Until recently, utilities have not seen the need to identify cost management as a critical factor to their future success. While it is true that effective cost management contributes to the success of any business, regulated or unregulated, current economic forces driven by a deep global ression and emerging regulatory changes have raised continuous planning and cost management in the Utility industry to a level of paramount importance. Any industry migrating from the economics of a rate-base rate of return to a competitive environment is faced with a significant shift in business imperatives.
In a regulated environment companies provide services to ratepayers; a captive class of customers, whose sole market choice is when and how much service to use. In a competitive environment, companies pursue value-creating customers by providing products and services that customers want at competitive prices. The former relationship is a static “take-it or leave-it” approach, while the latter a dynamic relationship, which requires an understanding of market and customer preferences as well as an understanding of differing costs to serve. Planning and cost management for utilities is primarily a function of understanding customer capacity requirements and structuring rates appropriate to meet customer demand. In a competitive environment, however, companies need to be more aware of customer purchasing behaviors and service requirements and how those factors impact company profitability.
Utilities are, for the most part, vertically integrated entities offering homogenous bundled products and services to broadly defined customer segments (Industrial, Commercial & Residential). Revenue and costs are understood, if at all, at highly aggregated levels. In an undifferentiated environment, utilities have little need to clearly understand disaggregated revenue and costs. As long as revenue requirements are met and costs incurred according to established targets (budgets), regulated businesses achieve allowable rates of return, even though one or more of the products or services are unprofitable. Rapid product and service unbundling, increasing market segmentation and product/service differentiation are experiences gleaned from industries that have traveled down the path of deregulation. Competition in energy supply, delivery and related energy services will dramatically alter the information needs of utilities with respect to profitability and the composition of revenue and costs associated with unbundled differentiated products and services. Cost management in the newly developed market driven environment will require utility managers to know, understand and manage costs to a level of detail unprecedented in their history.
Forward thinking utilities have turned to Beyond EPS Advisors for driver based planning and cost management assistance in applying adaptive control and continuous planning techniques, such as rolling forecasts and Activity Based Costing (ABCM) and Management in an effort to better understand future impacts on their business.