companies strong valu-
ations have been shaken. The industry lost $90 billion
in market value in 2001, and continues to hemorrhage
in 2002. Falling energy prices, looming overcapacity,
and a crisis of confidence have cast a pall over mer-
chant energy companies and generators. The California
energy crunch and the Enron debacle have stymied the
progress of deregulation. And investors have stepped
back from their lofty endorsements of intellectual
capital, intangible assets, and energy pure plays.
In fact, investors appear reluctant to bet on any partic-
ular strategic posture these days. As a result, average
valuations assigned to different plays on the utility
value chain have converged, while, at the same time,
valuations within particular strategic niches have
spread (see Exhibit 1). The question, What strategic
position should we occupy in the energy value chain?
is less important today than the question, How do
we create value from the position we do occupy?
The progressive liberalization of the electric utility
industry has inspired energy companies to seek
new strategic positions on the value chain of power.
Traditionally an industry of vertically integrated
companies, the boundaries of which were defined by
geography and historical accident, the utility sector
has undergone a fundamental and comprehensive
restructuring in recent years. Regulatory mandate
and market discipline have driven the development
of intermediate, wholesale markets and new pure
play business models in transmission, generation
(gas, nuclear), trading, and retail services. The market,
recognizing that each of these niches offers distinc-
tive growth and risk characteristics, has generally
applauded this trend. Indeed, as recently as a year
ago, it appeared that the single most important
driver of an energy companys market valuation was
the strategic position it elected to occupy on the
industrys value chain. But that was a year ago.
Electric Utilities
Electric Utilities
A New Operating Model
A New Operating Model
Exhibit 1
Competitive Differentiation Is Increasingly a Matter of Execution,
Not Strategy
Generation
Companies
December 2000
December 2001
Wires
Companies
Integrated
Companies
P/E Ratio
Mean P/E
P/E spread between strategies
is greater than the spread
within any strategy.
P/E spread within any strategy
is greater than the spread
between strategies
One standard
deviation
13
0
40
0
40
11
12
9
33
14
Source: Booz Allen Hamilton 3
As the spotlight moves from a companys broad strate-
gic positioning to its specific performance potential,
issues of organizational design and management
rise to the fore. To be effective, strategy must be
translated into behavior and ultimately institutionalized
and operationalized through the organization (see
Exhibit 2).
In moving through this three-step process, most utili-
ties have directly addressed the question of strategy.
They have unbundled and rebundled, consolidated and
globalized. All too often, however, companies have
failed to move beyond that strategy, to the questions of
how they will execute it, and how their internal organi-
zation will enable that execution (see Exhibit 3).
Exhibit 2
Translating Strategy Into Effective Organization
Strategic Imperatives
What must the firm do well
to be advantaged relative
to our competitors?
STRATEGY
The process begins
with the strategy
translates that strategy into
what the design must accomplish
and creates a customized
organization based on the
particular company and situation.
ORGANIZATION
Behavioral Imperatives
How must individuals behave,
act, or make tradeoffs to
succeed at our strategic
imperatives?
Organizational Imperatives
What kind of environment
must the organization provide
to promote those behaviors?
Exhibit 3
Utilities Have Failed to Harness Value From Strategic Positioning
Source: Booz Allen Hamilton
Source: Booz Allen Hamilton
Source: Booz Allen Hamilton
35
30
25
20
15
10
5
02/01
08/01
02/02
P/E Ratios of Different
Utility Business Models
Vertical Pure Play Type
Repositionings Have Not Resulted in
Superior and Sustainable Valuations
Share of Non-Regulated Revenues
Versus Total Shareholder Return (TSR)
Horizontal Repositioning Has
Yielded Unimpressive Results
Mergers Announced
19971999
Value Creation from M&A Has
Proved to be Elusive for Many
300%
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% Non-Regulated Revenues
(19982000)
250%
200%
150%
100%
50%
0%
-50%
100%
80%
60%
40%
20%
Integrated Utilities
Sier
ra P
acific Ne
vada
Pow
er
Energ
y East NYSEG CMP
WEC
WICO
R
AEP CSVV
PGN CPL FPC
SCANA PSN
C
NST
AR Bost Ed Comm Ed
NiSouce NIPSCO Columbia
Dominior CNG
Ceysnan BU
G LILCO
Exelon Unicom PECO
Averag
e
R
2
= 0.01
Energy Merchants
Power Generators
Distribution Companies
40%
20%
0%
-20%
-40%
2 3
During the course of our work with clients in the energy
sector, we repeatedly hear the same execution complaints:
Performance Anxiety: The organization just isnt
performing, and we are not getting results.
Get With the New Plan: Our strategy has changed
and, as a result, we need to overhaul how we structure
and manage the business.
Merger Migraines: The success of our merger(s)
is hampered by our inability to integrate organizations
and deliver on expectations.
Crippling Costs: My cost centers are bloated and
adding questionable value.
To a greater or lesser extent, all of these concerns apply
to utilitiesas they do to the automotive, aerospace, or
pharmaceutical industries. The question every executive
wants to answer is how do you overcome these hurdles
and develop a new operating model for success?
The purpose of this article is to introduce the elements
of a New Operating Model for electric utilities, one
that not only enables strategy but also unleashes long-
lived competitive advantage. By operating model,
we refer to the full gamut of organizational levers from
structure, to measures, to incentives, to processes,
and responsibilities.
Is a company able to respond quickly and effectively
to market signals? Does it have mechanisms that con-
tinually promote internal efficiency? Is it capturing all
potential economies of scale and scope? Does it fully
capitalize on outsourcing opportunities, while develop-
ing strong internal capabilities of strategic value? Are
the companys institutional functions and accountabili-
ties aligned in a manner consistent with its external
value propositions? These are the questions the New
Operating Model is designed to address. While organi-
zational configurations will continue to differ across
utilities, the basic elements of the New Operating
Model are consistent and enduring.
The New Operating Model
This new operating model can best be understood as
the application of five key operating principles to five
different organizational building blocks (see Exhibit 4,
on following page):
1. Profit Centers
2. Shared Services
3. Corporate Center
4. Alliances
5. Connective Rules & Tools
The five key operating principles that shape and guide
the conduct of these five organizational building blocks
collectively constitute a philosophy that is focused on
value creation throughout the organization. Align organization with strategy: An ancient prescrip-
tion, but always challenging. To align your organization
with your strategy, you first need a clear understand-
ing of what that strategy actually is. What are the
key value propositions and the critical markets? What
capabilities and positioning are needed to provide
competitive advantage with respect to these value
propositions? Then you must carefully assess how
well the organizations design supports this strategy.
Do the right people day-by-day have the right informa-
tion, the right motivation, and the right authority to
make critical decisions on a timely basis? Use market-like mechanisms to allocate scarce
resources: The organizations primary function is
to marshal and deploy resources in order to create
value. It makes sense that the organization would
seek out or simulate the efficiency of market
mechanisms in fulfilling that function. Even his-
torically stodgy utilities are now reforming their
procedures of resource allocation and internal service
delivery, and moving toward market-based shared
services organizations and outsourcing. Subjected
to internal market discipline, support services are
becoming more efficient, more competitive, and
more responsive to user needs. Co-locate decision rights and information: Decision-
makers whether in the corporate center or on the
plant floor need ready access to the enterprises
best information. Sometimes this means delegating
decision authority to those in the organization who are 4
5
closest to the information, and sometimes it means
moving information closer to those with the decision
rights and authority. Regardless, the scope of organi-
zational design choices available to an enterprise will
depend critically on the flexibili