CEO SPEECH
THE EMERGENCE OF THE MULTI-SERVICE UTILITY
30th October 1999
Mr Keith Stamm
Chief Executive Officer, United Energy
Ladies and Gentlemen:
I suspect that in future years, when we look back on 1999, we will view it as an historic year in the evolution of the energy industry in Australia. It has been the year in which the transformation of the industry reached a new level with the completion of the privatisation of the gas companies in Victoria.
A reform process that commenced in that state some five years ago with the break-up and subsequent privatisation of the State Electricity Commission of Victoria concluded earlier this year when the last of that State's gas assets were acquired by the private sector. Whatever your political or philosophical views, it is clear that Victoria has been the pace-setter in the energy reform process which has changed forever, the way in which energy is distributed and marketed in Australia.
Privatisation in Victoria has been accompanied by the rollout of contestability throughout Australia. With this profound reform program has come a major shift in the way we need to approach the business of energy distribution and marketing.
From the new environment has emerged the multi-service utility. Its impact on the market is only just beginning to be felt. The key point is that this new corporate creature is not loyal to one particular energy source - it is loyal to its customers and to the basic belief that fulfilling the needs of the customer is why it is in business.
I am proud to say that my company, United Energy occupies a special place in this historic sequence of events. We were the first of the Victorian electricity businesses to be privatised and the first to float on the Australian Stock Exchange. Today, two thirds of our equity is in Australian hands - we have 68,000 shareholders who own 42% of the company while Power Partnership owns 58%. Power Partnership is, in turn, jointly owned by AMP Life and UtiliCorp Australia Holdings. UtiliCorp, as you may know, is an American energy company based in Kansas City, Missouri.
When the gas businesses were put up for sale, AMP and UtiliCorp acquired Ikon/Multinet and then appointed United Energy as the manager of these businesses.
So, with our electricity, gas and our telecommunications operations, we became a true multi-service utility company. This did not occur through a series of random collisions. We had, from the beginning, set out to be a multi-service utility and our position had been made public on many occasions.
I have observed that much of the public debate in Victoria, and throughout the rest of Australia, has concentrated on the advantages and disadvantages of public versus private ownership of major infrastructure assets. Far too little of the debate has focused on the fact that there has been this fundamental shift from single fuel utilities to customer focussed energy businesses.
This shift is, I believe, even more fundamental than the question of ownership. It goes to the very heart of being an integral part of the supply chain to industry and commerce, and, eventually, the entire community
The emergence of multi-service utilities is just part of this changing landscape. We fully expect to see non-traditional energy retailers enter the market when the final tranche of electricity deregulation - the residential sector - becomes contestable in Victoria in 2001. These new retailers may come from a variety of areas - industry associations, major corporates, even churches and not-for-profit organisations that see business activities as a means of meeting their operating costs whilst underwriting their social welfare agendas.
It is the expectation of the emergence of these new entrants that has led United Energy to establish its Utili-Mode back office subsidiary. This business will provide call centre, credit and collections, billing, customer service and energy trading support to potential entrants such as retailers, other energy companies and aggregators. For existing large scale retailing organisations the new national market will have some obvious appeal, however the astute amongst them will recognise that they do not have the expertise to manage the risks inherent in the new deregulated energy markets and they will therefore want to partner with an organisation that can provide these skill sets and the tailored back office services needed. New entrants would therefore be able to utilise their existing national brand equity and retail channels while utilising the expertise of United Energy in the competitive national market. Whilst such new entrants will, to an extent, be expected to target our existing customer base, we firmly believe that protecting our interests through the strategy of being in the back office for new entrants, is more realistic and business focussed, than trying put up barriers to prevent the loss of customers to such newcomers. Whilst churn of contestable customers will be modest, we believe our customer management systems provide us with a strategic advantage which can be leveraged.
Competition is fierce and, to survive, the utilities must be very "customer-centric". The days when we, as a single service utility, wanted to sell only that single energy service to our customers are gone. Today, we do not think about the energy source as much as the energy solution. Our role is to add value to our customers' energy requirements and, in order to do this, we look at the entire picture.
Industry expects its energy suppliers to be progressive and proactive in recommending improvements for energy management. Our customers expect us to make recommendations based on their requirements - not on whether we get more margins from electricity or gas.
As multi-service utilities grow and build market share, they will have significant advantages over single fuel suppliers as they can better meet customer needs and have the capacity to leverage their business systems and spread their costs over a broader customer base. So the combination of much more comprehensive service offerings combined with lower costs should certainly prove attractive to all sectors of the market, particularly the larger energy users.
While we are looking after the needs of our customers, we have another, highly critical audience to satisfy - our shareholders. Our shareholders are focussed on returns and we know that that we have to be constantly vigilant on costs while still being innovative to find solutions for customers.
Publicly listed companies in the Australian energy sector are nothing new. However, their emergence in the new multi-energy infrastructure sector has added a new dynamic to the industry. It is not just a question of profitability but also one of accountability and transparency.
We are all familiar with the term "convergence". It is liberally applied to many industries and is, without question, the coming trend in energy. We see it as far more than marketing electricity and gas. It includes all forms of energy, and energy obtained from many sources, including the rapidly growing field of renewables and the energy-efficient new technologies. At United Energy, we shall certainly be marketing the most appropriate forms of technologies for the end user and these are likely to include fuel cells, micro-generators and many others.
Businesses like ours that make the bulk of their income from distribution believe that the days of lobbying for one type of energy over another must be put behind us. Customers have energy needs which are ideally suited to a particular fuel source and these truths should be recognised. Competition between fuels should not cause us to overlook our common agendas.
For example, in Victoria, gas has a huge share of the ducted heating and hot water market which given the present infrastructure and lack of upstream supply competition, places the gas grid under pressure in winter. Conversely, the electricity grid in winter is under-utilised but stretched during summer by cooling requirements. This creates price spikes in the electricity market in a fully contestable market. We can therefore look at initiatives such as gas cooling not only as a new market for gas, but potentially to offset the loads on the electricity grid in summer. The work being done by the AGA to hasten the viability of gas cooling is to be applauded. However, if we do have the customers best interests at heart then the extension of gas into the cooling market needs to deliver a benefit through infrastructure capital expenditure deferral or the avoidance of peaks in electricity cost. Similarly, it may be cheaper for customers to use more electricity for heating in winter than to pay for new gas infrastructure.
In this new environment, how can industry associations best serve the needs of their members? With the industry now dividing horizontally, industry associations need to focus more on sectoral issues and less on competitive differentiation of one fuel source from another. Companies like ours are not going to fund promotional campaigns which benefit only one part of our business. We would like to see industry associations working on behalf of the energy sector as a whole. There are many large and important issues such as the regulatory framework, environmental impositions and taxation regimes in which we all have a stake.
The major environmental issue capturing government attention in Australia is of course the level of greenhouse gas emissions. In the United States, we faced a similar debate on SO2 emissions. The government wanted to impose mandatory limits on all industry while we argued for the introduction of emissions trading. The latter was introduced and has, in my view, produced a more realistic and cost-efficient outcome.
Whilst this worked for SO2, the pricing of permits for carbon emissions needs very careful consideration if much of Australian industry is not to be destroyed. At the end of the day, we all need to recognise Australia's national interest and look for ways to reduce emissions without destroying our major source of competitive advantage - our abundant low-cost energy sources.
In areas like research, the new competitive structure of the industry will mean a lessening of preparedness to share information that might provide a competitive advantage. Intellectual property will often be the difference that secures market share for one company, or enables it to sell value-added services to the market at large.
So what is the role for AGA and other associations in the new competitive multi-energy business environment? In our view a opportunity exists for an association to emerge which plays an active leadership role in the key area which threatens the further development of our industry, - not greenhouse, not gas over electricity, not fuel cells (although all of them remain important) but regulation.
The Australian regulatory framework is, in some ways, very similar to the one I am familiar with in America. The common element is that both markets are heavily over-regulated!
Rate of return regulation has proved that it is not a driver of efficiency and customer benefits. Do we really want to encourage an environment that delivers a better return on paintings on the boardroom wall rather than stimulating investment in facilities that deliver improved service to end customers? Regrettably the regulatory environment for electricity in Victoria seems to be headed towards rate of return regulation and away from the light-handed incentive-based regime which attracted much of the investment in privatised utilities in recent years.
The cost of regulation is another matter of concern. Estimates in the electricity industry begin at $50 million per annum for costs borne directly by the businesses. This amount can be doubled when the costs of the various state regulatory bodies are taken into account. These costs are, of course, borne by customers for what I believe are questionable benefits. It must also be said that having regulatory bodies in all states at a time when we are rapidly moving towards a national energy market makes very little sense.
As we move towards a contestable and privatised energy market, it is self-evident that industry is getting a far better deal from privatised electricity companies than from the old state-owned monopolies. Energy prices are lower, reliability and quality of supply have improved and there is now a new range of value-added services that customers can select.
This has provided a competitive advantage to industry in those states that have privatised their utilities. I would therefore expect industry in the other states to lobby hard for getting onto the same playing field. The benefits from contestable gas markets are still to be realised as reform is, as you are all aware, more recent.
As part of the ongoing reform agenda, we expect to see a national gas market with strong competition in upstream production. The current situation of upstream monopolies will change. We should also expect to see further convergence between upstream and downstream players because massive scale is needed to be successful downstream. Undeniably, strategic alliances or long-term supply contracts are essential to underwrite the very significant risks involved in upstream energy development. In the emerging competitive energy market, retailers and distributors such as United Energy will also focus more on the quality and responsiveness of our upstream suppliers because of their ability to impact on our service delivery and competitiveness. Similarly, scale is important at the retail level given a contestable market, the removal of historical cross-subsidies and the demands for increased reliability of supply from customers. Given the importance of these relationships, the role of the regulatory authorities in respect of cross-ownership will be very important to the delivery of the benefits of reform to customers. We fully understand the need for diversity in the market place for full competition. We also see the need for careful review of vertical ownership structures and ring fencing to ensure adequate competition. We do not, however, see a compelling argument to limit horizontal mergers in the highly regulated, transmission and distribution sectors of the market. Again we see a strong role for industry associations like the AGA in lobbying for the removal of horizontal cross ownership restrictions which are unnecessary given the sound open access regimes and significant regulatory standards applied to this sector.
With a fiercely competitive energy industry Australia is well placed to build on our existing energy export markets. If we are to achieve this, then we need to be at world's best practice in all aspects of what we do. While I do not pretend to understand the game of cricket, I am told that Australia is very successful in international competition because of the existence of a strong national competition - the Sheffield Shield. The same is potentially true in the energy industry - a competitive local league will make us internationally competitive. The true winner from energy reform and convergence must be our customer. But first, all of us within the industry will need to embrace the new emerging reality that we will only prosper if we are delivering energy solutions for our customers.
