Unbundling the Rates and Managing Performance CARILEC Finance & IS Conference October 2001

1. Unbundling the Rates and Managing Performance CARILEC Finance & IS Conference October 2001 Presented by: Jeff Sealy 1

2. Contents • The situation we typically face • A glimpse of Utopia • Making our way there • Unbundling our own costs • Determining the extent of the journey • What we need to get there • What progress are we making? Are we there? • Taking Action • Reporting on progress • Keeping up the momentum • Q&A • Appendices

3. Margin Margin Margin Support Costs Support Costs Support Costs T&D Costs T&D Costs T&D Costs Generation Costs Generation Costs Generation Costs Here is the Situation that we usually face Margin Level Approved Margins Realized Rate Approved

4. Or Hell on Earth Margin Level Approved Cost Elements Unbundled And certain elements fixed Margin Support Costs Margin Legislated Rate Support Costs T&D Costs Rate Approved T&D Costs Generation Costs Generation Costs

5. And here is the Typical Analysis of the situation that we can provide….. Margin Support Costs T&D Costs Generation Costs

6. And the insights provided by our analysis

7. A glimpse of Utopia Margin Support Costs T&D Costs Generation Costs

8. How do we make our way there?

9. The extent of the journey General Ledger Salaries 4500 Benefits 7800 Facilities 1500 IT 1000 Materials 1200 Support 3400 ResourceDrivers Business Model Process Costs Activity Dictionary Connect User 6000 Install lines 5500 Bill Customers 4500 Pay Suppliers 3200 Recruit staff 4500 Activity Drivers Cost of Service And Cost-to-serve Local Long distance Residential Commercial Internet Leased lines etc. Cost of Service to Internal Customers

10. Let’ s look at what we need to get there

11. SUPPORT PROCESSES Corporate Strategic and Business Planning Management Control Corporate Communications CORE PROCESSES Deliver the Service Grow Service Throughput Getting Paid By the Customer Extend the Service Infrastructure Manage the Supply Chain Connect The Service SUPPORT PROCESSES Corporate Finance and reporting Information Management and Security Human Resources & Admin We Need a “Road Map” of the Business

12. The Business Model

13. We need the right methodology With this approach, costs are traced to products based on the activities consumed, rather than on the basis of “allocations” Activity Based Costing The Allocation Approach • Key elements of an ABM structure: • What resources are consumed? • What activities are performed? • What drives the activity? Resources Resources/Costs Consumed by Consumed by Activities Products Demanded by Products, Services or Customers Usually “Peter pays For Paul”

14. Key features of the methodology • We need to understand the each company’s internal service model ie the framework of internal customers and suppliers, the services provided and consumed • We must understand the cost drivers since effective cost management involves managing the cost drivers.

15. Driver Data And a business intelligence architecture Cost Modeling Engine Budget & Forecast System Budget & Forecast Data Resource Pools Business Activity Model Cost Objects General Ledger System Actual Cost Data By Department & Account Customer Activity Channels Other Sources Products/Service Lines Multi-Dimensional Reporting ToolPower Play, TM1, Essbase

16. Managing Performance: Are we on track?

17. Target & Focus DesignHigh Level Design Details Pilot Execute Review & Improve Taking Action at the Process level: An example First of all you will need a tried and tested approach for getting the desired levels of improvement Program Management

18. Remember progress must be measured where initiatives are undertaken Total Company Business Unit Department

19. Understand the “Customer” Assess “As Is” Processes IdentifyQuick Wins Prepare Mobilization Plan Develop a Business Process Model Perform High Level Cost Analysis Assess Quality to Customer Develop Design Approach Plan Remember that with the holistic approach being recommend we will have completed a substantial part of the phase I Target and Focus work in the cost unbundling phase. Target and FocusWhere do opportunities exist? Understand the “Business” Prioritize Opportunities Assess“As Is” Organization Assess“As Is” Technology Develop Communication Plan

20. An Example: Billing Process Flow

21. Metrics Objectives Targets Financial Customer Internal Processes Metrics Objectives Targets Financial Learning and Knowledge Customer Internal Processes Team A Scorecard Support Group Scorecard Learning and Knowledge Control Store Costs Team Measures Strategic Objective Measure • Reduce Paint Cost • Design Easy Assembly Fixtures • Reduce Energy Consumption • Current wall covering replaced with textured paint alternative • Cost of fixtures • Utility cost F2 Control Store Cost C4 Customer Partnership I4 Construction Excellence L4 Optimize People Resources • Cost psf by division • # of cooperative / productive effort • Time / quality and cost standards met • % of people qualified for key positions Customer Partnerships Team Measures • Develop Joint Lighting Program • Communicate better with RMs & DMs on construction issues • Increase travel with operating divisions to recently opened stores • Have all members work in store • Light cost • Customer feedback • Number of trips with the Division • All members work in store Construction Excellence Team Measures Corporate Measures Scorecard Business Unit Measures Individual Goals • Contract schedule vs. plan • Documented cost savings • Write contracts 2 weeks prior to scheduled construction start • Identify cost savings 1993 1994 1995 1996 1997 1993 1994 1995 1996 1997 And Near Term Action Steps Financial Targets Targets 1. 100 120 160 180 250 • Earnings • Net Cash Flow • Overhead & Operating Expense 100 450 200 210 225 Optimize People Resources Team Measures 100 85 80 75 70 Operating Targets Targets 2. • Number of cross-training assignments • Assignment in different stores • Promote cross-training • Work in different stores 100 75 73 70 64 • Overhead & Operating Costs • Finding & Development Costs • Total Annual Production • (Indexed: 1993=100) 100 97 93 90 82 100 105 108 109 110 3. Corporate Objectives Individual Measures 1. 2. 3. 4. 5. • Double our value in 10 years. • Increase our earnings by an average of 20% a year • Achieve an internal rate of return 2% above the cost of capital. • Reduce our overhead & operating costs by a further 30% by 1997. • Reduce our 5-year average finding & development costs by 20%. • Reach the top quartile of industry profitability by 1997. • Increase production by 10% by 1997. 4. If we can achieve all these business objectives, we will be a top quartile competitor Name: Location: 5. Performance reporting and performance management must be connected throughout the organization Corporate Performance Reporting Level of Strategy BU Performance Reporting Departmental Performance Reporting Individual Performance Reporting Number of People

22. SVA Financial Non-Financial Profit Optimization Emphasis Public Policy Emphasis Profitable Growth Emphasis Shareholder Margin Management Investment Management Public Mandates Customer Retention Customer Profitability Enhance Value of Assets New Revenue Growth “Good Business” & Community Interests Grow the Business Secure the Base Enhance Customer Focus Efficiency & Productivity Effective Governance Public Support Service Excellence Value-Added Solutions Market Development New Strategic Businesses & Markets BC Hydro Balance shareholder objectives Retain profitable customers Grow customer profitability & utilization Manage assets & investments to improve cash profits Enhance value by maximizing margins in emerging markets Profitable growth through strategic market entry/exit Build & maintain public support for operations Customer Goodwill and consent to operate Anticipation of future business & market needs & threats Low cost, competitive price Customer-driven reliability Appropriate levels of service Service choices Creative solutions Targeted energy solutions Value Proposition Make explicit investment trade-offs Proactive relationship building with customers, regulators and public Strategic decreases in overhead Attract new customers and augment product line Business development in export / wholesale markets Easy, efficient & trustworthy call centers and billing Value-based operating costs Build/invest to capitalize on new opportunities Seamless outage management Account management Create unbundled rates/ offers profitably Strengthen strategic management processes End-to-end customer driven processes Consider strategic JVs/ alliances Redeploy resources Manage asset portfolio Align generation, transmission and trading activities Support priority public objectives Work with SH to clarify roles/ boundaries Active citizenship Internal Smart sourcing and abandoning unprofitable ventures Research to understand customer needs Transmission, distribution, and retail business partnership Influence and create a shared vision for BC Hydro Commodity risk management Articulate priorities and principles of BCH Establish appropriate corporate structure Optimize organizational structure and BPIs across SBUs Clear corporate two-way communication Understand & base decisions on core capabilities Identify new market opportunities to proactively meet customer needs Leverage competitive advantages Cross-organization investment and resource prioritization Understand key public values Understand Shareholder objectives Understand structural change in emerging markets and advocate BCH’s position SVA-based decision & resource management systems Move from custom to COTS applications Web-based information delivery and self-service Customer management systems Customer / product information and profitability tracking systems Standard cost and capital information Market pricing/ risk assessment tools Service logistics management systems Competitive intelligence Strategic Tools for the Future Y2K Leadership Communication and Information Competencies Build a Strong & Capable Organization A Strong & Capable Organization Relationships Collaborative Management Aligning the Workforce Diversity Flexibility To maintain momentum improvement efforts must clearly contribute to achieving our strategy: An Example

23. Summary

24. Business Solutions Network & Solutions Group • We are experts in cost analysis • Our consultants are experts in cost analysis and service costing, and have provided consulting assistance to world class organizations including: • Cendant Corporation • Nav Canada • BC Hydro • Williams Communication • Nortel Networks • We have a proven methodology and state-of-the-art tools for cost modeling • Your Success is our business • We take accountability for the success of our engagements, and focus on providing rapid delivery of solutions, and we are careful to avoid “analysis paralysis” • Our number one objective is that any consulting assistance provided to you is “100% referenceable”.

25. Our Interest in Utilities • The Solutions we offer include: • Cost of service studies, including service cost unbundling • Implementing the information systems to support performance based regimes • Business Process Transformation • Implementing ‘Shared Services’ charge-back systems • Implementing Performance and Strategic Management System • The common denominator in all our solutions is the expertise that we have in using the activity-based methodology and our skills in deploying ABM and OLAP tools

26. Our Experience – Energy Companies • Past Clients • BC Hydro • Tampa Electric Corporation • Alliant Energy • Central and South West (now American Electric Power) • Outstanding Proposals • TECO • CP&L • Singapore Power • FTC Barbados

27. Q&A

28. Appendix

29. Tools Required • Cost Modeling Software • Metify • Oros • Flex ABM • Activa • Reporting Tools • Power Play • TM1 • Business Objects • Essbase • CFO Vision • Oracle Financial Analyzer