lunes, agosto 23, 2010

Answering “What Energy Business Are You In?” As the Way Out of The Third Depression

During a similar time of great change, railroads and utilities have defined their business incorrectly, by ignoring several insights, like the one Theodore Levitt gave us in his 1960’s Marketing Myopia manifesto. A quote on the 1982 book Megatrends explains utility investors why the attempt to keep a monopoly on the customer relationship, with an ineffective old economy Big-Bang Advanced Metering Infrastructure will further extend the uneconomic overexpansion of the resources of the supply side. To reduce the odds of the return of the depression, we need policies for the new economy, like power industry transformation and boring banking, which mutually reinforce each other with the coming communications’ boom to enable innovative value creation and long term jobs.

Answering “What Energy Business Are You In?” As the Way Out of The Third Depression

By José Antonio Vanderhorst-Silverio, Ph.D.
Creator of the EWPC-AF
Systemic Consultant: Electricity

First posted in the GMH Blog, on August 23rd 2010.

Copyright © 2010 José Antonio Vanderhorst-Silverio. All rights reserved. No part of this article may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying and recording, without written permission from José Antonio Vanderhorst-Silverio. This article is an unedited, an uncorrected, draft material of The EWPC Textbook. Please write to to contact the author for any kind of engagement.

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João Batista Gomes has added the very interesting and timely discussion in two LinkedIn groups with the paradox “The only way utility companies will move toward a "Smart Grid" model (with own money), is if they are allowed to charge more money to deliver less power?” I claim that there is another way out.

It is easy to see from that paradox how the utilities mindset has led as a de-facto policy to an uneconomic overexpansion on the supply side that keeps the demand side highly undeveloped. The way out of that broken business paradox in which utility investors are involved was explained by Theodore Levitt in the July-August 1960 issue of the Harvard Business Review’s article (called a manifesto in HBR site) "Marketing Myopia."

To start to show the way out, I have adapted Levitt’s example on the situation that the railroads business faced after The Great Depression to the situation that utilities will face with the emergence of the Smart Grid (whose main value creating opportunities are in the development of the demand side) under The Third Depression (see below) in the making.

The utilities did not stop growing because the need for energy based services (light, air conditioning, refrigeration, etc.) declined. That grew. The retail side of utilities are in trouble today not because that need was filled by others (competitive retailers, energy services companies, energy management companies, solar panel vendors, demand side energy efficiency suppliers, demand response companies, battery manufacturers) but because they could not be filled by the utilities themselves. They let others take customers away from them because they assumed themselves to be in the utility business rather than the energy based services business. The reason they defined their industry incorrectly was that they were utility oriented instead of services oriented; they were product oriented instead of customer oriented...

In addition, the idea of trying to keep the ownership of the relationship of all of the retail customers through the ownership of an ineffective old economy Big-Bang Advanced Metering Infrastructure is bound to extend the duration of the uneconomic overexpansion of the supply side that at some point will lead to a crash. That insight can be foreseen as we make a parallel with the crash for overexpansion in the railroad industry during The Long Depression at the end of the XIX Century, which highlights the reality versus illusion as a result of the big change being experienced in the business environment.

John Naisbitt's 1982 Megatrends, explains under the section "Law of the Situation: the railroads did not understand," the illusion utilities and state regulators are in, with the quote of Walter B. Wriston, chairman of Citicorp, who in 1981 said:

The philosophy of the divine right of kings died hundreds of years ago, but not, it seems, the divine right of inherited markets. Some people still believe there's a divine dispensation that their markets are theirs - and no one else's
- now and forevermore. It is an old dream that dies hard, yet no businessman in a free society can control a market when the customers decide to go somewhere else. All the king's horses and all the king's man are helpless in the face of a better product. Our commercial history is filled with examples of companies that failed to change in a changing world, and became tombstones in the corporate graveyard.

Now referring to what happen after the Great Depression, in The New York Times of April 10, 2009 article "Making Banking Boring," the Novel Prize winner and Op-Ed Columnist PAUL KRUGMAN wrote, among other things, it is: “Strange to say, this era of boring banking was also an era of spectacular economic progress for most Americans.” Carlota Pérez, a Venezuelan, researcher, lecturer, and author of the book Technological Revolutions and Financial Capital, has a self consistent explanation that runs as follows: the shift from financial capital to production capital [in which “boring”] financial capital takes on its traditional role, has happened after the depressions ends, in each one of the past 5 technological revolutions, after the old economy loses to the new economy, and a new golden age starts.

Increasing the leverage of the insights from the report "The Coming Communications Boom?: Jobs, Innovation and Countercyclical Regulatory Policy," written by Michael Mandel, I argue that initiating the transformation of the power industry and "Making Banking Boring" will come as the power industry and communication industries mutually reinforcing each other, through forward looking policy decisions that will create a new economy golden age boom, with mores jobs, innovations, helping us avoid altogether The Third Depression or at least substantially reducing its negative impact.

To place the needed sense of urgency to the emergent way of a customer oriented electricity business, please take a look at the EWPC post The New California Capitalist Model to Initiate the Transformation of the Global Power Industry, which responds to a challenge set byKate Rowland in her Intelligent Utility article Smart meter reflux continues. The challenge is based on a quote made by Peter Darbee, CEO and president of PG&E Corporation, which says:

As we go forward, I think the stakes are very great because once again, California is in the position to serve as the model for the rest of the United States when the United States has said it's not ready to move forward. And the challenge that we have is, are we going to be a good model, or a bad model, or an indifferent model.
All of the above explanations that leads to the new way are well in accordance with the EWPC article Three Smart Grid Predictions for Initiating the Global Power Industry Transformation, whose summary offers:

Prediction #1: Recognizing the emerging global power industry in the complete context around the Intelligent Utility Inside article Baltimore G&E: AMI Comeback? and that of this EWPC article, the Maryland PSC “No so fast” decision on the BGE proposal is highly likely the 1st domino of the chain reaction that is going to start “knocking over the next” state regulator’s utility case, “which upsets the next one, and so on.”

Prediction #2: Rethinking the old utility compact with an obligation to serve to an emergent compact on the T&D Grid side of the EWPC-AF with an obligation to deliver, the end-to-end “smart grid” will play out as part of the Enterprise side of the EWPC-AF.

Prediction #3: Repositioning the utilities that missed the opportunities to learn the lessons of other industries is bound to be in a restricted T&D Grid space that will sooner or later be "painfully consolidated."

I conclude that any forward looking utility savvy investors, based on the above insights, will now be able to answer without distractions the question “What business are you in,” as either the T&D Grid or the Enterprise side of the EWPC-AF. Hence, I further predict that the opposition of state governments and the special interest utility lobby that aims to disallow the emerging creative destruction of the power industry will fade, in order to decrease the likelihood of The Third Depression.