Building a multi utility business

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Introduction

If you look in the dictionary for the word ‘utility’ you will find the following:

“the quality of practical use, usefulness: a public service such as the bus system.”

These definitions help us to arrive at a picture of what utilities are. Utilities are services which are of practical use to the community at large in this country including businesses, other organisations and individuals. More specifically the term is used today to include public services which supply water, sewerage, electricity, gas, telecommunications and waste disposal. All of us make use of these utilities every day – when we have a bath or a drink of water, speak on the phone to a friend, boil water for a cup of tea or coffee, turn on the light and so on. Without these utilities life would be very basic, but we all want to get the best possible service and value for money from these utilities. This case focuses on outlining ways in which ScottishPower has increased the benefits to consumers through utility provision.

Private sector/public sector

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The private sector of the economy is made up of firms and other organisations which are owned by shareholders, individuals and partners, all of whom have contributed to the setting up of the enterprise. These people are essentially risk takers who seek to satisfy customer needs and will earn a profit (or in some cases make a loss) for their involvement. In contrast, the public sector is made up of organisations and firms which are owned and, in many cases, controlled and directed by the government and its representatives on behalf of citizens.

In recent times there has been a wave of privatisation around the world, in which organisations previously owned by government have been sold off to private shareholders. This move to privatisation stemmed from a dissatisfaction with the way in which public sector organisations managed resources. Because there was no competition, when a public sector organisation managed an industry there was no “spur” to create efficiency. These organisations fitted very much into the pattern of the large bureaucracy. There were many levels of hierarchy. Decisions tended to be made in a top-down direction. Decision making was slow, resources were often allocated to meet social obligations (e.g. full employment) rather than service. From 1979 onwards, there was a wave of privatisation in this country, including the privatisation of water, electricity, gas, telecommunications, coal, steel, airways and railways.

Review

The Electricity Industry in this country was privatised mainly in 1990 and 1991. The operations of the Electricity Industry consist of four main functions:

  • Generation: The production of electricity at power stations.
  • Transmission: The bulk transfer of electricity at high voltages through a central transmission system known as the national grid.
  • Distribution: The transfer of electricity from the national grid and its delivery over local distribution systems to customers.
  • Supply: The wholesale purchase of electricity from generating companies and its sale to the customer, using the transmission and distribution systems to deliver the power.
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Before 31 March 1990, the responsibility for carrying out these functions was in the hands of public sector organisations. Most of the electricity was generated and transmitted in England and Wales by a central generating board, with regional electricity boards distributing the electricity and selling it to customers within their own areas. In Scotland the two main boards generated and supplied electricity to the north and south of Scotland respectively. In 1990 the first companies in the Electricity Industry were privatised.

Individual companies in England & Wales take their electricity from the national grid, operated by the National Grid Company. These individual companies – known as RECS – then feed these supplies to customers through their own distribution systems. They buy electricity via the Electricity Pool which is a wholesale market for bulk electricity.

In Scotland, the two electricity companies, ScottishPower and Scottish Hydro-Electric, generate, transmit and supply their own electricity. Both companies take a large portion of their electricity from Scottish Nuclear, under agreed trading arrangements. Both companies also trade in the Electricity Pool in England and Wales and both successfully export power. At present, throughout the UK, suppliers are able to compete to supply mainly large customers (those using over 100kW). From 1 April 1998 all customers throughout the United Kingdom will be able to purchase their energy needs from any supplier. The objective of this change to the existing market is to introduce greater competition into the marketplace.

This case study therefore focuses on the way in which one such organisation – ScottishPower has developed a multiutility strategy that will enable it to keep ahead of the field in serving customers in the next century and beyond.

The principal activities of ScottishPower are the generation, transmission, distribution and supply of electricity to industrial, commercial and domestic customers, together with the sale and servicing of electrical appliances, electrical contracting and the provision of technical services. The company supplies gas to industrial and commercial customers and, through Scottish Telecom, is engaged in the provision of telecommunication services to commercial customers.

The company acquired Manweb plc on 6 October 1995. Manweb also distributes and supplies electricity and gas to commercial and domestic customers in Merseyside and North Wales. In August 1996, ScottishPower acquired Southern Water. You can see from this current range of activities that ScottishPower is already a multi-utility organisation. This case study goes on to outline the logic behind and the benefits that stem from this direction. The popularity of a multi-utility approach is growing around the world. Here are some international examples of multi-utilities:

The main business reasons behind multi-utilities

  1. Customers are able to buy all their utility services from a single company they know and trust. In other words they benefit from a one-stop shop for all their utility needs, creating the opportunity for a business to grow rapidly.
  2. Multi-utilities give organisations a much reduced cost base. Companies an cut the costly duplication of billing and administration of accounts. They can have a single telephone system, common depots, maintenance and transport fleets. (With large fleets they can also demand lower servicing rates). Companies can share energy management initiatives and benefit from a rationalisation of their headquarters.
  3. The multi-utilities capitalise on their knowledge and experience of delivering basic services into homes and businesses. However, they are reducing risk by building on several bases, so that they are stronger.
  4. Water and electricity companies share many characteristics, such as managing large capital expenditure programmes and large customer bases. In commercial terms the two businesses are complimentary, with the strong cash flow generated by the electricity business, financing the large capital investment programmes which are needed by the water companies to meet new environmental requirements.
  5. The expanded business offers more geographical centres of opportunity and more opportunities for dissemination of best practice and a larger skills base.

The external environment

Looking at the recent history of developments in the electricity industry, it becomes immediately apparent why ScottishPower has developed its strategy:
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Large industrial customers who used over 1MW were able to choose their own electricity supplier. These customers account for around 30% of electricity sales, but include only a very small number of the large industrial firms, such as ICI and British Steel.
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Smaller commercial operations, like supermarket stores or hotels, who use over 100kW were able to choose their own electricity supplier.
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Domestic customers will be able to choose their own suppliers.

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Given this increasing liberalisation of the electricity market, ScottishPower had to choose a way forward to ensure future growth. The multi-utility idea avoided the problems that the other utilities had experienced when they diversified into areas beyond their core competencies. They found they lacked the management expertise to run businesses that differed profoundly from their own.

This meant that ScottishPower made the move into a range of utility services that tapped existing management skills and expertise, whilst delivering to large numbers of new customers, most of whom prefer to deal with a single supplier for their water/gas/electricity etc. The advantages of this are particularly noticeable in either building a new property (the utility services put in by one company) or for those just having moved home, when a single call can arrange the provision of a range of utility services.

ScottishPower’s strategy

ScottishPower’s strategy has always been driven by striving to be “best in class.” In 1991, ScottishPower undertook a substantial benchmarking exercise by measuring its performance against that of other utility and customer service businesses in the UK and US and by adopting the best, most cost-efficient business practices. Therefore, ScottishPower’s expansion strategy has always hinged on being the best at what it already does, before considering growth opportunities elsewhere.

Strategic planning is concerned with giving an organisation an overall sense of direction and purpose. It is concerned with defining areas the organisation will focus on and how it will channel resources into these areas. It is concerned with the major long-term decisions.

A brief outline of ScottishPower’s strategy is that it is seeking to:

  • Establish ScottishPower as the leading UK electricity producer/supplier – giving customers excellent service at competitive prices.
  • Expand in the UK to provide a range of other utility services.
  • Expanding abroad into electricity supply/ generation/ consultation.

The main costs of implementing this strategy have been the £1.1bn spent on Manweb and £1.67bn on Southern Water.

Strategy

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In recent times there has been ever increasing competition in the utilities market and this has been accentuated by the entry of foreign companies into the UK e.g. French multi-utility companies, particularly in the field of water services and US telecommunications. Regulation has been ever-tightening. Regulators are appointed by the government to establish and maintain a competitive framework in privatised industries. Regulators in recent times have been seeking to ensure that customers and shareholders alike enjoy the benefits of the more liberalised market conditions.

As indicated earlier in this study, ScottishPower has businesses spanning electricity generation, transmission, distribution and supply of electricity, gas supply, water and sewerage and telecommunications services. It also has an electrical retail business, technology and contracting services.

Above all, ScottishPower is a customer driven organisation and in creating its strategy it has sought to develop one which is shaped by customers’ requirements and needs. Extensive market research has been carried out with domestic and industrial customers to determine the popularity of the multi-utility concept. The results of this research indicated that:

  • Customers find it more convenient to get a single bill;
  • Customers prefer to deal with one contact at a reputable company;
  • Customers demand high quality service;
  • Customers expect to benefit from price economy.

Implementing a strategic vision

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ScottishPower has gone a long way towards implementing its strategic vision. This case study has shown how ScottishPower has moved into a diversity of utilities – most recently by acquiring Southern Water so that it has added water supply and sewerage services to its portfolio.

The popularity of offering multi-utility services is already in practice. For example, one of ScottishPower’s largest industrial customers, in addition to taking electricity supplies, now uses the telecommunications, technology services, contracting services, energy management and power quality management services. Because the organisation has an excellent cash flow position, it is able to plough extensive sums of money into improving and developing the services that it offers. For example, this is how ScottishPower will be able to meet the significant capital investment programme required by Southern Water in the medium to long-term period.

Working from a strong existing base, ScottishPower is able to develop new business interests, turn them into successes and generate an even stronger business base. The multi-utility strategy is based on economies of scale, customer orientation and sound business sense. ScottishPower now has five million customers across England, Wales and Scotland.

1998 and beyond

The multi-utility strategy is a forward-looking strategy, which should gain further impetus when the gas and electricity markets are liberalised in 1998. ScottishPower aims ultimately to expand internationally when the opportunities arise.

ScottishPower believes that after liberalisation of the domestic power market in 1998, only the most competitive companies are likely to prosper. Those which have benefitted from cutting costs wherever possible (without compromising service) will be able to gain. The savings gained from centralising, where possible, administration and customer service functions through the multi-utility operation, will keep ScottishPower among the most competitive. The quality of the ScottishPower brand name enables the organisation to be successful in a variety of new utility areas so that considerable synergy is achieved by operating on a grand scale. The emphasis is always on providing value for money and on building a strong personal relationship with customers.

ScottishPower believes that there are many overlaps in running a utility business and therefore some skills are cross-transferable, such as dealing with industry regulators, managing assets and a large customer base. Other operational benefits include:

  • Increased purchasing power
  • Single wayleave and record system
  • Single design, cost and tender resource.

Conclusion

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This study provides students with a fascinating and detailed practical case study of how a leading organisation has developed and implemented a strategy designed to enable it to ride the wave of change. This strategy has involved careful consideration of the scope of its operations and of how resources can be drawn on to ensure that the organisation is able to focus on its strengths. ScottishPower has identified consumer preference for a “one-stop-shop,” multi-utility approach. It has therefore outlined a carefully constructed path to delivering this approach. This is the essence of good strategy.

ScottishPower | Building a multi-utility business