By Randy Hurst
Transitions are never easy, personally or institutionally and it is an understatement to say that the deconstructed former Ontario Hydro (now broken into three separate companies -- Ontario Power Generation (OPG), Hydro One, and Ontario Power Technologies) is in a period of transition. The new OPG, the largest of the three new companies, has half the staff (16,000) of the former Ontario Hydro and has set about to "decontrol" itself of 65 per cent of its installed generating station assets. This is no small undertaking.
The regulatory and business environment in which OPG finds itself is fraught with change. In fact, the overall North American power industry is also facing great change and Ontario seems to be caught up in the wave of change sweeping across the continent.
Ron Osborne, OPG president, is challenged with the task of steering this new ship through the unchartered waters of "deregulation", and at the same time overseeing cultural change within the organization.
Speaking at a recent electricity conference in Montreal earlier this summer, Osborne was open about the forces of change reshaping the power industry, clear about the expectations of government on OPG and unequivocal about how the internal culture of the utility must adapt in order for the whole transition to be successful.
The "Twilight Zone"
"We're in a twilight zone between being part of a huge monolithic monopoly and ultimately being a company which will be loaded onto a stock market by our shareholders in the Province of Ontario. There are many things we have to do before our shareholder has the ability to focus on the idea of a company or even a strategically investing company, so we're in the process of trying to develop those building blocks that will give our shareholder options with respect to its investment in our company," he said.
OPG is "pure generation", he explained, adding that OPG is probably one of the top 2 or 3 potential merchant generators in the world.
"Obviously, the market needs our power but it will be delivered on a basis quite different from the past. One of the key issues we have to face is that 16 per cent of our capacity is laid up. This is in the form of 8 nuclear units. When you think about it, it's quite startling that we're able to keep every light on, every refrigerator working and every plant operational on the coldest day in January and the hottest day in July and 16 per cent of our capacity is laid up. And, in that excess capacity lies probably the single biggest issue that we have had to address."
Under the old regime at Ontario Hydro, it didn't really matter if you didn't operate particularly brilliantly, there was always another plant that could be fired up, and in that issue lies the seeds that ultimately led down the road towards reorganizing the company, he added.
Forces of Change
What exactly are the forces of change that have given rise to OPG? There are three main forces shaping the new company.
First of all, he referred to the "show me attitude" among today's consumers.
"Customers 30 or 40 years ago, in just about any business, had an element of trust in their relationship with their suppliers. It was trust that enabled a life insurance sales person to sell life insurance and you can go through many examples. Customers today are skeptical. Everything now is "show me". Customers are far more educated. Those of you for example that have had any exposure to the life insurance business will know that nobody takes on faith what the life insurance sales person says. It's "show me", "prove it to me". Well that is happening in all aspects of business life."
The second point he made was about nuclear safety and operating performance improvements. "We operate safely," he explained, "but our safety margins are the safety margins of the late 1970's and the early 80's, not of the beginning of this millennium. The bar has risen around the world in nuclear safety margins and we have to catch up to a bar that is constantly be raised. "
The third point he made was that none of this external change is unique to the North American power industry in general and OPG in particular.
"I came out of the telecom business before entering the electricity business and every one of these points, with the exception of nuclear safety , would have shown up in the telecom presentations that I used to make and, in fact, some of the presentations I make to our employees are right from presentations that I made to my former employees within Bell Canada."
"We have to shrink our company and within 42 months of open access (which will happen sometime within the next few months) we have to decontrol 4,000 MW. And within 10 years of open access we have to decontrol -- a word, by the way, we use to indicate that we are prepared to enter all kinds of transactions including swaps, leases, etc, that will move a large chunk of our capacity out of our control -- down to roughly 35 per cent of the available capacity within Ontario. That means that we have to cut ourselves roughly in half. That adds, obviously, to the employee communication challenge," he said.
One of those challenges, he suggested, was building a strong internal culture.
Old Drivers -- New Drivers
How then do you deal with employees and how do you communicate with employees and what are the messages that you have to get across to employees during this period?, he asked.
The message for employees is simple, he answered. You explain that the drivers for the old, monopoly, commercial regime are completely and directly opposed (in most cases) to the new drivers motivating the company.
"Under the old monopoly regime we were driven by an obligation to serve. We drove that to extremes and ended up with 16,000MW too much capacity. Going forward, our only obligation will be to make money. In fact, ironically, we will make more money when we are unable to serve everybody that when we were able to serve everybody."
"In the past, we at Ontario Hydro made all the product choices. In the future, the customer will make those product choices partly with our help but with the help of third parties as well."
"The biggest sin in the past was to run short of generation. Hence, we had way too much. Going forward the biggest sin will be to have too much capacity. You can't make money on underutilized capacity. In the past, we set the price with a minimal amount of regulation -- in fact, virtually no regulation. In the future, it doesn't matter about regulation because the market will set the price. And, of course, in the past we based our prices on cost. In the future, the price will be based on value," he said.
"Now that is a tough concept to get across to 16,000 employees who are used to a cost of service regime," he admitted.
In the past, he explained, excess capacity costs were passed on to the consumer. In the future those costs will be absorbed by the shareholder.
In The Past
"In the past, whether we like to admit it to ourselves or not, we had limited financial discipline because the discipline was really that of the obligation to serve. In the future, we will have to have heightened financial discipline. In the past, we had what I'll call unreliable returns -- but at least they were stable returns. In the future, there will be no stability and the risk will be significantly greater but the returns, hopefully, will be more exciting," he said.
"In the past, we insisted on getting things perfect. We didn't always succeed but that was where we aimed. In the future, we want to get things right and, as I used to say at Bell Canada, the search for perfection obviates the attainment of the possible. We have to get things right in the future, not necessarily perfect."
Future R&D Potential
Just like the aftermath of innovation that followed the U.S. breakup of AT&T in the 1980s, Osborne forecasts a great potential for R&D innovation in the power generation industry as a result of deregulation and an end to monopolistic practices.
"If you think back to the pre-breakup of AT&T pre-1984, AT&T and companies like it made all the R&D decisions. They determined where the R&D dollar was spent. They did it on the basis of what they thought might be interesting from a scientific standpoint, or it may have been from a marketing standpoint, but also with a view to avoiding cannibalization of their asset base, their rate base, etc. In the future, AT&T will continue to spend R&D money but many, many other companies are also spending R&D money. It is clearly that breakup, that opening up the grid, that unleashed those R&D forces," he commented.
"You can make your own bet as to what R&D forces will be opened up in our business, electricity -- whether it's fuel cells, distributed generation, higher capacity transmission elements, etc, I don't know. But I don't believe that any of us can predict what the electricity business will do on the R&D front over the next 15 years any more than anybody in telecom was able to predict what the unleashing of R&D would do in 1984. At that time, Sisco didn't exist. Microsoft barely existed. Wireless technologies were just coming into view on the radar screen. And all of that innovation was released through R&D channels in my view."
Communicating The Big "C"
Competition is a new concept in the Ontario electricity marketplace and for OPG employees, they must keep focused on three marketing principles: Custom-ers are demanding, competition is unrelenting, and the financial markets are unforgiving.
"It's simplistic, but I rather like the phrase that "competition is a race with no end."
For OPG employees, these relatively new marketing concepts focused on competition translate into cultural change within the new company.
"We had an internal focus at Bell Canada and I get to Ontario Hydro and lo and behold we have an internal focus at Ontario Hydro. What we have to have, of course, is an external focus and the way that I characterize this is to say that in the past we circled the wagons and shot in. In the future, we have to circle the wagons and shoot out...If we are half as tough on the external competition as we are on the internal competition we'll win every race and I firmly believe that."
"We have grown used to competing internally and if we can take that internal competitive strength and focus it on our competitors, we have a very good chance of winning," he said.
He cautioned that with an average employee age at generating plants being 47 or 48 years and an early retirement package that triggers in with the rule of 82, when he tells employees to stop worrying so much about their pensions and start focusing on bonuses, his message is greeted with some suspicion.
"You have to be very careful how you handle this, but you have to have an organization that has the right focus, the right balance between the focus on maintatining personal financial and family security and at the same time earning professional rewards -- rewards in the form of bonus or stock option," he said.
"There isn't anybody who starts working for a silicone valley company who even knows what a pension really does. They sure know what stock options and bonuses do," he added.
"I was asked by an employee the other day: "How will I know -- I'm buried in a fossil plant -- how will I actually know when competition's there and that it's actually affecting us?" I didn't really have a pat answer but I think what I said was, "Well perhaps the way you'll know in a fossil plant when competition is real is when, under the order of merit, your plant should be running and it isn't. Somehow, you with the advantages you've got within, your plant should be generating electrons and somebody else has beaten us to the punch in some fashion."
And then I thought about the same question with respect to our sales force and I concluded the answer to the sales force is that they'll know competition is there the first time they come home without the order. Not many of our sales people came home without the order in the past. We will have to help them through that experience of not getting the order."
"We have to avoid being internally team-oriented or silo-oriented and we have to figure out we're all on the same team, fighting the same common enemy. We have to avoid the tendency to hire clones and subordinates. Instead we have to hire those people who would disagree with us, those people who would try to push us out of our jobs, those people who would indeed succeed us, and the last who are essentially mirrors of the same. What we need is people who can see the glass to be half full and not half empty. That is the way that I characterize the kinds of cultural issues that management in my position has to deal with. You have to rejuvenate management," he added.
In order to accomplish this, the easiest thing to do might seem to be to bring in people from the outside, he said. But this is contrary to his plan.
"We tried that at Bell Canada and it didn't work. What I have tried to do within Ontario Power Generation when I'm working within the management structure is to figure out who are the keepers within existing management and then supplement from outside and I've tried to focus as much on the keepers as I have on the external hires. Any organization has what I refer to as the 6 usual suspects."
"When you have a task that needs to be done you can count on the fingers of one hand the number of people you can really trust with a difficult task. We have the 6 or 7 usual suspects and the trick to keeping things working smoothly is to bring in people you have some faith in -- often you've worked with them in the past -- and from the right mix of new and old employees there will evolve a new and successful organization. And I think that we are well on our way to achieving that at OPG."
"Communicate, communicate, communicate. This is difficult enough for a normal business, one which is owned by Bay Street, by shareholders, by financial institutions, etc and is independent and is able to carve out its own highway. It's a little tougher, frankly, when you're owned by a province and you don't quite know what the province has planned to do with you."