Cost reduction in utilities is about getting to the root drivers of the company's costs. Joseph Scalise, who leads Bain's Utilities practice in the Americas, outlines what leaders can do to develop a roadmap for sustaining cost reductions over time.
Read the Bain Brief: Cost Reduction for Utilities in a Zero Load-Growth World
Read the transcript below.
JOSEPH SCALISE: The utilities sector has a reputation of being slow and stagnant and not changing. We all know that's actually much more complicated than that. The topic we're seeing now that's animating the sector is flat to declining load. And what flat to declining load means is that your growth ambitions—rate base and capital deployment that's required to keep your shareholders happy with earnings growing 4% and 6%—well, there's just fewer kilowatt hours to amortize that investment over.
And what that means for your cost structure is as you deploy this capital for fewer kilowatt hours, you see an explosion in rates, rather not an explosion so much as an acceleration in rates, an acceleration in rates far greater than the rate of inflation and far greater than regulators are typically willing to countenance. So, more aggressive utility leadership teams than those at the forefront of the industry, they focus on their O&M. And they focus on O&M in a way that's different than they ever have before.
Leaders in the sector are able to operate their business on an O&M per customer basis 20% to 40% below that of those folks in the third and fourth quartile. What does that mean? It means if you think about your business, capital deployment, your growth ambitions, and load, you're probably looking at a cost reduction effort in your O&M space of probably 20%. Across the industry, that's about $15 billion. $15 billion in O&M spread across the country invest their own utilities. It's a significant change.
Now, what we're seeing in the way the leaders tend to attack this, it's actually a straightforward process, right? What's critical is leading from the top and setting an ambitious target. Not just an ambitious target, but a target in the context that your people can understand. Utilities don't operate in the same—tend not to operate in the same context, business context, as other businesses. So the ability to explain that target to your people? Incredibly important.
Beyond that, it's really straightforward cost reduction. When I say straightforward, it's about getting to the root cost drivers of your cost. There are ways to do that quickly. There are ways to do that more measured over time. Important part of the dialogue here is figuring out what's the right pace of change for your organization. After that, it's really about developing the right plan of attack to go after those opportunities and then sequencing them into a multiyear roadmap or even not even multiyear. Some companies will do it in less than six months. But usually, it's a multiyear roadmap that both takes the cost out and then sets the foundation for ongoing cultural change that will allow you to live in a lower load-growth world.
Cost Reduction for Utilities in a Zero Load-Growth World
North American utilities will need to cut $15 billion, about 20% of operations and maintenance costs, over the next 5 years to meet their commitments to investors.