FPH Insights: Improving Financial Performance Through Operational Discipline
This article was first published on January 22, 2021. (Updated April 26, 2021)
Authorized gas utility ROEs continued to wane in 2020 as companies persistently seek rate recovery mechanisms – what operational strategies best complement these efforts?
Gas distribution construction expenditures reached a record high of $22 billion in 2019 followed by numerous project delays in 2020 – how should utilities plan for 2021?
Testing out new technologies in an inherently risk-adverse culture can be a challenge, however utility companies have a distinct advantage – what is it?
Employee engagement has been up-and-down since last summer – what has been the impact to labor unions and how can leaders get them more involved?
The Natural Gas Distribution industry, like many essential industries, has experienced a turbulent past year brought on by the substantial impacts of COVID-19 and the economic downturn that has followed. A year ago, leaders were focused on modernizing aging infrastructure, developing methane emission reduction strategies, and structuring thoughtful regulatory solutions. As 2021 begins, leaders are now addressing the impacts of reduced demand, delayed construction, and volatile pricing conditions. All of this while contemplating how the post-pandemic world will further redefine their companies and what the new Biden administration will mean for the future of fossil fuels.
This article presents a perspective on the financial health of the natural gas distribution industry in 2020 in comparison to the past decade followed by an introduction of operational strategies to help leaders improve and sustain performance. Emphasis is given to return on common equity, as it best represents how effectively management uses its assets to grow value and operational strategies will center on work practices to optimize resources, technologies, and capital investments.
With a foundational understanding of the many factors that influence gas utility financial performance, leaders can focus on operations and the upstream functions that enable field efficiencies. The operational strategies that follow provide a solid foundation to facilitate strong return on equity performance.
Employee safety is the top priority for all utility companies. A safe workforce is a productive and a more fully engaged one and that engagement must extend to the senior management team up to and including the CEO.
In a recent survey of 1,000 workers across various industries, utility respondents felt 54% more likely than those in other industries to get injured. Researchers in another study found that utility workers had a higher exposure rate to serious injuries and fatalities. And gas-only companies consistently have higher incident rates than combination utility and transmission companies.
Actions to Take: Field employees need assurance that senior management is fully committed to their safety. The entire leadership team must be visibly engaged to cultivate an interdependent culture. One way to do this to implement a proactive field observation program with a consistent cadence of leader field visits. Every field employee is visited at least once per week even during the ongoing COVID-19 public health crisis.
While ensuring co-workers go home safe every day, operators must also remain steadfast on Public Safety. Natural gas pipelines are the safest, most reliable, and efficient manner of transporting energy making up less than one one-hundredth of one percent (.01%) of all U.S. transportation accidents. However, when an incident does occur it can be quite sensational and damaging.
This is particularly the case with gas distribution related incidents, which more directly impact residential and small commercial customers. Since 2010, there have been 1,200 gas distribution related incidents resulting in over 500 injuries and disrupting 170,000 customers.
Actions to Take: Gas distribution leaders must practice, rehearse, and study three disciplines: Prevention, Preparation, and Response. The best defense against incidents is to prevent them from occurring. Define operational standards with sensible clarity and implement quality control inspections to test current work practices against the standards. Prepare all levels of operations with a solid foundation in FEMA’s Incident Command System (ICS) and relentlessly measure organizational maturity. And finally, extend response metrics beyond dispatch, travel, and arrival times – think like a customer, after all that is who you are serving.
Local distribution companies have been seeking rate relief for replacing aging infrastructure since 1988 with programs targeting higher risk cast iron and bare steel. Since then, 41 states including the District of Columbia have implemented programs to accelerate removal of deteriorating pipelines and services. Despite this effort, only 22 states have eliminated cast iron and just 5 states have removed bare steel pipelines entirely.
Significant progress has been made with construction expenditures reaching a record industry high of $22 billion in 2019. However, COVID-19 has disrupted project deliveries and companies cannot afford another season of delayed infrastructure replacement. Disciplined investment ensures a safer and more reliable system and enables strong rate base growth. As company officials prepare year-end earnings reports, emphasis on capital investment spend will be critical.
Actions to Take: Within the company, leaders should assess program execution and delivery plans. Assign an explicit executive sponsor (no more than 2 levels from CEO) who are accountable for delivering results. There should be strong project review cadence of Plan, Execute, Assess, and Deliver that includes active engagement from engineering, project management, construction, operations, and the assigned executive sponsor.
In response to the coronavirus health crisis, new uses of technology have been inspired in the utility industry which has traditionally been dependent on centralized control, structured processes, and complex legacy systems. Optimizing field resources, communicating virtually, and unlocking new customer value streams necessitates greater use and quicker adoption of innovation and technology.
Embracing technology is not easy for the conventional utility leader in an inherently risk-adverse culture that has relied on experienced employees and standard operating practices.
But these leaders can leverage something they already have – data and a lot of it. With new gas safety regulations emerging with increased regularity, gas companies are collecting and retaining more data with greater accuracy than they ever have before. This creates a distinct advantage as machine learning and artificial intelligence (AI) thrive on data.
Actions to Take: Imagine the possibility of adopting technology and innovation in the same way employee safety is embraced. Culture will not change with either without intention. And don’t leave monitoring and controlling technology to the IT department – make it a core competency within the operations team.
Provided here are sources of value and enablers. See where your company stands with each.
Last summer, Gallup, a global authority on polling and analytics, recorded the most significant drop in employee engagement across the U.S. since 2000. The uncharacteristically high decline followed the killing of George Floyd in late May 2020 and subsequent protests, which were on top of a pandemic that continues to claim many lives and collapse businesses. In October 2020, engagement encouragingly bounced back to pre-COVID-19 levels.
The decline in engagement has likely been more considerable for union employees who historically have been more disengaged than nonunion workers. In a recent Gallup study, union members (across different industries) reported being significantly less satisfied in 6 of 13 job aspects with the biggest differences in workplace safety, recognition, flexibility, and job security. The overall satisfaction difference between union and nonunion employees was 47% to 59%, respectively.
Union members, who are primarily field professionals, need to feel connected and union leaders need to be understood. According to Gallup, the best engaged employees are "those who are involved in, enthusiastic about and committed to their work and workplace". The first step is to involve them.
Actions to Take: One of the most effective ways to involve union leaders is to meet with them regularly. No contractual or grievance discussions are at these meetings – save that for another time. Focus these meetings on running the business where union leaders describe their needs and management responds with what is possible. Share operational metrics, financial performance, and upcoming work plans. Invite union leaders to your staff meetings. You will be amazed at what transpires.
For union members, host small roundtable discussions where they meet with senior leaders. No formal presentations. Turn the meeting over to employees to ask questions about the business, company leadership, and other points of interest. Encourage questions about key performance metrics, work practices, diversity, and leadership performance. Remember, these are front-line field employees, so work will need to be interrupted. This will be an investment of time and money – plan and budget for it. The payback will be tremendous.
As gas utility leaders prepare for the year ahead, there will unquestionably be challenges along the way. Some challenges will feel familiar while others will be new – particularly in our ‘new normal’. Financial performance will be as important as it ever has been following a year consumed by delayed investments, reduced demand, and the likes of politics never seen before.
Remember that financial performance is an ‘outcome’ and operational discipline is the ‘process’. All too often, leaders get distracted by outcomes and lose sight of the people, processes, and technologies to achieve them. Financial performance is driven by operational discipline. Disciplined attention to safety, capital investments, and people – all people. Be bold with agility and be willing to adopt new technologies and exploit the ones you already have.
About the Author: Charles Crews is the president and principal consultant of FPH Consulting Services. Charles works with clients on a broad spectrum of management issues including operations management, leadership development, workforce planning, and quality improvement. Prior to management consulting, Charles worked in the utility industry serving in key leadership roles including vice president and operating officer for one of the nation’s largest investor-owned utilities.