Pipeline &
Gas Journal
April issue 2000:
The Georgia Model
Rosput Tells How Atlanta Gas Light Took On Deregulation And Survived
by Jeff Share/Editor
The first deregulation of a gas distribution company was the ultimate challenge for any energy executive. Paula G. Rosput came on board Atlanta Gas Light Company (AGLC) in the fall of 1998, just in time to take the brunt of the state-ordered transition from a regulated to a customer-choice market.
Not only were she and AGLC venturing into unknown territory, but there were the needs of regulators, customers, marketers, shareholders, board members and staff employees to consider and satisfy. Consider the rapid progress of deregulation, which took just three years compared to 12 years for the airline industry and 16 years for telecommunications.
AGLC is the biggest natural gas distributor in the Southeast and the eighth-largest in the nation, with approximately 1.5 million customers in Georgia and Tennessee. AGLC has witnessed a robust growth rate of 2.5 percent annually the past half-dozen years in Georgia.
“This thing (retail deregulation) has moved so quickly that it challenges human beings to see how they can handle so many different projects at once,” Rosput recalled.
Rosput joined AGLC after a major shakeup involving the company’s top management. She had previously spent five years as president of PanEnergy Power Services and later Duke Energy Power Services. Earlier, the Rhode Island native worked as an industrial consultant in Boston before moving to the West Coast to work for PG&E.
Within the first few months, 20 percent of AGLC’s customers moved over to marketers. After 10 months, more than 1 million Georgians voluntarily had chosen commodity suppliers, basing their decisions on promotions ranging from $50 grocery certificates to buying 12 months and getting a 13th month of natural gas free. Prices converged when the marketers began phasing out their promotions and choice became less compelling, forcing 300,000 customers to be randomly assigned to a specific marketer.
The process has not been kind to AGLC financially. Indeed, several analysts, consultants and other industry experts interviewed by P&GJ said regulators did the utility few favors when it foisted deregulation upon it. It was especially hurt by the decline in operating margins resulting from the accelerated pace of customer migration to the marketers. The company lost $9 million in the startup of its own retail energy marketing business. The accounting methods authorized by the regulators also shortchanged the company in recovering its transition costs. Rosput acknowledges that the company’s revenues took a $60 million plunge for the fiscal year, although the first quarter has opened on a promising note.
AGLC faced a near disaster last fall when Peachtree Natural Gas, which was the third-largest marketer with 172,000 customers, filed for Chapter 11 protection. They owed AGLC more than $10 million for gas distribution and storage. The state had made no provision for a regulated default or interim gas supply function. AGLC could have been left holding the bag for an even higher debt because of the unresolved question of who would be liable for capacity on the transmission pipelines. AGLC had assigned much of its capacity on the pipelines to the marketers. Fortunately, Shell, the leading gas marketer in the state, took Peachtree’s customers.
Observers credit Rosput with doing a good job under trying conditions. “I don’t think the commission treated Atlanta Gas very fairly. Everything that could go against them went against them. They’ve done a fairly good job, given the very tough regulatory environment that they’re operating in,” one analyst told P&GJ.
The company has taken steps forward since deregulation. On Feb. 16, the parent company, AGL Resources Inc., became part of a joint venture to combine its propane operations with Atmos Energy, Piedmont Natural Gas and TECO Energy. Called US Propane, it will be among the ten largest propane retailers in the nation with 200,000 customers in seven states.
Rosput, 43, graduated with top honors and a degree from Wellesley College in economics. She is the single mother of a 12-year-old son. In February, weary but proud, Rosput candidly discussed the Georgia experience in an exclusive interview with P&GJ.
P&GJ: Now that you have had time to evaluate deregulation, how has the process worked?
ROSPUT: If you would have asked me last year at this time, I would not have had time to talk to you. Now that all of the customers have been assigned, we can look back and make a fair evaluation around the framework and come up with a pretty positive rating to the total picture, even though it was the year from hell. There’s no doubt that getting all of the customers signed over in a framework that really put so many incentives around choice that customers would migrate is exactly the right thing to do. The market is shaking out in terms of who’s participating as a gas supplier. Market shares are pretty well established. Now the biggest challenge we’re working on is getting more of a seamlessness around all of the business systems that deliver the service to the customer.
P&GJ: Are consumers finally educated about deregulation?
ROSPUT: If you look at what survey data we have, you’ll still have a feeling that consumers didn’t have an abiding sense that something was terribly wrong. But at the same time, there is a very high level of recognition around the fact that the gas company’s not your supplier of gas. There’s also a growing recognition about the relative roles of what a marketer does and what the distribution company does.
P&GJ: Looking back, what should Atlanta Gas Light have done differently?
ROSPUT: There should have been more time devoted between when the regulations where promulgated and the opening of the marketplace; in that interim period, much more work should have been done on our own business systems. The two big challenges we faced that were, in a sense, our own undoing last year were: Number 1, we did not have a whole set of accounting, finance and customer-service systems to support this. We had a central system, which is a web-based system, that allows the marketer to nominate the gas. But there was so much else that really should have been better developed prior to going into this.
Number 2, we were hurt every time a customer switched because $2.56 came out of their base charge. Unfortunately, we did not have a well-enough developed plan for how to get $2.56 out of our cost. Given how quickly the switching took place, there really would have been no way to get all those costs out. There should have been a much better plan, depending on the switch rate, as to what the actions are that you will invoke. In our particular case, we were taking as many calls, making as many service calls and on top of that had all of the additional costs to support this very complicated process.
It really would have been best to take a year from the time you have regulations to develop a full-grown business plan. During that year, there would have been a much better ferreting out of who’s going to stay in this game and who isn’t. We spent a lot of last-minute time trying to design interfaces for people who aren’t even in this marketplace any longer. But it didn’t stop them from offering lots of suggestions on how they thought the software should have been designed.
One real weakness was that for every customer who switched, a fixed amount of money comes out of the rates. A year later, the framework was generally right. Every time a customer switches, some amount should come out of rates. The formula should have been much more highly refined, because it is a function of how many customers switch, in terms of your ability to really get your costs managed well and maintain customer service. If anything, we were all very naive. Nobody believed that this program would have the profound effect that it had in the time period that it had.
P&GJ: What were some of the other financial hardships that were created by this? You mentioned earlier that you took a $60 million hit for the year.
ROSPUT: When you’re narrowing down a business, which is in effect what’s happened because we converted from being a comprehensive provider to being a pipes company, you don’t realize until after the fact how many other sources of revenue that you had, simply because you’re the comprehensive provider. We, for example, lost a large amount of revenue (an estimated $13 million) or the right to earn a large amount of revenue over the late payment charges that customers pay when their bill is late. Every service and retail provider has built into their economics the fact that a certain number of customers pay late and they’ll charge for it.
P&GJ: Did you have to make a major investment in information technology?
ROSPUT: We estimated between $20-$25 million was spent in IT investments. That’s a pretty substantial capital for a company our size and it’s on a short depreciation life so the affect on near-term earnings could be significant.
P&GJ: What were some of the specific investments that you had to make to upgrade your system?
ROSPUT: We had to develop a new interactive gas operating system. Gas operations for utilities is an enclosed system. Even if you have industrial customers who nominate their own gas, that is not an interactive system. They’re told how much gas they need to tender the system and they’re expected to do it and it’s a pretty straight forward transaction. When you have marketers nominating the system, you have to create an interaction about it because it’s how much gas is going to come out of storage, whether you can use your LNG supplemental supplies or whatever. We had to build that central enterprise system, called GOS (Gas Operating System). It needed a whole billing module off of that because you have to basically go from those transactions up to wholesale billing now rather than retail billing.
We had to tag a system onto our customer information system to keep track of switches so that when a customer selects a marketer, which marketer are they with? We need to know that in case they call to switch a subsequent time. You’ve got to be able to find the meter because the customer’s moving all around. Then we had a huge challenge with marketers who didn’t want to use our ten-digit account number. In any utility, the whole framework is built off of that number. If you lose it, how are you supposed to find the customer?
You have to be able to bill out. We still do bill out things. If, for instance, a customer needs an appliance repaired for a leak, we have to have a residual billing system that doesn’t drive through our customer information system. In the midst of all this, we were in the middle of an SAP implementation, so our underlying financial systems were being converted at the same time. It was a very chaotic time.
P&GJ: Much of this was brand new technology, wasn’t it?
ROSPUT: We agreed that this would be set up for an e-commerce type of approach and that was a hugely right decision to make. But it means that now all of the other business systems that you identify that you need must be tagged off of that framework. You’re really trying to drive out your legacy systems at the same time. Ultimately, over the next several years, there is at least $100 million of information technology investment that needs to be made in this company.
P&GJ: What were some of the challenges in dealing with marketers?
ROSPUT: Everybody who came to participate in Georgia had some experience in a retail program somewhere and had their own sense of what would work best. We try to do everything in a collaborative way and it gets cumbersome after awhile. If we talk to our major marketer customers now, they would call for standardization and today that’s our major challenge. But back then, that was not the theme of all the discussions.
P&GJ: What marketing standards would you recommend for adoption?
ROSPUT: Several elements within the Georgia Model are really good. One, you must choose a supplier or one will be chosen for you. That’s the only way you’ll get large numbers of people to move. The second part of the framework is that the marketers get the assignment of the capacity so they can begin to re-optimize the use of those assets. They have the pipeline capacity and can trade, swap and optimize it in different ways. Third is the fact that it created a pretty level playing field around the utility’s participation. The utility was not going to be in the residual business, though it could set up an affiliate as we did, with SouthStar Energy Services (a partnership with Piedmont Natural Gas and Dynegy).
P&GJ: Did you foresee the Peach-tree situation?
ROSPUT: Absolutely. Within months, after the outset of the program, if somebody had asked which marketer do you believe would be most likely to fail within the first year of business, it would have absolutely been Peachtree. They were undercapitalized. They were very successful on the marketing side and the organization is to be applauded for their creativity. But the punchline is this: when you have to accept the assignment of assets and inventory, you have to have a fair amount of working capital. You look at the average trading and marketing company of any scope and scale in this country and it’s got hundreds of millions of dollars put in to create a stand alone credit rating that enables it to do business on both the interstate and intrastate pipes. There was none of that kind of basic financial infrastructure at Peachtree.
P&GJ: How do you define “operational excellence” in terms of AGLC?
ROSPUT: We’re looking at every aspect of our operation and trying to determine how it can be improved. We’ve implemented a comprehensive program of individual performance objectives for every employee and performance standards on anything and everything we could quantify. Now we know what the productivity is of every serviceman who’s out in a truck; we know the response time around every leak that we’re dispatched to investigate, and we know exactly on a real-time basis how much every meter set costs us to install.
The second part focuses on technology. Because of its financial condition over the last few years, the company had really been unable to invest in a lot of the technology that is driving American businesses today. It’s everything from the simple stuff like automating our dispatch to the entire supply chain. From the time an order for a new meter set comes in to the time it’s fully installed, that whole process is automated, shortened and the cost driven out of it.
P&GJ: How have the employees responded to these changes?
ROSPUT: Anytime you go through a period of rapid change, it’s a challenging situation for employees. It runs the gamut for employees who embrace the change and say that it’s about time, to those who say ‘This just isn’t the same company anymore and I don’t really buy into these changes’. In this kind of business turnaround, it requires engaging each employee to come in every day and ask, ‘What am I doing to create value’?
In my own business career, one of the most powerful places that I ever experienced this was at Panhandle Eastern under (former CEO) Paul Anderson, where everyday you came in and if you didn’t feel as though you were creating value by the end of the day, you were wondering whether you should turn in your resignation. Here it would be a little bit tougher to have quite that powerful an experience, but as a practical matter, we really want employees to come in everyday and say, ‘Am I creating value’? Some people just don’t want that as part of their work experience. So we’re having some turnover and challenges around people understanding and buying into the vision. But the financial results that we’ve had in this first quarter speak eloquently to the fact that the vast majority of our employees have pitched in and performed magnificently.
P&GJ: Your workforce has been trimmed from about 2,500 to 2,000. Are you outsourcing much more now?
ROSPUT: Interestingly, we really aren’t outsourcing a lot more just yet. We are outsourcing our mainframe computer system. Fundamentally, our approach has been simply to try to get metrics around the work, understand the business processes and then try to improve productivity, taking whatever steps that are desirable. We’ve tried to deal a lot more decisively around performance issues. The company did not have a fabulous tradition of dealing with its poor performers.
P&GJ: Are you referring to corporate culture?
ROSPUT: In the utility business, it’s been that you come for life. Over the last decade, we’ve seen this transformation in utilities all across the country. I had the business experience of being on the edge of that in California some years ago when the whole issue of competition and the changing contract between employees and the company was first revealed. It’s taken a long time to get that to move to the Southeast where there’s still a tremendous lifetime employment culture around utility companies.
P&GJ: Looking ahead, how would you define your growth strategy?
ROSPUT: Like every business in the economy today, we need to have more scale. So as Walt Higgins, our chairman, has indicated, we’re always open to opportunities that would give us that scale. But they have to be ones that create value in the near term. We’re not at all interested in transactions that are just an optimistic promise. Our philosophy is that we are so driven to best practices in every aspect of our service delivery and that, in and of itself, will give us the kind of tool we need to ultimately achieve scale.
P&GJ: Are you talking about essentially staying in pipes business?
ROSPUT: We’ve looked to try to find a balance between regulated and unregulated. You wouldn’t see us making a vast shift into the unregulated without some balance. It’s a continued deepening of the businesses in which we’re already engaged and just being the best at those. As people look at our metrics comparatively to the rest of the industry, they will see that there has been a huge step change in the efficiency with which we are undertaking many of the basic elements of the business.
P&GJ: There’s been talk about growing existing businesses, perhaps by expanding into new territories?
ROSPUT: Virginia Natural Gas, for example, lives broadly within our reach and is going to be up for sale. That’s exactly the kind of franchise we’d look at because it’s got a fairly good adjacency, it’s in a state that embraces a deregulation model and the franchise is for sale. Having said that, we’ve looked at some of the prices at which assets have been exchanged in this industry and even with the fact that we believe our business metrics are better than others and we have a model to improve performance, it’s still hard to reach some of those values. So we’ll be very cautious.
What we’re trying to do is refine a business model, a total framework that is both a combination of technology and business practices. As we bring that implementation to a high point, it’s possible that we could take that business model elsewhere and not necessarily have to have the adjacencies. There’s no doubt that part of the issue around scale is once you’ve built your business systems, you want a lot of units over which to spread the cost of those systems.
P&GJ: There’s been speculation about Atlanta Gas Light being acquired. What is the prospect of that happening?
ROSPUT: Our industry is consolidating, so there’s always the possibility that we could be acquired rather than being an acquirer. The team is very committed to creating value, so we’re always open to what transactions could create value. But our principal focus this year is on restoring the base business to superb financial performance and underneath that, outstanding operational performance has to live.
P&GJ: All told, have consumers actually benefited from deregulation in Georgia?
ROSPUT: Sure. At a first level, the industrial customers have without a doubt had a huge benefit in the reduction of their rates. In addition, if you look at the price stability that has been afforded by this deregulation model and the fact that the base charges have been reduced significantly, there’s no doubt that consumers have the benefit. The challenge around any of these retail deregulations is that the underlying product moves around, and as we know, energy prices are much higher this year than they were last year at this time.
But rather than seeing the wild gyrations of energy prices, the aptitude of these marketers to manage commodity price risk has created a stability for consumers that they would not have achieved in a traditional regulatory framework. Customers have choices of fixed price gas today and that was something that was never available to them under regulation. And as a practical matter, they get much better service from Atlanta Gas Light for rates that are 15 percent lower today than they were a year ago at this time.
P&GJ: If you had a message to give other LDCs facing deregulation, what would that be?
ROSPUT: As a sector, LDCs are struggling to find their identity in the new economy. Deregulation provides that step change. It will be painful during the implementation process and sometimes it seems like that pain will never end. But in terms of an ability to effect a profound business transformation, deregulation is the only thing that is out there for LDCs.
P&GJ: Is that where you see the future for LDCs?
ROSPUT: Yes. Today’s market doesn’t want to reward this kind of traditional bricks and mortar infrastructure business. And the market can’t see that there’s anything in the current business model under which LDCs operate that suggests there’s going to be value creation. You look at what we’ve done to change our company in just a year because of deregulation and you begin to see a path toward changing the value proposition around a company. I don’t see anything but deregulation as the path to get there. There’s no other reason for LDCs to profoundly change their business.
P&GJ: Did deregulation fundamentally affect the operational aspects of your business, such as metering, corrosion control, pipe replacement?
ROSPUT: Absolutely, absolutely. Part of it ties to the fact that once you shine the light of consumer preferences on your company, the spur to modernization becomes enormous. People don’t like their streets being dug up by the gas company all the time; you’ve got to modernize your system and get rid of the leaks so that people aren’t going to be bothered by it. You’ve also got financial pressure to increase operating margins without going to the regulator for protection. That means adoption of technology needs to take place.
Deregulation changes your mindset about your business. It says, ‘I absolutely must satisfy customers and show them I’m an efficient provider or else my business won’t have any vitality about it’. So you change that mindset to: ‘I’m satisfying customers today; how am I going to satisfy them tomorrow?’ It’s the spur to a constant improvement and reinvention. That’s really what’s lacking in the LDC sector today. As a sector, there’s no spur to improvement and reinvention. Deregulation provides that.
P&GJ: Even though you’re not dealing with the customers directly like you used to?
ROSPUT: But you are. Every time somebody wants to move in or out, or set a new meter, or they smell gas they’re still calling the gas company. The only thing that they’re not calling you for is the bill. But they’re getting something different on the bill because it has potentially fixed prices. In some cases it’s lower than it was a year ago or they’re getting a bill that isn’t as high as they’d think it would be, given where they think energy prices are going to go. This year we’ll take 3.5 million phone calls and make a million service calls out in the field. As we said to our employees, that gives us 4.5 million opportunities to print on the customer and we can print for good or we can print for bad. We’re determined to make those 4.5 million experiences be superb ones.
P&GJ: What were the most difficult decisions that you’ve had to make?
ROSPUT: When we first implemented the straight fixed variable rate structure last winter and it was causing enormous bill impacts was one of the hardest. The decision to get in and get out quickly and potentially suffer a financial hit on it was the toughest one. As a new president, I was eager to try to quickly restore financial health to the company. But it was really a decision that we were not going to get through the implementation of this deregulation in that one year without a financial blow, so we just needed to get on with trying to do it as fast as we could.
It’s a tradeoff of getting it behind you and taking your hits, but when you’re new in the saddle, that’s really tough. It’s one thing if you have five years in the saddle to say ‘I’ll sacrifice this year’. When you’ve shown up and within two months you’re having to make that decision, that’s a tough one.
Everything moves faster in deregulation and that takes different kinds of executive and managerial talents. Finding the right balance between a preservation of what’s best in the management complement and yet realizing that you have to have some different qualities to carry you forward, doing that quickly and doing that right has equally been a challenge. P&GJ