PSC Energy
End of Engagement Report
Draft Three
January 17, 1997
PSC Business Transformation Program For Presentation
Los Angeles Department of Water & Power February 4, 1997
Transmittal letter
(to be drafted)
EXECUTIVE SUMMARY
Introduction
PSC Energy Corporation is pleased to present this End of Engagement report as
the final deliverable in our two-year contract, during which PSC Energy has
worked in partnership with the Department of Water and Power to initiate a
comprehensive business transformation of the Department, a process expected to
require from five to nine years for completion.
In February 1995, PSC Energy was contracted to assist the Department in
designing this restructuring. Such a business transformation was mandatory,
rather than optional, in order to provide a firm business foundation for the
organization to compete and survive in a soon-to-be deregulated market. It was
also essential that the Departments transformation begin immediately -- and that
the changes include not only business practices, but also a new philosophy of
doing business.
As PSC Energy began its contract in 1995, many of the Department's potential
competitors had already embraced the new business environment. They recognized
that, in the future, the emphasis would no longer be on commodity electric
service provided to a captive market. More important, the new environment would
no longer ensure regulated rates which guaranteed total recovery of operating
costs. These potential competitors understood that the a deregulated environment
would likely belong to open-market providers meeting customer expectations at
the lowest possible price while with the highest service quality.
PSC Energy and the Department agreed that the organization, which has been
providing reliable service for more than half a century in a stable monopoly
environment, must adapt to market changes in order to survive. The Department
faced the necessity of transforming itself to meet the challenges of the
changing market while under fire from competitors.
With these mandates in mind during the past two years, PSC Energy has worked in
close cooperation with Department personnel to:
* analyze the structure of the Department and its ability to compete in
the changing market environment
* design and implement strategies and action plans which can help the
Department adapt to that new environment, and
* create a business transformation framework which - if action plans are
fully implemented in a timely manner - would provide the Department its
best opportunity to remain viable and competitive in the newly
deregulated market
The measure of PSC Energy's success in working with the Department to design and
implement strategies to achieve these goals can be seen in reviewing the
situation facing the Department just prior to PSC Energy's engagement compared
to today:
* In 1995, the Department's Net Operating Income (NOI) was in decline, as
it had been since FY 1988/89, dropping some 70% during that period.
Today, the Department's NOI is up, having increased from $59.9 million
in FY 1994/95 to $132.7 million in FY 1995/96
* The Department's debt load was increasing in the years immediately prior
to 1995. This year saw debt reduction increase by 20%, to $66.0 million
in FY 1995/96.
* In 1995, the Department offered no service
guarantees to customers. Today, the Los Angeles Department of Water and
Power is the first municipal utility to offer such guarantees.
* The business culture of the Department in 1995 was one of a traditional,
monopoly municipal utility - non-competitive and without a customer
service orientation or even a marketing department. In 1997, the
business culture of the Department has begun to shift to
customer-service, led by a functioning marketing department charged with
developing products and services customers demand and implementing
strategies to respond to consumer needs.
* By 1995, the Department's cost structure was substantially higher than
those of investor-owned utilities because of high overhead,
non-competitive business practices and overstaffing. By 1997, the first
steps had been taken to reduce operating costs to a competitive level.
In the interim, new business practices had generated approximately
(((( $600 million )))) in one-time savings and avoided costs, annual
recurring savings, enhanced capabilities and generation of identified
and potential future revenues for the Department and its stakeholders,
the people of Los Angeles.
* In 1995, the Department staffing level was 10,713. By September of 1996,
the workforce had been reduced to 8,889 -- at a savings of more than
$100 million per year.
* Despite high staffing levels in 1995, the lingering effects of labor
strife still affected the Department, with little cooperative effort
between management and the unions which represent a large percentage of
the Department's personnel. By 1997, despite substantial workforce
reductions, labor and management were working together in joint teams to
improve previously strained labor/management relations.
* Facing the possibility of utility industry deregulation, the Department
in 1995 had no business plan to deal with the impending deregulation and
no strategy to function in that new unregulated environment in a way
which would protect the Department's stakeholders -- especially the
taxpayers of
Los Angeles - from the potential negative impacts of deregulation,
including possible insolvency or default of the Department. Today, the
Department has a comprehensive Strategic Business Plan with strategies
to maximize opportunities for success in that new environment.
PSC Energy is proud to have participated with the Department in the business
transformation process of the past two years. We are pleased that implementation
of our strategies and action plans during our engagement resulted in
streamlining Department operations, helping to reduce costs, increasing net
operating income significantly, identifying strategies for dealing with the debt
load and starting the process which can give the Department its best opportunity
to remain viable in the new unregulated market environment.
We believe the past two years represent a good beginning to the process. As we
have made clear, however, there is still a great deal to do. PSC Energy, working
with the Department, has created a blueprint for necessary action.
The Department, the Board and the City Council will now consider these strategic
recommendations. The success of the business transformation process depends upon
swift action.
It is clear that failure to become competitive in the unregulated market could
lead to dramatic financial consequences for the Department, the City and its
taxpayers.
Starting with implementation of the recommendations outlined in the Strategic
Business Plan, these actions are essential if the Department is to have a
reasonable chance of success in competitive, unregulated free market. The
Department cannot become competitive with an operating cost structure that far
exceeds those of other providers in the market and a business culture and
governance structure that cannot respond to the demands of the open market.
Seizing these opportunities will protect the Departments ratepayers -- and
ultimately, the taxpayers of the City of Los Angeles - from the potentially
disastrous economic impacts which would flow from a Department unable to change
and compete. These negative impacts could include:
* an exodus of industrial and commercial customers to providers better
able to compete in terms of products, service and price
* spiraling rate increases for remaining customers, or taxpayer subsidies
to the Department in order to keep rates artificially low for those
ratepayers remaining
* in the end, potential insolvency or
liquidation of a Department unable to compete in the unregulated market,
stranding more than $4 billion of the Department's current $8 billion
debt; the stranded debt would become the obligation of the City of Los
Angeles and its citizens.
PSC Energy's efforts over the past two years have been designed to help the
Department transform itself and seize opportunities to prevent these potential
negative impacts on the Department, its customers, the City and its taxpayers.
Additionally, strategies and implemented by PSC Energy, working with Department
personnel, have produced tangible, immediate savings -- as quantified in this
report - for the Department and its stakeholders worth approximately (((( $600
million )))) in one-time savings and avoided costs, annual recurring savings,
enhanced capabilities and generation of identified and potential future
revenues.
It has been a good start. But much remains to be done, as described in this
report and in the Strategic Business Plan presented to the Board on January 7,
1997.
((((( END OF EXECUTIVE SUMMARY ))))
ORGANIZATION OF REPORT
This report is comprised of an Executive Summary, which outlines the key results
of PSC Energy's work with the Department during the past two years.
Following the Executive Summary, the fill report includes:
* A short narrative of the background of PSC Energy's involvement in the
business transformation process
* A description of the scope of work called for in the Department/PSC
contract
* Objectives and accomplishments
* Accomplishments in specific focus areas including:
- Business Strategy/Third Party Alliance
- Market Focus
- Customer Service Delivery
- Central Services Organization
- Transformation Mobilization and Communications
* Recommendations for the challenges ahead
* Required actions for the future
* Conclusion
* Appendices
Background
With the passage of AB 1890 in September of 1996 the Los Angeles Department of
Water and Power, like all other utilities in California, faces the start of the
deregulation process in 1998 and the opening of its markets to competition.
In 1995, in anticipation of that pending deregulation legislation, the
Department of Water and Power focused on the need to assess the Department's
ability to compete in a newly deregulated environment. The challenges inherent
in this process had been highlighted in a number of previous studies, including
the Decennial Audit and the Barrington-Wellesly Group studies.
While these documents were helpful in defining the challenges facing the
Department, they produced recommendations rather than action steps to implement
changes necessary to resolve the growing problems they identified. Moreover,
these studies reviewed the Department's performance against historical utility
standards in a non-competitive environment, rather than by the standards
necessary in an unregulated and competitive market.
The Department recognized the need to formulate a strategic plan that looked to
the future and the new unregulated environment, in order to create a strong
business foundation that could maximize the organization's chances for success
in a competitive market. The Department also recognized the need for an
action-oriented approach, rather than generation of further studies.
To meet these needs, the Department contracted with PSC Energy Corporation to
work with Department personnel not only to develop a Business Transformation
Plan, but also to begin the process of undertaking the changes necessary.
Even with the recognition of the need for a dramatically new approach, the
Department was nearly a decade behind investor owned utilities in California in
responding to expected changes in the industry and in taking steps to
restructure itself to meet the challenges those changes presented. Moreover,
those investor owned utilities were continuing their own restructuring to meet
the demands of the changing market.
The challenges facing PSC Energy in helping the Department achieve a complete
business transformation were great:
* an internal culture with limited experience in competitive business
practices
* a governance structure that works against the type of timely business
decisions necessary in a competitive environment
* an obsolete information technology platform
* overstaffing in many key areas
* a labor force governed by both non-competitive collective bargaining
agreements and civil service requirements
* an environment in which many of the functions
currently performed by the Department will become obsolete with new
technological approaches, new products and services expected and
required by customers
* the Department's increasingly high levels of debt
* an excess of generation capacity, developed at significant expense and
adding to significant debt, much of which is unrecoverable
* a cost structure substantially higher than comparable investor owned-
and publicly-owned utilities
* the fact that the Department may potentially lose customers worth at
least $150 million in revenues at the outset of deregulation, suggested
by experience in other utility industry deregulations
* the most "at-risk" customers contribute 25% of the Department's total
revenues and share a disproportionate rate burden
* as higher prices drive customers to alternative energy suppliers, even
higher rates for customers remaining will result
* market trend models indicating that as much as 40% of the Department's
energy supply business may be at risk by the end of the deregulation
transition period in 2003.
As PSC began its contract in early 1995, the Department's own business trends
also indicated the immediate need for a new approach to an evolving business
climate.
Between the 1988/89 fiscal year and 1995 the Department experienced a gradual
but consistent deterioration in its financial position. Operating costs
increased by (((( _ % )))). During the same period, the Department's revenues
saw a relatively small increase of (((( __% )))), even though rates had been
increased. Debt servicing costs almost doubled, with nearly 30% of each revenue
dollar needed to service debt, both on- and off-balance sheet. As a result, net
operating income declined by nearly 70% from FY 1988/89 through 1995.
(((( CHARTS ))))
The Department had accumulated approximately $7.7 billion in on- and off-balance
sheet debt (since increased to nearly $8 billion), nearly $4 billion of which a
joint PSC Energy/Price Waterhouse, LLP study (the "Stranded Investment Study" or
S.I.S.) subsequently described as out-of-market or stranded from recovery in an
open market.
Implementation of action plans developed by PSC Energy in
cooperation with Department personnel during the past two years resulted in
immediate savings and cost reductions, as described in this report. However, the
Department's operating cost structure remains at least $400 million per year
higher than a comparable investor owned utility. Such a cost structure is non-
competitive in the unregulated market which will begin on January 1, 1998.
To address this issue the October 31, 1996, PSC Energy/Price Waterhouse LLP
Stranded Investment Study recommended dramatic changes in service and delivery,
governance structure and debt structure in order to realize necessary future
savings and generate future revenue in the competitive market. These changes
include:
* further reducing staff by at least 1,500 positions
* selling or retiring excess generation assets
* incurring no new debt
* raising rates to market levels
* reducing costs and overhead, and
* implementing an aggressive debt reduction plan
These corrective actions recommended in the S.I.S. have yet to be brought before
the Board in the form of specific recommended action plans for their approval.
Without these changes, PSC Energy has warned that the Department could become a
last-resort provider of high-cost services to that small core of customers with
no alternative. Or, in a worst-case scenario, the Department might cease to be a
financially viable entity, resulting in a default on its $8 billion in debt, the
bulk of which would become the obligation of the taxpayers of the City of Los
Angeles.
PSC Energy's interim and long-term strategic recommendations are designed to
maximize opportunities for the Department to avoid these negative outcomes and
emerge from the transition period with a reasonable chance of long-term success
in the new unregulated and competitive free market.
The result would be a radically changed Department dramatically different from
today: operating on sound business principles; flexible and capable of quick
response in a changing business environment; customer service oriented; ready to
provide the products and services demanded in an unregulated market at a
competitive price; and with a streamlined workforce possessing the experience
and skills to match the needs of a changing market.
Objectives and Approach
In the Department/PSC contract, executed on February 24, 1995, the Department
asked PSC Energy to pursue five key objectives during its two year engagement.
The goal of the engagement was to have PSC Energy assist the Department in
beginning the process of making the Department competitive in the coming
deregulated market and providing a platform for successful business
transformation.
The objectives included in the DepartmentlPSC contract are:
* Modernizing the Departments operations and organizational structure;
* Transforming the Department's existing internal business culture to
reflect commercial business concerns and increased customer expectations
in line with potential competitors in coming unregulated market
environment;
* Enhancing the Departments current level of services;
* Identifying and offering new products and services demanded by
Department customers; and
* Increasing Department revenues and Net Operating Income (NOI).
To meet these objectives, PSC Energy worked with Department personnel to design
and implement a large number of business transformation strategies during the
two-year engagement period.
Over the short-term these management and marketing strategies and action plans,
many of which are described in this report, have provided significant, positive
and tangible impacts on the Department's organization and performance -- an
immediate result not typical of consultant deliverables.
The changes which have occurred during the past two years stand on their own as
quantifiable benefits to the Department and its stakeholders. These benefits
include one-time savings and avoided costs, annual recurring savings, enhanced
capabilities and generation of identified and potential future revenues.
We are pleased that implementation of PSC Energy's strategies, developed in
cooperation with Department personnel, provided a combined financial benefit of
(((( $600 million dollars )))), described in the following chart:
(((( CHART OF SAVINGS DESCRIBED ABOVE GENERATED BY
PSC/DWP RECOMMENDATIONS DURING ENGAGEMENT
PERIOD ))))
Additional PSC Energy recommendations for future actions are contained in the
Strategic Business Plan, presented to the Board
on January 7, 1997. These recommendations, if fully implemented and sustained,
could result in future annual recurring savings and avoided costs estimated at
(((( $_ million )))), through the transition period ending in 2003 and beyond,
as indicated in the chart below.
(((( CHART OF ACCUMULATED RECURRING SAVINGS
THROUGH END OF TRANSITION PERIOD ))))
These present and future savings, as well as PSC Energy's strategies to reduce
Department debt and protect billions of dollars in investments, represent value
to the Department, its ratepayers and taxpayers in the City of Los Angeles
totalling more than (((( 20 times )))) the cost of PSC Energy's two-year
contract.
(((( COMPARISON CHART ON SAVINGS VS. $26 MILLION
COST OF PSC CONTRACT ))))
During the second year of PSC's engagement, Net Operating Income for the
Department also took a dramatic upward turn:
(((( COMPARISON CHART OF NOI IN FYs 1988-1995
AGAINST FYI 1995/96))))
PSC Energy also undertook a number of initiatives in cooperation with Department
personnel which resulted in significant, if less tangible, benefits. These
included creation, at the City Council's request, of joint labor/management
committees with the International Brotherhood of Electrical Workers (IBEW) and
other unions representing Department personnel, to improve previously strained
labor/management relations. The accomplishments achieved during PSC Energy's two
year contract have been the result of the unique working relationship formed
between Department management, labor unions representing Department personnel
and the PSC Energy project team
In many cases, joint Department/PSC Energy committees were created to identify,
evaluate and implement strategies and initiatives. Over the course of PSC's
two-year engagement, Department personnel participating in approximately 150
joint committees totaled more than 1,000 individuals - giving a significant
proportion of the Department's work force a personal, hands-on stake in the
development and success of the Department's Business Transformation Program.
This ongoing cooperative effort led to savings, described in this report, worth
more than ((( more than $600 million ))) to the Department, its ratepayers and
the taxpayers of Los Angeles in
one-time savings and avoided costs, annually recurring savings, enhanced
capabilities and generation of identified and potential future revenues. The net
impact of these savings is likely to grow dramatically over time, saving hundred
of millions more, as a number of these savings recur annually.
Even more significantly, this interaction has provided a creative spark for
development of specific strategies and initiatives in the areas of marketing,
customer service, federal and state energy regulation and continuing operations.
Continuing these cooperative efforts will be essential to create a unity of
purpose across the Department as it approaches the new business environment of
the unregulated, competitive market.
Although the Department faces the need to further reduce its workforce
significantly, PSC Energy has served as a facilitator in helping to improve
labor relations despite the pending force reductions. This positive outcome is
virtually unheard of in the industry under these conditions. The success of the
business transformation program to this point is due, in part, to the active and
cooperative involvement of Department management and union leadership.
In addition to the efforts and strategies which produced immediate benefits, the
long-term business transformation approach developed by PSC Energy in concert
with Department personnel is presented in detail in the Strategic Business Plan.
The Plan addresses in full the multiple objectives of PSC Energy's contract.
The Strategic Business Plan presents strategic options and recommendations, as
well as action plans for the future, which would maximize the Department's
ability to compete. Just as important, the Plan outlines action plans which
would best protect the Department's ratepayers and the taxpayers of Los Angeles
from a potential insolvency or default that could cost more than $4 billion - a
burden of more than $1,300 for each man, woman and child living in the City.
Scope of Work
The scope of work agreed to by PSC Energy Corporation in meeting the five
contractual objectives outlined above encompassed:
The Business Transformation Program
The goal of the Department in working with PSC Energy was to transform itself
into "a competitive, responsive and profitable organization under changing
conditions, including the new climate of competition and deregulation". This
process began with PSC Energy's two-year engagement to outline and assist in
the
initial stages of a business transformation program which would provide the
Department its best opportunity to become competitive in the new deregulated
market.
During the term of engagement, PSC Energy's primary mission was to lend its
support and expertise to the joint effort with Department personnel, overseen by
the General Manager, in developing the Business Transformation Program and
executing the action plans necessary for its implementation. These efforts
resulted not only in a long term Strategic Business Plan for the Department, but
also in immediate actions which generated hundreds of millions of dollars in
one- time savings and avoided costs, annual recurring savings, enhanced
capabilities and generation of identified and potential future revenues. These
benefits are enumerated and quantified in this report.
Assignment of a Core Project Team (CPT)
The scope of work described in the DepartmentlPSC Energy contract was intended
to be a cooperative effort between the Department and PSC Energy. The Department
agreed to commit resources to complement PSC Energy personnel in completing the
work outlined for the Core Project Team assigned by PSC Energy. The CPT
supplemented the Department's personnel in the business transformation effort.
The PSC Energy CPT was assembled and assigned to work closely with Department
personnel in all areas covered by the contract, functioning as part of a Joint
Project Team with Department managers and staff drawn from appropriate areas of
the organization. The close working relationship resulted in a knowledge
transfer to Department personnel which will benefit the Department beyond the
term of PSC Energy's engagement.
In response to the objectives outlined in the DepartmentPSC Energy contract, the
CPT included experts with the diverse applicable skills and experience necessary
to analyze the external, changing market environment as well as the internal
business culture of the Department, then design and implement strategies to
adapt the Department's business culture to the new unregulated market
environment.
Among the CPT members were recognized industry leaders in the areas of
generation, transmission, distribution, information technology,
telecommunications, finance, labor relations, natural gas supply, marketing and
customer service.
The Joint Project Team was reconstituted a number of times during the engagement
as specific initiatives
were identified, completed and new projects begun. CPT members assigned by PSC
Energy during the second year of its engagement included financial analysts,
financial modelers, economic analysts and others representing disciplines which
should be -- but are not currently - included among Department personnel. Again,
the working relationship among members of the Joint Project Team ensured a
knowledge transfer in these areas of expertise to Department personnel working
as part of the Team.
Over the course of the engagement, PSC Energy augmented the CPT as necessary
with additional expert skills, experience and talent needed to backfill the
Department's resource shortfall. The contract called for a commitment by PSC
Energy of 24.75 CPT full-time equivalents (FTEs) over the term of the
engagement. During the first year of the contract, the commitment was exceeded
by 12%, representing an uncompensated PSC Energy investment of approximately
$1.6 million.
By the end of the engagement, PSC Energy was providing as many as 39 FTEs, more
than 50% above the required commitment of personnel.
Included in these efforts, PSC Energy exercised a number of business alliances
to meet the Department's business requirements. These alliances included
contributions from partnerships with Minority and Women Owned Business
Enterprises (MBE/WBE), represented by:
** OAO Corporation
* RCA & Associates
* Kosmont & Associates
* GEM Communications Group
* PS Enterprises
* Reyes and Associates
Additional business partners, complementing PSC's strengths and bringing key
skills and experience to these efforts, were:
* Marathon Communications
* Latham & Watkins
* Camp Dresser and McKee
* Goldman Sachs
Deliverables for Year One and Year Two
The Department/PSC Energy contract set forth a number of targeted deliverables
for Year One and Year Two. The deliverables were modified during the course of
the engagement, at the direction of the General Manager and
the Board, to meet agreed upon prioritization of work efforts and
strategies.
As of the end of engagement on February 14, 1997, all contractually required
deliverables have been provided to the Department.
A full accounting of the contractually required deliverables and their dates
of completion is included in the Appendices to this End of Engagement
report.
Accomplishment of Objectives
The successful efforts of the DepartmentIPSC Energy partnership to accomplish
the stated contract objectives include:
* formation of a Marketing and Customer Service organization focused
directly on customer service and satisfaction; a special emphasis on
development of marketing expertise was required, because the Department
had not previously included a marketing organization, per se
* creation of a Chief Administrative Officer position and supporting
organization to coordinate and streamline responsibility for all
Department support services
* identification and development of market, debt and financial strategies
to guide the Department through the transition to a new role as a
provider in an unregulated market environment
* exploration of third party business alliances to assist the Department
in maximizing its invested resources through creation of a Wholesale
Energy Trading Service; marketing of excess generation; restructuring
existing contracts; providing new services and products for retail
customers in competitive markets; development of strategies to explore
new revenue opportunities; and, finally
* development and completion of a Strategic Business Plan which will guide
the Department in dealing with $4 billion in stranded investments, a
rate structure that produces disadvantage for high-risk customers and an
existing cost structure that renders the Department non-competitive by
exceeding the cost structure of comparable investor owner utilities by
more than $400 million per year.
The positive financial impacts of these efforts have been substantial,
including, during the first year alone:
* $161 million in one-time savings and avoided costs;
* $4 million per year in recurring savings
$ $86 million per year in recurring savings from the Focused Separation
Program, which PSC Energy assisted the Department in perfecting and
implementing
* $166 million identified future revenue opportunities
(((( CHART OF FIRST YEAR SAVINGS ))))
During the second year of the DepartmentlPSC Energy partnership, financial
benefits resulting from implemented strategies include:
* $13 million per year in recurring savings from operational improvements
in in-basin generation, achieved through joint labor/management/PSC
Energy working groups
* $10 million per year in operational improvements
* $4.25 million per year in recurring year over year reduction of accounts
receivable write- off from $27 million to $22.75 million, assuming this
level of improvement is maintained
* $28 million per year in additional staff savings not associated with FSP
* $1.5 million per year in savings through renegotiation of telephone
suppliers' contracts
* $1.3 million per year in savings through reduction of IT software costs
Additional savings initiated or realized during the second year of PSC Energy's
engagement included:
* $43 million over five years in avoided costs for the in-basin generation
capital program,
* $27 million over five years in avoided costs through a new utility pole
replacement process;
* $86 million in sustained improvements from the FSP implemented the prior
year
* $4 million in other recurring benefits from strategies implemented
during the prior year
(((( CHART OF SECOND YEAR SAVINGS ))))
New revenues identified in PSC Energy's second contract year included:
* $19 million realized during this year from a new $25 million "dark
fiber" contract, with a second "dark fiber" contract valued at $19
million in the final stages of negotiation (((( was recently
signed )))).
* $400,000 in contracts signed for providing support services outside the
Department, with an additional $4 million in proposals submitted and
awaiting responses.
These savings, avoided costs and revenue generated during PSC Energy's
engagement total approximately (((( $600 million )))) in financial benefits as
outlined in this report.
(((( CHART OF TOTAL SAVINGS ))))
In addition, $120 million in potential annual recurring savings has been
identified through efforts being conducted to re-negotiate fuel and purchased
power contracts, as well as improved utilization of generation assets.
The Department's first full fiscal year of PSC Energy's engagement saw net
operating income increase 169% (from $59.9 million in FY 1994/95 to $132.7
million in FY 1995/96) and debt reduction increase by 20% (from $55 million to
$66.0 million). This improved financial performance occurred even though the
Department also took accelerated write-offs of $28.7 million in preparation for
the new competitive market environment.
(((( CHARTS REFLECTING INCREASE IN NOI AND IN DEBT
REDUCTION DURING FY 1995/96 AGAINST PREVIOUS
6 FYs ))))
The positive financial performance for FY 1995/96 also reversed the trend of
recent years in which the Department has borrowed tens of millions of dollars
each year, including FY 1994/95 during which the Department was required to
borrow (((( $_
These efforts represent even more substantial financial benefits in the years to
come if cost saving programs are maintained, with accumulated savings of
hundreds of millions of dollars per year.
Accomplishments in Specific Focus Areas
Through Year 2 of the Department/PSC Energy contract, the Core Project Team
identified five key focus areas. The five areas are interdependent, and efforts
in each area created results beyond the boundaries of the area itself.
Business Strategy/Third Party Alliance
It is clear that incremental improvements in Department business practices
cannot alone bring the Department to long-term financial viability. For that
reason, PSC Energy explored ways to cut costs dramatically and exploit assets in
order to lower the Department's cost structure from its current level $400
million above a comparable investor-owned utility.
The Department has at least $100 million in excess annual operating overhead,
concentrated in the Central Services Organization. The Department is also
burdened with a physical and information technology infrastructure which is
poorly maintained and will require some $300 million in investment over the next
3-5 years. Even if the money were available for such investment, the Department
does not currently possess the amount of skill and expertise necessary to bring
these infrastructures up to competitive levels.
PSC Energy suggested that a dramatic response was necessary to deal with these
enormous financial challenges and to avoid potential insolvency in the
competitive market. PSC Energy recommends that the Department look beyond its
internal resources as an avenue to dealing with debt, underperforming assets,
existing high-cost energy purchase contracts, excess capacity and
non-competitive cost structure.
Specifically, PSC Energy recommended that the Department consider a strategic
alliance with a partner who could assist in these arenas:
* Creating wholesale energy trading service
* Active marketing of excess generation
* Restructuring of contracts
* Providing new products and services for retail customers
By the end of 1996, detailed proposals had been made by a number of candidates
for such strategic alliances. Those proposals are now being studied by the
Department and recommendations should be made in time to begin operations during
the first quarter of 1997.
PSC Energy also worked with Department personnel to design and implement
strategies which would help the Department maximize value from its Generation
and Transmission assets. PSC Energy's achievements in this area include:
* A proposal and plans for the Department to divest itself of some surplus
generation
assets.
* The start of negotiations with Montana Power to end the take-or-pay
Colstrip contract. The cost for power purchased under that contract is
twice market price and this output is not needed to meet current demand.
Potential savings of up to $40 million per year have been identified and
are being pursued.
* The possible sale of Mojave capacity rights. Mojave requires potential
large capital outlays for water supply and environmental modifications.
Annual capital and expense savings resulting from divestiture of Mojave are
expected to exceed $30 million per year.
* The effort to restructure the Intermountain Power Project (IPP), in which
Utah municipals have call rights to 25% of the output of the plant and
control the Board but are not required to take any output or pay any
expenses. The Department has notified the Utah municipals that the current
arrangement is no longer acceptable and they must assume their share of the
$5 billion in debt or renounce all rights. The negotiating process is
expected to take at least a year before resolution.
PSC Energy and Department personnel have also developed business and financial
models to allow accurate assessments for the disposition of Department assets.
Models developed include:
* IPP and Colstrip operations and contractual commitment ($40 in savings
per year)
* Gas supply contracts ($20 million in savings per year)
* In-basin generating station ($30 million in savings per year)
* Mojave generating station ($30 million in savings per year)
* Navajo generating station (annual savings to be determined)
Market Focus
The new competitive market requires the Department, along with other
suppliers, to focus on and meet customers' needs. From the Department's
perspective, large commercial and industrial customers are the most at-risk in
a competitive environment, representing a potential of $150-350 million in
lost revenue. Residential rates would need to rise by 20%-40% to make up for
such losses.
PSC Energy's strategies on these issues focused on account management, service
development, pricing and market forecasting. Accomplishments include:
* Initial segmentation of the customer base and assignment of responsibility
for servicing each group to a specific team within the Marketing
organization. The current access to customer information is inadequate and
is a significant impediment in the competitive marketplace.
* Development of a preliminary Pricing and Rates strategy, providing
compliance with the need to unbundle generation, transmission and
distribution services and costs.
* Development, implementation and service of a Product Development process,
to develop and deliver new products necessary in the competitive market.
* Conclusion of long-term contracts with UCLA, Ultramar, (((( USC if signed
))) and others who may otherwise have considered switching suppliers in a
competitive market. The result was retention of $12 million in revenue per
year.
Customer Service Delivery
Implementation of PSC Energy's strategies for customer service improvements have
led to tangible results, including a new bill format for easier customer
understanding, improved collections, service guarantees, a more efficient claims
resolution process and an action plan for a remodel of the Customer Information
System.
Accomplishments in the Customer Service area include:
* Waiting times for customers to reach a service representative in the
Customer Call Center (CCC) were reduced from an average of 180 seconds in
1995 to a current average of 105 seconds. The improvement was achieved with
no addition in staff, but an improvement in morale and performance by
existing staff. The Customer Call Center (CCC) is the key interface group
for the Department's 1.3 million electric and 600,000 water customers,
dealing with more than 3 million customer calls per year and arranging more
than 14,000 Field Service Orders per week.
* Reduction in the Departments write-off of "uncollectible" Accounts
Receivable from $27 million per year to $22.75 million per year. In
addition, ongoing efforts are actively seeking out further improvements.
* A program to reduce Accounts Receivable write-offs from master-metered
water accounts. These accounts represent only 7% of the customer base but
are responsible for 40% of Accounts Receivable written off in recent years.
PSC Energy and the Department have worked with other interested City
agencies in developing policies for dealing with this problem. Those
policies have been approved by the Board of Water and Power Commissioners.
* Introduction of a simplified bill to increase customer understanding of
rates and charges, as a result of customer studies (and more than 1 million
customer calls per year -- more than one-third of the total calls received
by CCC -- requiring an increasing nuumber of staff to respond) which showed
that customers were confused by the previous bill format.
* Development of service guarantees to external customers, making the
Department the first municipal utility in the country to offer such
customer service guarantees.
Central Services Organization
PSC Energy's strategy, designed and implemented in cooperation with Department
personnel, included formation of the Central Services Organization (CSO) in
January of 1996. This allowed the Department to streamline and make more
cost-effective the earlier, inefficient structure of fragmented responsibility
for human resources, fleet, internal communications, shops, procurement and
facilities management. Responsibility and accountability for all these functions
have now been consolidated and assigned to a single Chief Administrative Officer
(CAO).
The CSO leadership, with the support of PSC Energy and in conjunction with the
CAO, has developed a Business Plan which substantially reduces the present $200
million annual cost of providing support services to the Department. This plan
will ensure that functions whose costs are above market are either re-
engineered to be competitive or eliminated.
Accomplishments of the Central Services Organization include:
* Improvement in the quality of services to internal customers through the
development and introduction of service guarantees for each support
services group. This change in management and employee focus to identifying
and filling customer needs was a necessary first step in changing the
business culture across the Department to one that is focused on
identifying and serving the needs of external customers.
* Redesign of the procurement process, developed by a joint Department/PSC
Energy team. Formal contract processing time has been reduced by 4 weeks,
permitting a $5 millon reduction in inventory and a potential reduction in
inventory carrying costs of $1 million per year.
* Development of Strategic Procurement Partnerships, which have the potential
to reduce the delivered cost of materials and supplies by $40 million
annually.
* Implementation of a variety of process changes and cost reduction
initiatives which are on track to reduce annual costs by $10 million in FY
1996/97 and beyond.
* Decentralization of the stores function to place the operational management
of warehouses and inventory level in the business units. This improved
service levels and permitted a reduction of (((( $1 million ))) in material
handling expense in the business units.
Transformation Mobilization and Communications
During Year I of the PSC Energy contract, transformation efforts helped realign
the Department into manageable, focused and accountable business units. Business
Units for Generation, Transmission and Distribution were formed, and a Marketing
and Customer Care Organization was created. The General Manager's office was
streamlined and a number of other administrative functions were made more
efficient and accountable, including the creation of the Central Services
Organization through consolidation of a number of disparate organizations within
the Department.
Year 2 efforts extended these efforts to address organizational structures and
cultural issues. These include potential expansion of exempt positions to bring
key skills and expertise
into the Department and possible Charter revisions to revise the governance
structure in a way that will allow the Department to respond quickly to a
changing business environment. The level at which these changes are sustained
and extended in the future will determine the future success of the Department.
Communications tasks have centered on developing and implementing strategies and
action plans for internal and external communications processes to enable and
support transformation, improving labor/management relations and designing a
revised organization which can conduct business after the departure of some 17%
of the workforce over the past two years. The workforce reduction has continued
through PSC Energy's two year engagement, from 10,713 Department personnel on
March 1, 1995, to 9,133 after FSP, to 9,016 by March 1, 1996 and to 8,889 on
September 1, 1996.
The Barrington-Wellesly Group (BWG) studies in 1990 recommended a Department
force reduction to 8,700 people within five years. While that number is now
within reach, the BWG numbers were based on a traditional utility monopoly
model. PSC has advised the Department that the 8,700 number remains
significantly too high to be competitive in the new unregulated marketplace and
has suggested strategies to reduce overstaffing.
Nevertheless, the reduction to current levels has resulted in savings of $86
million annually from FSP reductions and an additional $28 million from further
attrition.
Savings and efficiencies have been augmented through the redeployment of
employees from surplus areas to critically needed functions and roles with the
Department.
A significant element in the success of the transformation effort to date has
been the active and cooperative involvement of Department management, IBEW
leadership and employees in the Department. PSC Energy has served as a
facilitator in building strong and improved labor relations in the face of
reducing the workforce - a result almost unprecedented in the industry.
Additional PSC Energy accomplishments in the Transformation
Mobilization and Communications area include;
* Creation of an integrated Marketing and Customer Service Department to
better focus on customers' needs and product/service development. An
Assistant General Manager has been appointed to lead these efforts.
* Formation of eight cross-functional joint labor/management committees and
more than two dozen labor/management subcommittees to address all aspects
of the business transformation program.
* Creation of more than 150 joint
Department/PSC Energy committees with participation by more than 1,000
Department personnel in the effort to identify, evaluate and implement
strategies and initiatives for business transformation across the Department.
* Institutionalization ofjoint committees and processes across the Department
to create ownership of initiatives and serve as the foundation for future
cooperative efforts.
* Creation of joint labor/management committees to foster a cooperative
environment and improve previously strained labor/management relations in
anticipation of the need for cooperative efforts in the implementation of the
Business Transformation Program.
* Utilization of the 11 service guarantees already passed by the Board as
evidence and a key element of the business culture transformation of the
Department.
* The use of service guarantees as a means of focusing on customer satisfaction
and providing a tool for accountability in delivering that satisfaction.
These guarantees and the associated support infrastructure empower front-line
employees to take ownership of customer satisfaction.
* Identification of $27 million in potential avoided costs through the Service
Reliability and Maintenance Guarantees Joint Labor/ Management Committee,
which identified an alternative to replacing distribution poles at a cost of
$1,000 per pole rather than $10,000 per pole. This alternative will be
applicable to approximately 3,000 poles over a 5-year period.
* Identification by the In-Basin Generation Joint Labor Management Committee of
$43 million in potential avoided costs for capital investments over 5 years
by cancellation of planned but unneeded expenditures for in-basin plants. The
Joint Committee has also achieved operational savings of some $13 million per
year, including $3.5 million per year from revised opering procedures in the
Haynes Generating Station.
* Development of a Management Appraisal and
Assessment process. This process can be used to link incentive
compensation, based on setting goals and targets, to subsequent measurement
of managers' achievements against these targets. Further, the process can
help identify management skills and expertise lacking in the Department as
it faces the future.
THE CHALLENGES AHEAD AND RECOMMENDATIONS
Significant work remains to be done in order to assure the continuing success of
the Department's Business Transformation Program. Even more significant than
past hurdles are the challenges facing the Department as it enters the new world
of competition. Decisions on strategic issues must be made to ensure that even a
transformed organization can become competitive in an unregulated market
environment.
Without these sustained efforts, the Department will likely be unable to
continue its historic role as a valuable asset to the City of Los Angeles.
The new world of competition and deregulation has created challenges which all
municipal utilities, the Department included, are ill-prepared to meet. A
cumbersome and time- consuming governance structure limits the Department's
capability to respond to changing needs, restricts the Department's ability to
succeed versus competitors with more streamlined, business- oriented governance
mechanisms. The City Charter, for example, inhibits the Department's range and
speed of implementation in taking swift action on essential business decisions
in the areas of supplying customer needs outside its franchise area, meeting
market needs by providing new products and services quickly and acquiring
badly-needed commercial skills and experience to meet specific challenges.
The positive changes which have been implemented through the business
transformation strategies of PSC Energy, working with Department personnel, have
been substantial, particularly when viewed from the perspective of the
Department's history. However, these changes, by themselves, are not adequate to
put the Department on a competitive footing in an unregulated environment.
A worst-case scenario would see the Department incapable of meeting the
challenges of the immediate future. These include the need to:
* manage and reduce debt
* dramatically lower operating costs to competitive levels
* ensure rates competitive for all classes of customers in an open and
unregulated market
* meet customer demand for service guarantees and innovative products and
services
The failure to meet these challenges would cripple the Departmenfs competitive
abilities even further, leading to a spiral of abandonment by large numbers of
customers requiring substantial increases for remaining customers, provoking
additional customers to seek other providers. The likely eventual outcome of
this spiral would be to burden the City and its taxpayers with responsibility
for paying the Department's $4 billion in stranded debt.
At the same time, the changing environment may offer windows of opportunity for
the Department, including the opportunity for the Department to redefine itself
with its ratepayers as a customer- oriented organization responsive to the needs
of customers and offering products and services they demand at competitive
prices. Such an organization, if issues of cost control and governance were
addressed simultaneously, would be in a position to retain its customer base and
compete in the unregulated market.
It has been the mission of PSC Energy during its engagement, as part of the
business strategy deliverable, to work closely with Department personnel in
designing and documenting specific strategies and action plans for the future
which can best prepare the Department to stave off these negative outcomes.
Further, these strategies and action plans are designed to create a platform
which, if sustained, would provide the Department its best opportunity to move
to a competitive stance in the unregulated market by the end of the transition
period.
The Department does operate at a serious competitive disadvantage in
implementing these recommendations, a disadvantage not shared by investor-owned
utilities. The Department must, as a function of its governance process,
disclose much of its business strategy and subject various elements of that
strategy to open public debate. Further, the Department must act quickly to
realize maximum value if it wishes to sell assets before they decline in value.
For these reasons, implementation must follow immediately after disclosure of
the business plan in order allow competitors minimum response time to the
Department's business plan and to realize maximnimum value for assets.
Specific Challenges
As outlined in the Strategic Business Plan, the challenges ahead include:
* Managing nearly $8 billion of tax exempt debt, including more than $4
billion in stranded debt. Complicating development of a strategy to deal
with the debt burden through sale, strategic alliance or joint venture use
of the stranded assets is the fact that IRS rules limit the use of public
debt for private commerce.
* Consideration of the impact of IRS rules limiting disposal of assets created
through the use of "tax exempt" municipal bonds.
* While AB 1890, which governs the deregulation process, provides for recovery
of that stranded investment, it severely limits the time frame for that
recovery. With an enormous stranded investment, the Department would need to
cut costs by (((( $j))) and raise rates ((((( __% ))))) evenly across the
customer base immediately to allow pricing comparable to other California
utilities by the end of the deregulation period at the end of 2002.
* Addressing the Department's high operating costs by actions including a
further workforce reduction of 1,500 individuals, shutdown or disposal of
non-performing assets, implementation of strategic alliances and
consideration of further strategic coalitions. These actions would help
reduce operating costs which are more than $400 million higher each year than
comparable investor owned utilities. Inability to bring these operating costs
in line with competitors' costs will make the Department uncompetitive in the
deregulated market.
* The inability to react quickly to market forces because of the Department's
governance structure.
* An outdated information and technology infrastructure which will require
significant capital investment to insure competitive levels of reliability
and service. An outdated power infrastructure, requiring capital investment
of approximately $100 million per year for the next three to five years to
achieve the goal of competitive levels of reliability and service.
* The need to revise rules and inefficient work practices, many codified in
municipal law and in labor agreements, into work and management practices
which measure and reward performance.
* The dual obstacles offered by civil service rules and labor agreements which
can serve to prevent reasonable and desirable personnel actions necessary for
change, an example of which was the length of time it took to staff the
Department's marketing organization with surplus personnel.
* A labor force governed by both long-standing
and non-competitive collective bargaining agreements and civil service
requirements.
* A mismatch of management and staff skills against those required to operate
successfully in the competitive arena; this could be addressed in part by
the expansion of exempt positions allowing the Department to add expertise
required to operate in the new unregulated market, but which is not
currently available among Department staff.
* An even greater potential mis-match of available skills against market
needs arising from civil service rules allowing "bumping", slotting
individuals into key slots necessary for competitive action even if those
individuals do not possess the necessary expertise the Department requires.
* The need to understand that services, transfers and revenues provided by
the Department to the City under the current system will likely diminish in
the new unregulated environment, but that new environment may also generate
replacement revenue through license fees, taxes and other charges not now
paid by the Department.
The Department's business strategies in dealing with these challenges should
comply with two overriding objectives:
1. Elimination of as much debt and disposal of as many non-performing assets
as possible during the transition phase of the deregulation process; and
2. Positioning the revised business to operate effectively in the deregulated
market.
Strategic Recommendations
In light of the Department's objectives, and in order to meet the challenges
outlined above, PSC Energy has made a number of strategic recommendations for
future action to the Department. These recommendations are contained in the
detailed Strategic Business Plan recently presented to the Board by PSC Energy.
The highlights include:
* Transition of Generation Business, including an exit from the competitive
generation supply business in the long term. The short term goal should be
to reduce fix costs by selling or closing down existing excess capacity
and renegotiating contracts.
* Transition of Transmission Business, through transfer of control of
transmission assets to
the California ISO in January 1998 as mandated by legislation.
* Modernize and Improve the Distribution Business, through streamlining of
the remaining business by improving work practices, introduction of new
technologies and cutting overheads.
* Create a Service Delivery Business, by investing in critical elements of
service delivery infrastructure. This would enable the business of
providing service to customers to be performed successfully in a
deregulated market.
These strategic recommendations are described in detail in PSC Energy's
Strategic Business Plan for the Department.
Strategic Actions
To implement the strategic recommendations contained in the Strategic Business
Plan, PSC Energy has suggested the following actions:
* Generation - Sell 500 MW of excess generation assets and close down 2
in-basin units totaling 600 MW before 1998;
* Transmission - File a joint tariff with the IOUs to the FERC in January
1997 and join the ISO in January 1998
* Distribution -- Consolidate operations and maintenance functions and
implement changes to working practices in the distribution system
* Service Delivery - Implement essential changes to the metering, billing
and account management functions to allow introduction of Direct Access to
customers
* External Alliances -- Complete negotiations and sign an agreement with a
strategic alliance partner in January 1997 and implement that agreement
within a Joint Powers Authority (JPA) structure
PSC Energy has also recommended in its Strategic Business Plan a number of
supporting actions which are required if the Department is to address its
financial, labor, organizational and communications goals. These actions
include:
* Implement ordinances immediately to restructure rates, raise residential
and small business rates in line with Edison's
expected rates in 1998, providing up to $250 million per year for early
debt repayment.
* Set an agreed method for reviewing current stakeholder benefits such as
rates, transfer and other subsidies and investigate new transfer
mechanisms.
* Implement ordinances and conduct public hearings to phase in Direct Access
beginning in January 1998, including implementation of competitive
transition charge (CTC).
* Implement voluntary incentive programs immediately to downsize current
staff numbers by at least 1,500 focused in non-core, non-essential and
overhead functions in two phases beginning March 1997 and ending July 1998.
* Reorganization of the Department's management and workforce structure to
maximize and coordinate skills of internal and external talent pools, align
the skills available with the future business structure and integrate
alliance partner functions during 1997.
* Select a technology partner to manage and implement critical information
technology (IT) projects to support restructuring, including new financial,
management information, metering and billing systems. The partner must also
assist in design and implementation of appropriate reeducation and
reorganization of Department personnel to realize these IT goals.
* Communicate the strategy and vision to all employees and stakeholders
through an established communications plan with clear goals and strategies
to attain them. This process begun through joint initiatives involving the
Mayor, the Board and the Council with the assistance of the firm of Hill &
Knowlton.
* Establish management and governance accountabilities for achieving the
Strategic Business Plan and measure performance against goals using
performance targets and metrics.
Implementation of these actions, which are discussed in detail in PSC Energy's
Strategic Business Plan, in a timely manner will require coordinated effort on
the part of Department management, the Board and the City Council of Los
Angeles.
CONCLUSION
PSC Energy is proud to have helped the Department design and
implement its business transformation process of the past two years. The process
has streamlined Department operations, helped reduce costs, increased net
operating income significantly and identified strategies for dealing with the
debt load. These actions represent a good start in moving the Department to a
competitive footing that will allow it to function in an unregulated market
environment.
PSC Energy is also pleased to have played a key role in designing the blueprint
for the next level of action which must be taken after our engagement with the
Department ends in February, 1997. This blueprint can serve as a firm foundation
for full business transformation of the Department.
Much remains to be done for the longer term, starting with implementation of the
recommendations outlined in the Strategic Business Plan. These actions are
essential if the Department is to have a reasonable chance of success in
competitive, unregulated, free market. The Department cannot become competitive
with an operating cost structure that far exceeds those of other providers in
the market and a business culture and governance structure that is slow to
respond to the demands of the open market.
With regard to the future, PSC Energy has made its recommendations for action as
part of the Strategic Business Plan. The decisions regarding those
recommendations are now the province of the Board and the City Council, with
implementation is in the hands of Department management and personnel. Success
in the new environment can be achieved only through creation of a coalition of
interests that can take necessary action in a timely manner.
All concerned realize that the stakes are enormous. Failure to adapt to the
changing market could lead to abandonment of the system by those customers able
to switch to more competitive providers with lower rates and higher levels of
service, which in turn would require substantially higher rates for those
customers remaining, prompting more of the remaining customers to leave.
Unable to generate cash flow to service its $8 billion debt load, the Department
would likely default, with obligation for the debt falling to the taxpayers of
Los Angeles.
PSC Energy's long-term strategic recommendations, contained in the Strategic
Business Plan, mark a path towards the goal of maximizing the Department's
opportunity to emerge from the deregulation transition period stronger and more
capable of competing in an unregulated market.
Such a capability may well spell the difference between a vital and viable -- if
dramatically different - Department enterprise and an organization stripped of
its customer base and unable to meet its debt service, leaving the taxpayers of
Los Angeles to pay the price of a potential insolvency or default.
Seizing the opportunity represented by the Strategic Business Plan provides the
best opportunity to protect the Departrent's ratepayers - and ultimately, the
taxpayers of the City of Los Angeles.
Sheet l
25-October-1996
PSC ENERGY BUSINESS TRANSFORMATION DELIVERABLES - YEAR 2
Date Completed Targeted Completion
Business Strategy
Produce Business Strategy Plan For:
Wholesale Power Market Q4 / 96
Retention of Retail Customers Q4 / 96
Core Business Efficiency Q4 / 96
Reducing Excess Generation Q4 / 96
Restructure Intermountain Power Project Q4 / 96
Restructure Generation Business Unit Q4 / 96
Support Alliance Negotiations and Restructuring
Develop initial Generation and Contracts Model Q2 / 96
Develop Joint Venture Generation Model Q3 / 96
Develop In-Basin Generation Model Q3 / 96
Develop Generation Optimization Model Q3 / 96
Develop Wholesale Trading Model Q3 / 96
Produce GLRA Position Papers
Retail Rate Restructuring Q4 / 96
Competition Transition Charge Q4 / 96
Utility Law Changes Q4 / 96
Power Exchange / ISO Q4 / 96
Produce Market Position Document, Including:
Direct Access as it applies to the City Q4 / 96
Stranded Investment and CTC Q2 / 96
Charter Amendments and Governance Q4 / 96
Strategic Planning process improvements Q1 / 97
(defined)
Sheet l
PJ 25-October-1996
PSC ENERGY BUSINESS TRANSFORMAON DELIVERAB ES - YEAR 2
Market Focus
<Table>
Agree deliverables with Marketing Dept Q2 / 96
Define individual responsibilities Q2 / 96
Form teams for initiatives Q3 / 96
Launch Account/Market Planning training Q3 / 96
Complete 60% of major account plans Q3 / 96
Complete price unbundling strategy Q3 / 96
Complete consumer market plan Q4 / 96
Complete product plans for prototypes of Q3 / 96
EIS and EMCC
Complete 80% of major account plans Q1 / 97
Complete CTC rate design Q4 / 96
Document Product Development process Q3 / 96
Establish Fiber Optic Business Group & Contracts Q2 / 96
Renegotiate External Telecomms Contracts Q1 / 96
Provide Internet Access Q2 / 96
Assist with ITS reorganization / restructuring Q3 / 96
Eliminate VM Operating System and Licences Q2 / 96
</Table>
Sheet l
25-October-1996
PSC ENERGY BUSINESS TRANSFORMATION DELIVERABLES - YEAR 2
Customer Services
<Table>
Reduction of CTS delay to < 60 seconds Q1 / 96
Introduction of Teams' working method in CTS Q1 / 96
Pilot Credit Card / Pay by Phone methods Q1 / 96
Delivery of improved call center statistics Q2 / 96
Introduction of front-ending for call center Q2 / 96
Pilot of Appointment Scheduling for Fl Q2 / 96
Introduction of new bill format Q3 / 96
Delivery of CIS strategic way forward Q3 / 96
Develop customer contact service standards
Introduce CTS quality control procedures Q2 / 96
Develop performance and quaifty improvement Q1 / 97
program for Branch Offices
Develop 'Process Design Model' for C/Svce Q1 / 97
Roll out Appointment Scheduling for all Fl staff Q4 / 96
Integrate customer audits with APS Q4 / 96
Delivery of Bad Debt and Theft strategy initiative DWP Initiative
Create redesign for Model Customer Care Center Q1 / 97
Include Quality as shift selection criteria Ongoing
Introduce Call Center and Field staff service gtees Q4 / 96
Achieve Bad Debt and uncollectables reductions Q3 / 96 (1st 6 mth)
Introduction of new anti-theft policies DWP initiative
</Table>
Sheet l
PJ 25-October-1996
PSC ENERGY BUSINESS TRANSFORMATION DELIVERABLES - YEAR 2
Central Services Organization
<Table>
Form Service Guarantee Teams Q1 / 96
Form Procurement Reengineering Team Q1 / 96
First Service Guarantees in place Q2 / 96
Phase 1 procurement process ready to pilot Q3 / 96
CSO Business Plan completed Q4 / 96
Enhanced Service Guarantees ready Q4 / 96
for implementation
Procurement process phase 2 processes Q1 / 97
ready for implementation
</Table>
Sheet l
PJ 25-October-1996
PSC ENERGY BUSINESS TRANSFORMATION DELIVERABLES - YEAR 2
Transformation & Communications
<Table>
Create internal communications campaign Q2 / 96
Institutionalize joint labor / mgt cttee process Q2 / 96
Create external / community comrns plan Q3 / 96
Develop performance appraisal system Q3 / 96
Develop management assessment process Q3 / 96
Follow up plan to Transformation roll-out Q4 / 96
</Table>
Sheet l
PJ 25-October-1996
PSC ENERGY BUSINESS TRANSFORMATION DELIVERABLES - YEAR 2
PSC Core Project Team
Plan / Begin Reassignment of PSC CPT Q/97
Produce PSC Exit Report Q1 / 97
Sheet l
PSC ENERGY BUSINESS TRANSFORMATION DELIVERABLES YEAR 2
DOCUMENTATION SUMMARY/INDEX
Business Strategy
Done? DOCUMENT NAME File Namel #
of Discs
Produce Business Strategy Plan For
Wholesale Power Market
Retention of Retail Customers
Core Business Efficiency
Reducing Excess Generation
Restructure Intermountain Power Project
Restructure Generation Business Unit
Support Alliance Negotiations and Restructuring
Develop initial Generation and Contracts Model
Develop Joint Venture Generation Model
Develop In-Basin Generation Model
Develop Generation Optimization Model
Develop Wholesale Trading Model
Produce GLRA Position Papers
Retail Rate Restructuring
Competition Transition Charge
Utility Law Changes
Power Exchange / ISO
Produce Market Position Document, Including:
Direct Access as it applies to the City
Stranded Investment and CTC
Charter Amendments and Govemance
Strategic Planning process improvements
(defined)
Sheet i
PSC ENERGY BUSINESS TRANSFORMATION DELIVERABLES - YEAR 2
Market Focus
Done? Document Name File
Name# of discs
Agree deliverables with Marketing Dept
Define individual responsibilities
Form teams for initiatives
Launch Account/Market Planning training
Complete 60% of major account plans
Complete price unbundling strategy
Complete consumer market plan
Complete product plans for prototypes of
EIS and EMCC
Complete 80% of major account plans
Complete CTC rate design Document
Product Development process
Establish Fiber Optic Business Group & Contracts
Renegotiate External Telecomms Contracts
Provide Internet Access
Assist with ITS reorganization / restructuring
Eliminate VM Operating System and Licences
Sheeti
PSC ENERGY BUSINESS TRANSFORMATION DELIVERABLES - YEAR 2
Customer Services
Done? Document Name File
Namel# of discs
Reduction of CTS delay to < 60 seconds
Introduction of Teams' working method in CTS
Pilot Credit Card i Pay by Phone methods
Delivery of improved call center statistics Introduction of front-ending
for call center Pilot of Appointment Scheduling for Fl Introduction of
new bill format Delivery of CIS strategic way forward Develop customer
contact service standards Introduce CTS quality control procedures
Develop performance and quality improvement
program for Branch Offices
Develop 'Process Design Model' for C/Svce
Roll out Appointment Scheduling for all Fl staff Integrate customer
audits with APS Delivery of Bad Debt and Theft strategy Create redesign
for Model Customer Care Center Include Quality as shift selection
criteria
Introduce Call Center and Field staff service gtees
Achieve Bad Debt and uncollectables reductions
Introduction of new anti-theft policies
Sheet i
PSC ENERGY BUSINESS TRANSFORMA TON DELIVERABLES - YEAR 2
Central Services Organization
Done? Document Name File
Namel# of discs
Form Service Guarantee Teams .__
Form Procurement Reengineering Team
First Service Guarantees in place
Phase 1 procurement process ready to pilot
CSO Business Plan completed
Enhanced Service Guarantees ready
for implementation
Procurement process phase 2 processes
ready for implementation
Sheet i
PSC ENERGY BUSINESS TRANSFORMAJION DELIVERABLES i YEAR 2
Transformation & Communications
Done? Document name
File namel# of discs
x Create internal communications campaign
x Institutionalize joint labor / mgt cttee process IBEW Joint Teams
x Create external I community comms plan
x Develop performance appraisal system DWP Perf. Dev Syst
Appreaisal.doctl disc
x Develop management assessment process DWP Pert. Dev System
x Follow up plan to Transformation roll-out
Sheet i
PSC ENERGY BUSINESS TRANSFORMATION DELIVERABLES - YEAR 2
Done? Document Name File Namel# of discs
SC Core Project Team
Plan I Begin Reassignment of PSC CPT
Produce PSC Exit Report