| Novec: Price Pain |
| Utility | |||
| Written by John Zorabedian | |||
| Tuesday, 01 April 2008 | |||
 Virginia has ended its flirtation with electric deregulation, but Stan Feuerberg says the threat of competition boosted this utility’s productivity.
 Stan Feuerberg, President and CEO Although Virginia has scrapped its deregulation plan, allowing only the largest electric customers (greater than 5 megawatts of load) to shop for better rates, Novec has improved productivity and profitability due to changes it put in place over the last 10 years. “We were readying our business with a strategy for a competitive environment,” Feuerberg said. “We recognized that the best way to compete would be to be more productive than our competitors.” So Novec deployed new computer technology to reduce worker hours reading meters and searching for failed equipment and slimmed down its business processes. The cooperative also launched for-profit subsidiaries for distributing natural gas, supplying back-up power, and selling excess capacity in its fiber optic network. Starting these companies showed Novec how to compete for customers, Feuerberg said, and gave the company an entrepreneurial edge. “The more productive we became, the more profitable we became,” Feuerberg said. “Even though we no longer have to worry about people coming in and stealing electric customers from us, we shouldn’t let these productivity gains slip. The threat of competition made us a better business operation, so we want to keep moving that in the right direction.” Wholesale shopping As a utility cooperative, Novec returns excess profits to its customers, who are also the company’s owners. But in the past several years, as power costs have accelerated with the price of energy commodities, Novec has been increasingly concerned about the price of wholesale power, which comprised 81% of its operating expense in 2007. And although Novec doesn’t have to worry about losing its customers to competitors, Feuerberg said he still feels compelled to seek a better deal for his rate payers. Currently, Novec is negotiating with its supplier, Old Dominion Electric Cooperative, in which it owns a 30% stake, in an attempt to end its contract to purchase power. “The cost of power to us is extremely high, and we think it’s not very competitive,” Feuerberg said. “Our number one priority right now is to find a replacement supply for our 140,000 customers from other sources. We think we can do better by shopping the wholesale marketplace.” Even in a monopoly business, keeping customers happy is crucial, and that means keeping the power on reliably, as well as maintaining low rates. Using a software package to track and manage outages, Novec has reduced response time and outage time, keeping power on more than 99.9% of the time—the best mark in the region. “We have a very affluent customer base, perhaps the most affluent in the entire country,” Feuerberg said. “These folks are highly educated, and they are very demanding. We want to minimize the disaffection.” Northern Virginia is one of the more recession-proof regions of the country because of its proximity to the capital, and the government spending that powers the regional economy is not subject to the same swings as the rest of the economy. This has led to steady growth over the years, boosting Novec’s customer base by about 5,000 per year since its founding in 1983. Yet even Novec’s service area has felt the impact of a slowdown in the economy, with less home construction due to the steep drop in the housing market and the ongoing credit crunch. The additional revenue from a growing customer base is what has allowed Novec to keep up with its high capital costs, improving its infrastructure to maintain reliable service. Last year, Novec spent about $30 million to build new electric plant and upgrade parts of the existing system. “Our industry may be the most capital intensive of any industry,” Feuerberg said, noting that Novec spends $30 million to $40 million annually in new infrastructure. Going forward, Novec will search for cheaper sources for power, likely from coal-fired and natural-gas fired generation in the mid-Atlantic region. But the upward pressures on energy prices will likely mean future hikes in power costs for Novec customers. Novec has not raised its rates for distributing electricity since 1991; however, fuel-related expenses to generate power have been on a steady rise since 2001. Feuerberg said Novec will emphasize energy conservation, load control during peak demand periods, and waste reduction by its customers to help keep monthly electric bills as low as possible. Because Virginia is once again a non-competitive marketplace for retail power, conservation is now a more viable option. “In an open, competitive environment, those concepts were at cross purposes, which is another reason competition failed in our industry,” Feuerberg said. “Before the move toward open competition, conservation was something we talked about an awful lot. In a competitive environment, you can’t make money selling less of your product. How often does IBM ask customers to buy fewer computers? Conservation doesn’t work in a competitive environment.” |
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© 2008 American Executive - RedCoat Publishing. All rights reserved.
American Executive is a RedCoat Publishing publication.
American Executive is a RedCoat Publishing publication.
