...CASE 5-3 JOAN HOLTZ (A)* (1) Electric utility bills. An electric utility company can estimate with reasonable certainty the expected revenue in a given period by taking into consideration some of the following: customer habits, average historical trends, demand and supply forecasts, and environmental changes. The electric utility industry effectively uses an insurance industry concept—the law of large numbers, to determine with certainty, expected revenue. The law of large numbers states, as the number of participants (customers) in a risk class (low, medium, high kilowatt users) increases, the expected outcome (usage for specific class) remains the same but the standard deviation (variability of usage) continues to drop until the probability that the average outcome (average usage) will be different from the expected outcome (expected usage) becomes negligible. This concept is conceptually similar to the Central Limit Theorem, and thus illustrates on average, the more observations per class, the more the usage tends to be bell-shaped and this usage is used for basing revenues per class. This is one way how the utility company can determine period-end revenue. Another way is if customer usage is consistent from period to period it can base reported revenue on actual meter readings. The unreported usage in December would be reported in January, and overall revenues for this year would not be materially misstated. The utility company can also adjust for seasonal changes in demand...
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...CASE 5-3 JOAN HOLTZ (A)* (1) Electric utility bills. An electric utility company can estimate with reasonable certainty the expected revenue in a given period by taking into consideration some of the following: customer habits, average historical trends, demand and supply forecasts, and environmental changes. The electric utility industry effectively uses an insurance industry concept—the law of large numbers, to determine with certainty, expected revenue. The law of large numbers states, as the number of participants (customers) in a risk class (low, medium, high kilowatt users) increases, the expected outcome (usage for specific class) remains the same but the standard deviation (variability of usage) continues to drop until the probability that the average outcome (average usage) will be different from the expected outcome (expected usage) becomes negligible. This concept is conceptually similar to the Central Limit Theorem, and thus illustrates on average, the more observations per class, the more the usage tends to be bell-shaped and this usage is used for basing revenues per class. This is one way how the utility company can determine period-end revenue. Another way is if customer usage is consistent from period to period it can base reported revenue on actual meter readings. The unreported usage in December would be reported in January, and overall revenues for this year would not be materially misstated. The utility company can also adjust for seasonal changes in demand...
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...FPL – An Overview FPL Group, Inc. is Florida’s largest electric utility company. In 1925, through the consolidation of numerous electric and gas companies, they formed Florida Power & Light Company (FP&L). FP&L grew steadily over the next 50 years until rising fuel costs, operating issues, and construction costs began to decrease profitability. In the mid-1980s, FPL diversified with four major acquisitions - Colonial Penn Life Insurance Company, Telesat Cablevision, Inc., CBR Information Group Inc., and Turner Foods Corporation- in order to minimize the potential risk within the utilities industry. To address problems in operations, FPL began a rigorous program of Japanese-inspired quality control. Management succeeded in transforming FPL into a lean operational system resulting in a drop in scheduled downtime from 18% to 4%, while customer complaints also fell by 60%. By 1989, FPL was recognized as “one of the best-managed U.S. corporations.†Despite the progress in quality, FPL was still dealing with problems: Colonial Penn was losing money, there were safety concerns about a particular nuclear plant, and demand was growing faster than capacity. In 1989, James Broadhead succeeded Chairman Marshall McDonald. Broadhead placed an emphasis on commitment to quality and customer service, increasing focus on the utilities industry, expanding capacity, and improving cost positions. He took measures to scale back the intense quality controls while still working...
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...believes this trend will continue, so he has been actively expanding his product line in an effort to increase sales volume. As a first step, Peachtree began offering trust and portfolio management services five years ago. Many of the trust clients are retirees who are interested primarily in current income rather than capital gains. Thus, an average portfolio consists mostly of bonds and high yield stocks. The stock component is heavily weighted with electric utilities, an industry that has traditionally paid high dividends. For example, the average electric company’s dividend yield was about 6.3 percent in 1992, versus an average stock’s yield of 3.1 percent. Until 1993, Peachtree had no in- house security analysts –all stock and bond selections were based on research provided by subscription services. However, these services had become very costly, and the volume of portfolio management had reached the point where hiring an in- house analyst was now cost-effective. Because most of its portfolios were heavily weighted with electric utilities, Peachtree created its first analyst position to track this industry. Taylor hired Laura Donahue, a recent graduate...
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...The Massachusetts Department of Public Utilities (MDPU), is the body charged with the responsibility for regulating rates and quality of service of public utilities in the state. This includes its Electric Power Division, which regulates electric utilities comprising of eight investor owned electric companies. The MDPU is currently faced with the challenge of prescribing the best approach to valuing the environmental impact (externality) to be considered during the selection of new power generation sources by electric companies. Two approaches have been proposed: 1. The implied valuation approach- This uses the marginal cost of pollution control, imposed by regulators as a proxy for estimating the externality. 2. The damage valuation approach- This approach calculates the actual damages caused by residual emissions of pollutants. The MDPU had prescribed the implied valuation approach, but is revisiting the decision due to criticisms by some of the utility companies. This paper analyses the two approaches against key criteria necessary to achieve the MDPU’s objectives, and recommends the most suitable approach. Recommendation The MDPU is advised to consider the implied valuation methodology Evaluation of Alternatives Option 1: Damage Valuation This involves a direct assessment and quantification of damages caused by residual emissions. This methodology assesses the marginal benefit of the abatement of pollution. Pros • Most preferred method by the industry ...
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...Regulated Electricity Utility Industry The electric utility industry generates, transmits and delivers electrical power to consumers, businesses and governments. Today there are three primary business structures in the regulated electrical utility industry—public companies owned by shareholders, municipally owned companies, and those owned and operated by the federal government. Shareholder owned companies are the largest group, providing half of all electricity in the United States. Burning fossil fuels to power steam turbines produces over half of electricity consumed today.1 Other generation methods include harvesting the power of nuclear reactions to power turbines and, increasingly, renewable methods such as wind or water-powered generation. Unlike most manufactured products electricity cannot be stored, so a complex and delicate fabric of transmission systems (know as the power grid) exists to deliver power when and where it is needed. Many firms involved in the generation of power are also involved in its transmission and sale to end-users, making vertical integration commonplace within the industry. This end-to-end integration, as well as end users’ dependence on electricity, has led to historically strict government control of the industry. The most significant piece of regulation in the last century was known as the Public Utility Holding Company Act of 1935 also known as PUHCA. The act had a profound effect on the regulated electrical industry. First, and most...
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...Bogazıcı unıversıty executıve mba program | ADEX 509 STRATEGIC MANAGEMENT SEMINAR | GENERAL ELECTRIC VS WESTINGHOUSE CASEPOSITION PAPER | | OZDE KARAKAS | 03/03/2012 | ADEX 509: STRATEGIC MANAGEMENT SEMINAR Ozde KARAKAS / Position Paper This position paper aims to illustrate the competitive environment in large electric tribunes market in 60’s between General Electric and Westinghouse and will be evaluating the competitive positioning of both companies. BRIEF SUMMARY Market Turbine generators produced over 80% of the US power supply. Tribunes were the major cost item of the electrical utilities. Therefore any reduction in the prices of turbines increased market share. The buyer of turbines was electric utilities which are owned by the government – federal, state or local – and private investors. The top 25 utilities accounted for 55% of the US demand for turbine generating capacity. The demand for turbines was depended on the peak electricity demand forecasts, which tended to be highly cyclical, of utilities. Furthermore utilities bought large units infrequently rather than purchasing smaller units more regularly since there are rapid advances in turbine technology and turbines require high capital cost. There was two months lag between the order and the shipment due to engineering and manufacturing of the product. The procurement process of government electric utilities was composed of a sealed bids submitted to their specifications. On the other hand procurement...
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...Decisions in Paradise Part One Sheri Johnson MGT/350 December 09, 2013 Kimberly Ramsawak Decisions in Paradise Part One As a new employee of Frontier Communications, I will be guided through this journey by Chris and Alex. As with many things in my life, things are not always what you imagine them to be. My perception of what Kava was going to be like was nothing like the reality of Kava, as with my co-worker Alex. The issues that face us in this journey is getting Kava the communication services it needs to be a productive island, which would conceivably bring in more tourism and secure Kava’s future. The issues that Alex and I are faced with are many. To start out with, the disaster threats alone are enough to make you reconsider any business at this location. These disasters range from tsunami’s, tornadoes, floods, fires, volcanic eruptions, and earthquakes. Manmade threats such as HIV/AIDs, avian flu, and petroleum spills are also issues we will have to deal with. However, my company is dedicated to helping communities and providing them with quality telephone and internet service, no matter how rural the area is. One obstacle that we will face while building a new infrastructure in Kava is finding ways to have our technology installed and resistant to or as resistant as possible to the threats that face Kava. We have to use the most innovative technology in order to keep and sustain our presence in Kava. One of the first options that we would have to look at...
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...FPL – An OverviewFPL Group, Inc. is Florida’s largest electric utility company. In 1925, through the consolidation of numerous electric and gas companies, they formed Florida Power & Light Company (FP&L). FP&L grew steadily over the next 50 years until rising fuel costs, operating issues, and construction costs began to decrease profitability. In the mid-1980s, FPL diversified with four major acquisitions - Colonial Penn Life Insurance Company, Telesat Cablevision, Inc., CBR Information Group Inc., and Turner Foods Corporation- in order to minimize the potential risk within the utilities industry. To address problems in operations, FPL began a rigorous program of Japanese-inspired quality control. Management succeeded in transforming FPL into a lean operational system resulting in a drop in scheduled downtime from 18% to 4%, while customer complaints also fell by 60%. By 1989, FPL was recognized as “one of the best-managed U.S. corporations.” Despite the progress in quality, FPL was still dealing with problems: Colonial Penn was losing money, there were safety concerns about a particular nuclear plant, and demand was growing faster than capacity. In 1989, James Broadhead succeeded Chairman Marshall McDonald. Broadhead placed an emphasis on commitment to quality and customer service, increasing focus on the utilities industry, expanding capacity, and improving cost positions. He took measures to scale back the intense quality controls while still working to preserve...
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...Discussion Questions 1. What are the most important issues confronting the FPL Group in May 1994? 2. What is the current payout ratio and dividend yield for FPL and how does this compare to other firms in the electric utility industry? 3. What is FPL’s competitive position Vis a Vis other electric utilities in terms of costs and revenues? 4. What changes is Broadhead making? 5. According to signaling theory, what would the right dividend decision be? Analysis Questions 1. What is the nature of FPL’s historical dividend policy? 2. How does the DPS compare to its EPS? 3. Estimate the Lintner model of dividend policy based on historical data. Make a reasonable assumption about the target payout ratio and estimate FPL’s dividend adjustment growth rate. Lintner's Model A model stating that dividend policy has two parameters: (1) the target payout ratio and (2) the speed at which current dividends adjust to the target. | | In 1956 John Lintner developed this theory based on two important things that he observed about dividend policy: 1) Companies tend to set long-run target dividends-to-earnings ratios according to the amount of positive net-present-value (NPV) projects they have available. 2) Earnings increases are not always sustainable. As a result, dividend policy is not changed until managers can see that new earnings levels are sustainable. | iv) Use your estimates from the Lintner model to simulate the effect on future...
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...Scientific and Medtronic in medical devices Media companies (e.g. Time Warner, Disney, Vivendi) and their diversification strategies Amazon’s tablet business Shangri-La Hotels: strategy for regional growth Cemex: strategy for globalization P&G and Unilever in China (or India) Walls icecream’s (owned by Unilever) growth in Asia Nestle’s growth in emerging markets Globalization strategy of Whirlpool Whirlpool and GE’s strategies in appliances in Asia Walmart’s globalization; experiences in Latin America, Asia, Europe Carrefour: successes and failures in globalization Mittal’s growth in steel industry; industry consolidation AES growing in electricity generation industry; globalization; industry restructuring Consolidation in the electric utility industry in the US Consolidation in the aluminum industry Consolidation in the automotive industry: Fiat+Chrysler, Daimler + Chrysler, Renault + Nissan Alliances in the international airline industry New airlines in Europe, such as Ryanair, Easy Jet, Go, Virgin Express Lenovo (China) in PC and Internet Haier (China) in appliances Ebay’s acquisition of Skype Chipotle’s growth: past, present and future Disney’s acquisition of Lucasfilm Inditex and fast fashion industry Paypal and mobile payment industry Schneider Electric’s acquisition of Invensys Online instant video industry Growth and decline of Blackberry Globalization of McDonald’s Intel and vertical integration Microsoft’s acquisition of Nokia Uniqlo Big tobacco...
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...The Challenges Facing Electric Utilities The electric utility industry is extremely important in the United States. In recent years, there have been many changes to this industry which has led to some interesting challenges. Some of these challenges include, “…new technologies, tighter environmental regulations, regulatory pressures and changing customer preferences” (Oskvig). These challenges are something that need to be overcome due to the urgency of their nature. A key challenge that needs to be addressed is the issue of energy that has been wasted due to lost electricity. The industry of electric utility needs to attempt to deal with the issue of lost energy. There is a huge amount, totaling to, “…a whopping $40 billion [that] is wasted in lost electricity, natural gas and water resources in the U.S. alone” (Pyper). Even though this amount includes natural gas and water resources, one can still see the great affect that this waste has on the electric utility industry. In order to fix this issue, there needs to be a better, more effective way for people to save this energy that is being wasted. Scientists must be able to develop a more reliable method for storing electric energy in order to be more efficient. With the saved energy, we will be able to become much more efficient and effective in electrical usage. All-in-all, the electric utility industry has a few issues that it needs to address in order to become as efficient as possible. Whether it be new technology...
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...business potential expands. Many businesses have an endless opportunity to expand to new markets, adapt the products they produce to expand market share, and modify their marketing plan to reach additional geographical customer niches. In a more defined area of the marketplace, businesses that provide a service to a specific geographical area have different challenges and perceived 2 payoffs to use the online market place to effectively expand the business. An electrical utility, for example, is not able to expand its customer base merely by increasing viability by expanding online to communicate to potential new customers the competitive pricing, reliable service, and products available to those who receive service from their utility. It is increasingly vital for businesses with similar fixed markets to maximize exposure, increase consumer satisfaction, and streamline business processes for meeting and expanding the services provided using online business expansion techniques. Utilities share a unique section of both urban and rural consumer spending. Contributing factors to the seemingly fixed market share include cultural and modern ways...
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...The grid operaTor, power MarkeT & prices under Texas eLecTric dereguLaTion ERCOT THE GRID OPERATOR, POWER MARKET & PRICES UNDER TEXAS ELECTRIC DEREGULATION THE STORY OF FEBRUARY 2011 A SPECIAL RESEARCH PROJECT BY THE STEERING COMMITTEE OF CITIES SERVED BY ONCOR & THE TEXAS COALITION FOR AFFORDABLE POWER The sTory of ercoT AMARILLO LUBBOCK PLANO FORT WORTH ABILENE MIDLAND/ODESSA WACO DALLAS ALPINE AUSTIN HOUSTON SAN ANTONIO CORPUS CHRISTI LAREDO THE ERCOT REGION The grid operaTor, power MarkeT & prices under Texas eLecTric dereguLaTion THE STORY OF ERCOT ABOUT THIS REPORT The Electric Reliability Council of Texas, also known as ERCOT, is the non-profit corporation that oversees the Texas power grid. The organization also has responsibility for settling transactions in the state’s wholesale spot market for electricity. But the term “ERCOT” also is used loosely in other ways. For instance, the term can describe the geographical footprint for retail electric deregulation in Texas. It is also sometimes used to describe the state’s wholesale energy market. This report touches upon policy questions relating to all these conceptualizations of ERCOT: as an organization, as an energy market, and as the area of Texas with competitive electric suppliers. To distinguish between these meanings, the term “ERCOT” will be used whenever practicable to refer to the organization, “the ERCOT region” will be used to refer to deregulated areas of the state...
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...Smart Grid: Focus Areas Smart Grid The current electric grid was conceived more than 100 years ago when electricity needs were simple. Power generation was localized and built around communities. Most homes had only small energy demands such as few light-bulbs and a radio. The grid was designed for utilities to deliver electricity to consumer's home and then bill them once a month which is a one-way communication which is illustrated in figure 1; Before smart Grid. Figure 1: Pre and Post Smart Grid communication This limited one-way interaction makes it difficult for the grid to respond to the ever changing and rising energy demands of the 21st century. The smart grid introduces the two-way dialogue where electricity and information can be exchanged between utility and its customers shown in figure 1; After smart grid . Its a developing network of communications, controls, computers and automation, and new technology and tools working together to make the grid more efficient, more reliable, more secure, and more greener. The smart grid enables newer technologies to be integrated such as wind and solar energy production and plug-in vehicle charging. With our participation as informed consumers, the smart grid will replace the old infrastructure of today's grid. And utilities can better communicate with us to help manage our electricity needs. Grid Situational awareness Situational awareness in the context of power grid operation is the...
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