Getting to "why?"

Or how we manage to learn almost nothing from utility benchmarking.

December 11, 2018

Recently, while at a conference, I learned a surprising statistic: it turns out that only 7% of Canadian manufacturing companies engage in competitive benchmarking activities – to see how their products and operations stack up against the marketplace.

This being the stat for capital-intensive industries open to competition, the pace at which regulated utilities have been embracing external benchmarking may be actually seen as somewhat positive. Whether the insights these studies produce end up informing the operating and strategic decisions - that's an entirely different matter.

Regulators are certainly to thank for the increased prominence of benchmarking work within the industry - mostly by way of mandating their completion in the context of rate filings. They are, however, equally responsible for helping curb the unease that many utilities continue to feel towards cross-industry comparisons and their implications.

Few things are more valuable to an organization than finding out that its practices and outcomes lag those of its peers. It sets forth healthy introspection, which drives change and tests preconceived notions. This view is, however, less likely to be shared when the expected outcome of every study confirming a given utility's inferior cost performance, is a cut to its forecasted expenditures.

These cuts seem to follow sub-par benchmarking results almost invariably, and given the length of rate proceedings, are effective almost immediately. In this state of affairs, supplying no benchmarking information may actually be a safer play than presenting results of a study that confirms your inferior performance. This perverse logic is real, and it benefits no one.

Granted, results of a study suggesting that a utility's costs are higher than those of its peers may imply that they could be lower. What it does not imply, however, is that these higher costs are unreasonable (a topic for another day), and even more so, that these costs can be brought down in short order in a way that benefits consumers.  

Utilities should feel safe owning up to their present shortcomings in front of their regulators, just as they should make (and meet) commitments to do better. The question that is less clear, is whether the near-automatic (and near-immediate) reduction to cost forecasts is actually a useful way to make sure that utilities fix the issues driving inferior benchmarking performance. My hunch is that it's not.

Having sustained a funding reduction, it is far easier to ramp down your forecasts (often slashing innovation budgets) than to revisit the factors inherent in your operating performance to date - the very reasons behind your sub-par benchmarking results. The end result is that less work is planned, the old operating practices persist, and benchmarking studies fade into the background until it's time for another rate filing.

Curbing the rate trajectory may seem like a sufficient outcome from the perspective of the regulator. However, even if the utility is diligent about turning the benchmarking insights into real improvement plans, a good chunk of the value inherent in these insights is left on the cutting room floor if regulators are not equally motivated to find out why some utilities have worse benchmarking results than others.

The burden of doing the legwork to answer this question certainly falls on the utility, but the responsibility (and the ensuing commitment) to explore these answers in detail – and only then define an informed path forward – must be shared between the utility and the regulator.

If the automatic implication of poor benchmarking results is a deep-dive exploration of their underlying causes – and not a foregone conclusion that costs are unreasonable –utilities may still not be thrilled. However, they may be more willing to disclose their shortcomings and commit to informed strategies of rectifying them if the outcome is shared learning.

Benchmarking does not stop at comparison. Comparison is only step one, and arguably the easier step. Regulators should not be content with analysis that simply concludes that one utility's performance results are better or worse than the next. On their part, utilities should feel compelled to explore the "why" in a meaningful way that contextualizes the comparative findings.

Business of all kinds make mistakes. They learn from them and get better – as do their competitors, and the market at large which determines their returns. Acting as market proxies, regulators share the responsibility for deep and continuous learning along with utilities. Committing to measuring twice before cutting once may be a step in the direction that facilitates this collective learning.