Decentralized Model A Common Sense Approach To Expansion

July 2013, Vol. 240 No. 7

Michael Reed, Managing Editor

For many, the thought of a favorite company moving into expansion mode conjures images of a huge central office, employees who become increasingly narrow in focus and the all-to-common problem of trying to deal with customer service personnel located so far from the problem that they can’t provide much assistance.

Oakville, Ontario-based Liberty Utilities, a subsidiary of Algonquin Power & Utilities, embarked on a growth initiative less than five years ago after deciding it would be better served if regulated utilities formed a more significant portion of its business assets. The company bought a wastewater utility in Arizona, an electric utility in California and gas and electricity assets in New Hampshire. However, in an unusual twist, Liberty decided against implementing a centralized management, opting to keep the bulk of its customer, employee and even regulatory decision-making with local managers.

Algonquin CEO Ian Robertson describes himself as “an unapologetic entrepreneur.” In this interview he explains why centralized offices aren’t always the least expensive or most efficient form of management and his company’s commitment to bring bring back the local utility. He also discusses the one challenge that “keeps me up at night.”

P&GJ: Liberty Utility bought Atmos Energy’s natural gas distribution business in Illinois, Iowa and Missouri. Previously, the company bought water assets in the West and National Grid’s gas and electricity assets in New Hampshire. Which of the sectors (gas, water or electricity) presents the biggest challenge for expansion-minded companies?

It’s worthwhile to touch on the history. Algonquin got its start in the regulated utilities business back in 2000. We bought our first regulated utility, a wastewater utility in Arizona. The regulated utility business really was a very small diversification in mission for the organization whose primary focus was renewable energy – solar, wind and hydroelectric space.

A fairly significant strategic direction shift came in late 2008 when we decided the organization would be well-served if regulated utilities formed a more significant portion of the business assets, say 50-50. So what you saw was the announcement of our first electricity utility in California from MD Energy.

Moving forward, there was the acquisition of National Grid assets in New Hampshire, gas and electricity, continuing on with Atmos Energy’s assets in the mid states. We have followed that with a transaction for Atmos’ gas assets in Georgia, a water utility in Arkansas and a gas utility in Massachusetts.

With respect to expansion, water is probably the hardest sector to grow because of the market, followed by electricity and then lastly, natural gas. Water is a very fragmented marketplace and the systems generally tend to be very small. There is a high penetration of municipal systems across the U.S. and they don’t trade very frequently. With gas, systems tend to trade hands more frequently, and there is greater actualization. Half of our assets are in the gas base which we didn’t get into until 2009.

P&GJ: What do you envision in 10 years regarding ongoing expansion as it relates to Liberty’s efforts to handle much of its operations within its service territories?

In 10 years, I’d like to think we’d have a footprint in more than the 10 states in which we now operate. Our operating paradigm is a decentralized model, so I would see more of our stand-alone utilities operating across the U.S. To the extent that we are able to acquire additional utilities in states where we are not operating, or in states that we are operating, we manage our business on a state-by-state basis.

However, we certainly are active in the communities in which we serve and it is important for us to relate to those communities. That means we have a state president in Georgia and will have a state president in New Hampshire. I think we will continue to chip the rock off the side of the mountain from a growth strategy. We very much see an opportunity to find utility operations that are owned by large utilities – a $10 billion-a-year utility that has $250 million of assets in a non-core state would be coveted by us but almost disregarded from their point of view.

P&GJ: Did Liberty have a company it used as a model when developing its expansion and local operations game plan? If not, how was the strategy devised?

Yes, we did have a company in mind – it was ourselves. We’d been in the utility business almost a decade before we started on the expansion, and what we found was the approach to running these businesses locally, of building these relationships with customers and with regulators, of giving locally empowered management the authority to be responsive to customers, was just the right way to go. When we acquired our first public utility in California, it was complete common sense that we would replicate that model by putting in a management team that provided customer service locally – that provided income-statement and balance-sheet management locally. The strategy has been an evolution of our own positive experience.

P&GJ: What departments did you find presented the biggest advantages when it came to operating utilities locally? Aren’t there economic motivations to centralize operations as much as possible?

Robertson: The big question in a centralized vs. decentralized model is, “It sounds great, but doesn’t it cost more?” The implicit thesis behind centralizing a management team is, “We’ll get all of these economies of scale that we’ll be able to pass on to our customers.” There is some truth in that. For really small utilities, it is expensive. If you had 2,000 customers and had to manage all the functions to serve those customers it would be an expensive proposition. But when you’ve got around 50,000 customers, there really isn’t a dramatic continued drop in the cost per customer that you rise above. There have been studies done showing as much.

The fact is there are some inefficiencies that start to eat up that economy-of-scale benefit (centralized operations). We found that by giving our customer-service representatives (CSR), for example, a broader job set so that they not only answer the phone, but deal with walk-in customers and might also help out in the office, we’ve been able to make up that inefficiency.

Consequently, it’s not like we need more people to operate our utilities. And, what our customer satisfaction studies have definitely shown is that customer service – doled out locally by our CSR, who is staring out his or her window, looking at that some snowstorm that causing the customer to call, is a much more empathetic experience than phoning and getting a CSR in Texas or India, who just doesn’t have that connection with the community. In the end, the customer walks away with a better experience, and it didn’t cost more.

Frankly, it’s a better experience for the regulator, too. I think they feel marginalized and disenfranchised when they have to call out-of-state to get ahold of somebody that has the authority to fix their problem. It’s worked very well for us to say, “Here’s the local president. If you have an issue, this man or woman has the authority – the balance sheet, the capital authorization – to make things right in this state.” That has been popularly received by regulators.

P&GJ: Are there departments the company has decided will function better by being centrally operated?

If a function is customer-, regulator- or employee-facing, it should be dispensed within the state. There are functions that are not ‘facing’ to any of those. The most obvious example is information technology (IT). The development and implementation of IT is something that we do centrally. Gas procurement is a function that we have centralized because it doesn’t face any of those stakeholder groups and where we have better buying power.

P&GJ: With some of your operations being so far apart geographically, how do you manage to coordinate operations?

Robertson: This is the issue that keeps me up at night. We have strong feelings about how we want our organization to live up to our brand promise of local responsiveness and having a caring relationship with all customer groups. We think of ourselves somewhat in the franchise model. Here in Oakville, we see our business not as running the utilities, but as setting the standards and developing the strategies that we would like to have executed locally.

We have perspectives on how we want our customers treated; on how we want our constructive and transparent regulatory relationship built; on how we want the family of employees treated. So, we develop those strategies and download them much as McDonald’s would download to individual restaurants the strategies for ensuring that Big Mac you order tastes the same in California as it does in New Hampshire. Obviously, we want our teams to tailor things so they have a local look and feel, but at the end of the day we have some standards that we insist on being met.

P&GJ: Do any of the people in your field operations receive cross-training that allows them to handle situations in more than one sector, for example, gas and electricity?

Robertson: When National Grid ran the utilities (in New Hampshire) – Energy North and Granite State – they ran them on a line-of-business basis, so the electrical guys never got together with the gas guys. Under our business, we obviously don’t expect a lineman to know how to do gas fittings and we wouldn’t presume to ask them to do so. It’s a very technical job. But you can imagine them during a storm, and “Superstorm Sandy” was a perfect example. The gas assets are obviously well protected, because they are buried in the ground. The electrical assets obviously bore the brunt of the storm, and what we were able to do was say to the gas guys, “We have tree crews. We just need arms and legs out in the field to give a hand.” We were able to call on our own crews from gas operations to help out in non-technical areas.

P&GJ: Do you, based on what you’ve just said, feel jobs at larger companies are sometimes too narrowly constructed to allow employees to serve customers as well as they could and possibly feel better about what they are doing in the process?

Robertson: When a utility gets bigger, people’s jobs get narrower because they must fit into a larger organization. We think of ourselves as a kind of smaller, flatter organization, where your job breadth gets smaller. Obviously, we need to be very mindful and respectful of the fact that the business we are in is a deadly serious business. There is, in my mind, no more of an intimate relationship between a customer and a utility than in the water utility business. You are actually going to drink our product and bathe your children in it. We take the operations very seriously in terms of respecting qualifications and quality. But when you think about office personnel – CSRs and supervisors – those job functions can actually get wider because there are perhaps fewer people. I think the job satisfaction goes up. So, consequently, it’s not about cross-training a lineman to be a gas-fitter, but it is about broadening the job responsibilities.

P&GJ: To what extent have your expansion efforts involved new construction? Will your efforts involve future construction?

Robertson: We are very committed to growing the business organically. We want to find ways to get natural gas penetration into areas that aren’t well-served. New England is a perfect example where natural gas does not serve all of the customers. There are other heating fuels that have predominance in that area, but the economic argument for natural gas is so compelling with the price versus a barrel of oil.

We are very interested in how can we put more money into the ground to bring more customers onto the system. We are starting to see “green shoots” of new home development in our area. Some new subdivisions are being built, and we are enthusiastic supporters of developers who want our commitment to provide utility service. We do not set our return hurdle so high as to not let it be a valuable proposition to the developers; we are willing to take some risk to work with them to have this come through to fruition.

P&GJ: In closing, how did you get into the business?

Robertson: I would proudly say I am a serial entrepreneur. It all comes down to asking, “Why not?” and trying to be a little visionary as to what we can do from an organizational standpoint and how we can make this work, both for customers and ourselves economically.

My background is electrical engineering by training, but I’ve kind of branched out. I’m an MBA and have a charter financial analyst designation. My partners and I got into the power business at a very nascent time (the independent power movement of the 1980s). We saw that as an opportunity. I was coming out of the University of Waterloo in Ontario. It’s just gone from there.

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