of their home or business electricity requirement. Again, we fit in as the possible supplier and service organization for these individual generators. We have the personnel to assist each consumer in finding the "best fit" of equipment and appliances to provide the results the customers want from their equipment and appliances. Our customers are buying comfort, entertainment and necessities, not KWH.

In addition to being driven by the customer, how will our individual rural electric systems change? Our systems must become intensively aware of another customer, the internal customer (or employee). Total quality management, or continuous process improvement, relies on the coordination and communication between employees. We strive to achieve TQM through a focus on the organization and the process, not through a focus on the current responsibilities of the employee or department. Employees are our most important resource. TQM allows the systems to reduce the waste of the human resource, thereby increasing efficiencies and quality of service to the customer.

The benefits gained through the elimination of wasted human resources will allow our people to focus on the preparation for and the shaping of this paradigm shift.

Barker describes a triad in the twenty-first century--excellence, innovation, and anticipation. CONSUMER reflects this triad. The constant pursuit of excellence, knowing how to do things right the first time, total quality management, will not just be the requirement to stay in business, but the requirement to get into business. Innovation is how you become the industry leader. Innovation is the way you become competitive. Anticipation is the means by which you will acquire the information that allows you to be in the right place at the right time with an excellent, innovative service or product.

What must we do as individuals? We must be leaders. A leader shapes and shares a vision which gives point to the work of others. A leader must be seen to believe in the vision, but always remember that the vision will be carried out by the work of others. You manage within paradigms, you lead between paradigms. We are between paradigms. Market-driven economics produces winners and losers. Lead your rural electric system so that you will be a winner in the market-driven paradigm of the electric utility industry.

The Advanced Management Program participants concluded that real effort will be required to lead rural electric systems so that they will be winners in the market-driven paradigm of the electric utility industry.

This article has been compiled from the thoughts and ideas that came about from the Advanced Management Program. The following participants and speakers from the Advanced Management Program should be recognized for their contribution.
COPYRIGHT 1992 National Rural Electric Cooperative Association
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992 Gale, Cengage Learning. All rights reserved.

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Title Annotation:characteristics of emerging paradigm in electric utilities industry
Author:Luecal, Scott
Publication:Management Quarterly
Date:Sep 22, 1992
Previous Article:Restructuring in the electric utility industry: old and new paradigms.
Next Article:Working effectively as a team: the board of directors and manager.

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