By Kim Allen, Daria Babaie and Paul Ferguson
The Municipal Electric Utilities (MEUs) of the province of Ontario are undergoing major change to comply with the Energy Competition Act, 1998 - Ontario. The challenges facing the MEUs and their Municipal Councils in shaping their utilities are considerable. If the impact of the changes and restructuring on any key stakeholders of the MEU (i.e. municipal council, commission, customers, employees, union) is ignored, there could be economic, social, and political implications. A decision on the utility's future based on a simple accounting exercise and the utility's market value is short-sighted and potentially dangerous. In order to reach a proper decision on any MEU's future, the people side of restructuring must not be forgotten and all issues concerning the key stakeholders must be considered.
This article offers an overview of the issues to be considered as a part of any decision on the MEU's future. A stakeholders impact analysis is essential to ensure minimum risk, social, and economic implications to the municipality. Furthermore, communication with and involvement of stakeholders are key to the utility restructuring and change management process. Successful utility restructuring requires an alignment of stakeholders with the restructuring effort to transform the MEU so it can best serve its customers.
Introduction
"Change: A bend in the road is not the end of the road... unless you fail to make the turn." - Unknown
The electricity industry in Ontario is currently entering a period of transition and fundamental change, which is certain to affect all Ontarians in the next few years. The Ontario Government has introduced a competitive electricity market scheduled to open in 2000. After the market opens, the Municipal Electric Utilities (MEUs) will face competition and increased customer demand for cost-effective, high quality, and reliable energy services. The Energy Competition Act, 1998 - Ontario will change the role of MEUs in the utility industry marketplace. It will introduce a number of new entrants into the electricity marketplace, reshape the relationship between customers and their suppliers, and change the way business transactions are performed.
A number of Ontario MEUs and their municipalities have started to prepare themselves to comply with the requirements of the Act. They are implementing a number of changes to meet the challenges of the new marketplace by developing and implementing strategic, organizational, operational, financial, taxation, and marketing business plans. DTE/Probyn Energy Solutions has presented a detailed road map and a high level process for the utility restructuring called the Restructured Utility Model (RUM), as published in Electricity Today in December 1998.
All key stakeholders of the MEUs including municipal councils, commissions, customers, employees, and unions are included in this period of extraordinary transition. Understanding the needs and expectations of these stakeholders and facilitating their active involvement in the restructuring process are critical to successful change implementation. It is absolutely critical to ensure that any decision on the MEU's future be made based on a detailed stakeholders impact analysis and evaluation of various ownership and governance options.
An expedient and simple approach to electric utility restructuring is to make choices on a market value analysis of the MEU's assets. However, a decision on an MEU's future based solely on its market value and ignoring the impacts of ownership options on its customers and staff could have future economic and social implications. Market value assessment of the MEU must complement the people side of restructuring as they play a critical role in the MEU's future. We strongly advocate that the impacts on the key stakeholders be considered as an integral part of any final decision on the MEU's ownership and governance. A concerted effort on stakeholder involvement and education in any utility restructuring is key to managing change. It will be the prime factor in facilitating the transformation of the MEUs to new value-added business entities in the new market.
Restructuring of the MEU, new regulatory regimes, and introduction of competition will lead to increased uncertainty within the MEU's organization and among its various stakeholders. There is a profound need for clarification and definition of roles and responsibilities among all key stakeholders. The future cannot be charted without addressing the needs of stakeholders in both short and long terms.
The creation of a competitive MEU requires balancing two aspects of the change. One is organizational involving the utility's business structures and the other is the people. Without people and their support, the MEU does not have any chance to create a competitive business entity and succeed in the new competitive marketplace. The MEU needs to utilize its stakeholder's knowledge, experience, and facilitate their involvement in the change process.
Municipal Council - The MEU's Shareholder
The Energy Competition Act, 1998 - Ontario provides an opportunity for Municipal Council to serve as the MEU's sole shareholder and represent the interests of customers, businesses, and communities in their Municipality. However, the recent Ontario Government's municipal restructuring has introduced major changes in funding to the municipalities. This has made the sale of some of the MEUs an attractive option for some Councils, especially those who have been experiencing financial hardship and economic downturn.
Making a decision on sale based on access to short-term cash can be quite risky since the apparent value of the MEU's asset does not truly represent its market value. In a transition phase, the MEU faces opportunities, risks and uncertainties on both the wires and retail sides of business, all of which affect its asset value. However, each Council will need to make a decision on providing competitive services and/or maintaining their present wires business. They will need to consider all business options to maximize the benefits to citizens. Councils need to have sufficient information on their MEU to make a preferred choice. This information includes the benefits, costs, and risks associated with each business option. Presentation of available ownership and business alternatives will facilitate a process for Councils to make an informed and prudent decision concerning the future of their MEU.
A stakeholders impact analysis will offer excellent information for Council including the impacts of change on the MEU's key stakeholders. This is necessary to make an informed decision to retain or sell all or part of the MEU. Only a detailed analysis that evaluates the risks and benefits associated with each business option and ownership alternative on a quantitative and qualitative basis can help Councils reach their best decisions. The analysis must consider criteria such as impacts on customers with respect to rates, reliability and safety, the community's need for value-added services, municipal control of essential services, economic development, debt reduction, local employment, and taxation.
The MEUs and their municipalities have a responsibility to keep local distribution costs as low as possible while offering reliable electric supply to customers. The MEUs must take advantage of the opportunities presented by the new marketplace and implement a number of programs to operate more effectively and efficiently. They need to maximize their cost effectiveness and operational efficiency as well as generate returns for their municipalities. They can set up de-regulated businesses, offer value-added services to their customers and communities such as telecommunications, and generate new revenue streams. They can explore partnership and joint venture opportunities with the private sector that will allow them to thrive in an open market. They can pursue environmental initiatives such as offering green power to their communities. Business strategies such as these will ensure the delivery of energy services that enhance Councils' economic development objectives.
MEU Commissioners - Business Partners to Municipal Councils
The Commissioners of the MEU have traditionally represented customers and business communities in the MEU's service area. They have served as the board of directors of the MEU and provided direction and leadership to ensure customers receive cost-effective, reliable, and safe utility services. They have played a proactive role in making the MEU an important asset of the municipality and an integral part of their community. They serve their community by promoting economic development in the MEU's region. More importantly, Commissioners have invaluable business and technical knowledge and experience in MEU operation.
Commissioners must be encouraged to continue their participation and representation on behalf of the customers in any restructuring process. This will be critical to the change implementation process.
Customers - The Reason MEUs Exist
The changes introduced in Ontario's electric industry will offer choices for customers. Competition in the electric industry will offer a broad range of price, product, and service options to customers in the future. In addition to their demand for basic energy products, customers will seek value-added services in the areas of customer service, quality, and reliability of supply. The MEUs need to differentiate their services and products in the new marketplace in order to keep their customer base and better compete in the market. This will require the MEUs to continue to evaluate and accommodate their customers needs and expectations more than ever before.
The Ontario MEUs have delivered reliable and cost-effective electricity to their customers in the past. Residential and business customers expect that the prices for electricity will remain as low as possible. Reductions in the total energy bill will be of major concern for those customers who use large quantities of electric energy in their core business. Electric rates will have significant impact on the economy of the municipalities and Municipal Councils' economic development programs.
Reliability, quality, and safety of supply will continue to be high priority items for those customers whose loads are sensitive to power interruptions and outages. Any interruption to these customers may be quite costly with a resultant negative influence on their businesses. Loss of service affects thousands of people and can cost millions of dollars in economic loss. Any negative impact on reliability may lead to loss of business customers in the municipality. The MEU and its municipality must maintain and improve the reliability of their service delivery for their customers through innovative practices.
Employees - Invaluable and Skilled MEU Assets
Industry restructuring could lead to loss of employment for some people and also provide many new career opportunities for others who are impacted by the change. Change caused by the restructuring is stressful and creates anxiety among employees who want a place to work, learn, and be valued. They are concerned with their job security and future of their families. Employees will need to have their confidence reinforced.
Successful change occurs faster within the MEU when it is championed by all staff. Change sponsorship can be achieved when the issues surrounding change and utility de-regulation are communicated and clearly understood by all staff. Maximum staff involvement is critical for successful implementation of restructuring.
Resources are very scarce during transition that brings additional workload for those MEUs that want to be proactive in the utility industry. Ontario MEU employees are highly skilled people essential to the future success of their utilities. Early planning and implementation of staff redeployment processes in the transition period will make the best use of the employees who have transferable skills to the new wires and competitive businesses. This will also reinforce the need for the MEU to retain their employees and grow with them in the new marketplace.
As employers, the MEUs desire to retain all of their skilled employees. In the current restructuring process, there is a high risk of staff turnover. Entering a competitive environment will require that intensive training be provided to allow resources to acquire the skills necessary to perform effectively in the new business environment. Providing training and development programs so as to maximize the expertise of all employees is essential for the MEU to be effective in the competitive marketplace. The winners will create a flexible, diverse and competent work force.
Unions - Potential Business Partners to MEUs
Most MEUs' unions are facing difficult issues and uncertainties concerning security, pay, benefits and working conditions for their members. Unions have demonstrated an ability to act as insightful and effective business partners, given a relationship based on mutual gains and trust. After all, both management and union need an organization that can compete in the marketplace. The management team can conduct information sessions with all union leaders and their members giving them succinct details on the MEU's issues and challenges. The union's involvement at an early stage of utility restructuring is one of the critical contributing factors to successful restructuring. Candid two-way communication between the management and union builds trust and facilitates a partnership and is critical.
Conclusions
Municipal Councils and their MEUs must not ignore the people side of restructuring while examining the MEU's ownership and governance options and deciding on its future. Their decision must not be single dimensional based on a purely economic analysis, but flexible, consultative, and outcome focused through complete consideration of the impacts on all key stakeholders in both the short-term and long-term. Their decision should be of a multi-dimensional nature with appropriate risk analysis and risk management to go beyond a simple financial and accounting exercise of the MEU's market value. Effective communications and involvement need to be a top priority for the Council and the MEU so that all stakeholders understand the issues and have a real opportunity to contribute to the change process. After all, people make businesses successful.
The Upper Canada Energy Alliance is an MEU cooperative entity formed in 1998 and consists of utility members: Aurora, Georgina, Innisfill, Markham, Newmarket, North Bay, Orillia, Richmond Hill, Vaughan, Whitchurch-Stouffville Hydros.
Kim Allen and Daria Babaie are with DTE/Probyn Energy Solutions Paul Ferguson is with Upper Canada Energy Alliance.
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