As natural gas local distribution company (LDC) spending on non-fuel costs and infrastructure replacement requirements continues to increase, the need for gas utilities to identify and pursue operational and cost efficiencies persists. Recent increases in natural gas prices are putting significant upward pressure on customer bills, exacerbating this challenge. Utilities with multiple operating companies have a unique opportunity – they can use their own operations to identify and implement best practices. As we will describe below, this can lead to sustained cost reduction.
Cost-reduction efforts often struggle because companies cannot easily compare operations and identify improvement opportunities across different LDCs or jurisdictions. The standardization of gas LDC processes can create significant value, but how does a utility begin this effort?
Main questions to answer
Pursuing cost and operating efficiencies across multiple operating companies requires an organization to answer some key questions:
- How do we design an approach that allows visibility into each LDC's workload and provides a comparison across them?
- How does the approach "objectively" identify best practices, promote adoption, and achieve operational improvements across the companies?
- How do we make this approach sustainable and repeatable?
Companies that do this successfully and repeatedly can immediately cut costs, increase margins, and position themselves to manage costs in the long term.
Multi-opco natural gas companies that want to identify best practices and increase the standardization of gas LDC processes should consider performing a workload-based assessment. This assessment should center around client teams, using a series of workshops to identify best practices and efficiency opportunities across the LDCs.
Philosophy of approach
Three key points underlie the philosophy of a cost-reduction approach that will resolve the key questions outlined earlier:
- Workload drives cost, signals process differences, and is free of labor rate differences
- If you want to improve efficiency, you must improve workload volumes (units) or efficiency (unit rates)
- Normalizing workload with work volumes allows true benchmarking
Start by meeting with representatives from each LDC to define workload categories, allocate FTEs, and then quantify the workload for each category. This process will require you to identify differences in workload due to true volume drivers and to use unit rates to identify the best practices among the LDC.
- Define the workload categories; compare categories across all LDCs to identify and resolve differences
- Identify and sanction differences in workload due to true volume drivers
Apply a line management/peer group ownership model to make decisions and recommendations created by the teams that own the function. This step creates a sense of ownership and buy-in that would not be present if the recommendations came solely from a third-party analysis.
- Use unit rates to identify the best practices among the LDCs
- Raise issues to challenge and break through local preference
Lastly, you will need to validate the opportunities by quantifying the benefits of the change and define an implementation approach with leadership from each LDC.
- Separate identification of opportunities from decisions on how to best use benefits
- Review and challenge recommendations at multiple levels
This process establishes a foundation for comparison across the LDCs, identifies opportunities to create efficiencies across the LDCs through standardization and consolidation, and aligns senior management on how to move forward and harvest savings or redeploy to more critical activities.
Methodology put into action
A large energy company with natural gas LDCs across the United States wanted to accelerate the identification of best practices and increase the standardization of gas LDC processes to reduce its service cost. Because the LDCs are dispersed, fostering interactions among peers—many for the first time—was vital to ensure alignment. A workload-based assessment was performed with client teams, using a series of workshops to identify best practices and efficiency opportunities across the LDCs.
By following the approach outlined, the energy company:
- Established a foundation for comparison across the LDCs
- Identified opportunities to create efficiencies across the LDCs through standardization and consolidation
- Aligned senior management on which recommendations to move forward with, as well as decisions on how to use improvements—harvest savings or redeploy to more important activities
Given volatile commodity costs and increasing capital and O&M requirements, cost management will be critical for utilities. This methodology allows multi-opco utilities to identify and implement practices that support long-term cost efficiency.