Strategic Planning Models for Utilities

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Strategic Thinking Requires Strategic Analysis

ENERGY CRISIS? — Maybe!

Utilities were roiled by the energy crisis of the 70's. And many say we're entering a new era of extreme challenges. China and India — with almost seven times the U.S. population — are growing their economies at breakneck speed which together with the insatiable appetite for energy in the USA are creating a huge demand for energy. In May of 2003, the price of oil was $24 per barrel. In five years it has shot past $50, $80, $100, and $140 per barrel. Where will it settle? Some say it will reach $200 within a year or two.

In addition, long term interest rates, while still at historically low levels, are expected to rise in the future thereby impacting future construction costs.

Meanwhile, the deficit is all but out of control, commodity prices are soaring and the dollar is plummeting putting even more pressure on interest rates and construction costs.

And on top of this is the credit crisis, the housing meltdown and the spector of a looming recession. And if that weren't enough, we have global warming to contend with.

Are you ready for all these challenges?

For example, What types of alternative energy supplies are you looking at? At what cost?

How about customer rebellion? If customer utility bills double or triple within the next few years, Utilities are in a whole new ball game. Expect adverse customer reaction and intense public and political pressure on State Commissions to hold down rates of allowed return and zero tolerance for failed diversification endeavors that negatively impact bond ratings.

To deal with these and other challenges, you'll need two things: 1. an outstanding Strategic Planning Process, and 2. a powerful Strategic Planning Model that provides quantitative answers to all your strategic questions in a timely manner.

That's where we come in. If you would like to improve your Strategic Planning Process click to our Consulting Services tab. If you want a tool that provides quantitative answers to questions that come out of your strategic planning sessions, then you need — The IPS Strategic Planning MODEL for utilities.

The IPS Strategic Planning Model can give you the quantitative answers you need, usually within minutes of being asked. Read on and see for yourself.

Try it out at little or no risk by leasing the IPS Strategic Planning Model for a nominal monthly fee. If it doesn't pay for itself many times over, just cancel the lease.

Brief Description

The IPS STRATEGIC PLANNING MODEL is an extremely powerful, yet extraordinarily easy to use software package, based on Excel and Visual Basic for Applications, that is designed to answer strategic questions in a quantitative way. In fact, it's so powerful that one person can run through dozens of scenarios involving millions of calculations in just a few minutes (see links at the left for a more detailed description of the model and how some utilities have used it). It automatically checks input numbers for reasonableness and has built-in intelligence that checks output for outlier data and consistency of assumptions. With these features, plus executive summaries that make heavy use of charts and graphs, one can quickly analyze a project without hunting through detailed reports. By improving the quality of decision making, this model has saved millions of dollars for those who have used it. Taste it's power by examining the example below.

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Questions That Pop Up in a Strategic Planning Meeting:

After a day of discussions, the company's situational assessment is this:

The Utility business has been pretty stable for quite some time. There has been very little new construction and cash flows have been accumulating which has allowed us to concentrate on new business diversification endeavors.

Unfortunately, a number of these have not turned out as well as we had planned, especially the special purpose entities (primarily financial in nature). Many of the senior staff believe that these have distracted us from our core competencies. The Utility is starting to demand more of our attention. One construction plant is behind schedule and our transmission system needs up-dating. Reserve margins are tight and we are relying more heavily than ever on purchased power. In addition, inflation and interest rates are on the rise and fuel costs, in particular, are soaring. Customer rates are already higher than the national average and customers are complaining and the commission is listening. The Commission is talking about a range of policies inimical to our interests. And finally, our dividends have not grown and our stock is where it was 10 years ago. Also, a merchant company has offered to purchase all or part of a troubled plant and another Utility has approached us with the idea of merging.

We need to know the range of impacts of these potential scenarios on our stakeholder (e.g. customers, stockholders, bondholder, etc.) We need an action plan to deal with them. The time is 4:00 P.M. We're meeting again tomorrow at 8:00 am.

I go fire up the IPS Strategic Planning Model. I have already created a "BASE CASE" complete with fifteen year statements. What I need now is some quantitative information for tomorrow's meeting.

Question: What's the downside the sales, inflation and interest rate situation?

Analysis: I adjust the Base Case to reflect alternative sales and demand forecasts and assess their risks, changing power plant construction plans accordingly.

I also run 5 or 6 alternative varying construction inflation rates and interest rates.

Elapsed Time: 10 minutes

Question: What are the downsides of the various Commission policy changes?

Analysis 1: Look at a range of about 5 or 6 Return on Equity scenario.

Analysis 2: Look at a ruling that allows a return of capital but not a return on capital.

Analysis 3: Phase the troubles power plant into ratebase over 5 years.

Analysis 4: Test a scenario that eliminates allowed CWIP in Ratebase.

Elapsed Time: 10 minutes

Question: Look at a number of alternative dividend policies: input dividend for first two years; grow the dividends at various growth grates for the next five years; then set a constant payout ratio for the remaining years.

Analysis: Run about 10 alternatives and make conclusion.

Elapsed Time: 5 minutes

Question: A Merchant Company is interested in purchasing all or part of the troubled plant. How would this impact us?

Analysis 1: Sell 25% of the new power plant.

Analysis 2: Sell 50% of the new power plant.

Analysis 3: Sell 75% of the new power plant.

Analysis 4: Sell 100% of the new power plant.

Elapsed Time: 10 minutes

Question: What is the impact of selling off some of our non-utility ventures?

Analysis: Sell 3 non-utility businesses. Assume various write-off levels.

Elapsed Time: 2 minutes

I've done dozens of scenarios on my own with no help. I've made conclusions and present these in concise graphs. I've done millions of calculation. I have significant information for tomorrow's meeting. Decisions need to be made and the impact of these decisions on the company is huge. How much is this capability worth?

But what about the merger?

Question: What would a combined utility look like?

Analysis: This is a bigger project and there is not enough time to analyze it for tomorrow's meeting. But I can get a head start for the next day by starting to collect data on utility proposing the merger.

I create a base case for that utility. I already have our base case. I then create a base case for the combined utility. We look for areas for savings and generally review the reports. This is a good starting point for a strategic planning session devoted solely to the merger question.

Elapsed Time: Approximately a day to input the target utility data and the combined utility data and to study the results and make some summary conclusions supported with charts and graphs. Detailed reports are available for reference.

The merger question is a billion dollar question. Getting a detailed handle on it is critically important. Once again I ask, how much is this capability worth?

For more information, contact us and receive a packet of additional information including reports and a Windows Media demonstration.

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Price of Addiction
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USA Energy Policy

Nationally Renowned

I have developed financial and other analytical software products for companies all over the country for over 20 years. In the process, I have gained a national reputation for providing outstanding products.

IPS software has been used as a basis for various regulatory decisions (i.e. testimonies, analyses and exhibits) in numerous states across the country.

I have also I have been used as an “Expert Witness” (provided testimony) for companies and State agencies with regard to financial analyses using my software products to determine financial and customer impacts of regulatory decisions.

For more background see: Statement of Experience & Qualifications.