The Agile Utility –Forces at Work Changing the Industry in North AmericaAGA/EEI Accounting Leadership and Chief Audit Executives Conference

June 15, 2015 | kpmg.com

© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 383650

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Today’s agenda

Impact of disruptive technologies

Industry at a tipping point

The race for the customer

Business and regulatory challenges

Becoming the agile utility

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Remember this word?

DISINTERMEDIATIONThe elimination of intermediaries in the supply chain, also referred to as

“cutting out the middlemen”.

© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 383650

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It’s been busy…

■ Borders ■ Kodak ■ Circuit City

■ Digital ■ Blackberry

■ Arista ■ Sam Goody

■ Midland ■ MCI

■ U.S. Postal Service ■ Webvan

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…With some new guests

■ Home Depot ■ Lowe’s

■ Google (Nest) ■ Apple

■ Bloom Energy ■ Solar City

■ Meritage Homes ■ Balfour Beatty

■ Tesla

© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 383650

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Power and utilities industry is approaching a tipping point

Business model

changes

Need for agility

Operating model

alignment

New energy economics

Evolving/New regulatory model

Aging and inadequateinfrastructure

Out of dateregulatory model

Emerging technology

Changing customerexpectations

© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 383650

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Distributed Energy Resources (DER) is here to stay

Increasingly cost effective residential

solar sower

Energy storage technology breakthrough

(Tesla)

Continued expansion of wholesale renewables

(e.g., wind, geothermal)

Increasing plug-in electric vehicle market

penetration (two way flow)

Local microgrid enabling technology availability

Transmission infrastructure cyber-

security implemented

New low cost natural gas supplies drive industrial cogen

The future state will likely be a hybrid of today’s hub and spoke model and the more

distributed future state

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In this scenario, the most successful companies are those that invest in and are well-positioned to market the new technologies the marketplace is adopting.

Technology breakthroughand the powerof the people

Forces of change play out differently across the U.S.

A number of plausible scenarios to envision the future

In this scenario, the most successful companies are those that adopt aggressive efficiency, capital project rationalization, and asset management initiatives designed to streamline operations, conserve capital, and enhance asset productivity.

Flat economyand customer conservation

The utilities that fare best in this scenario are those with strong regulator and community relationships, trusted rate and compliance organizations, established regulatory constructs that incentivize greener energy supply portfolios and grid resiliency investments, strong disruption and service recovery plans, and strong stakeholder management organizations.

The most successful utilities are the ones that work with regulators to establish regulatory constructs that provide enabling infrastructure and market access.

The most successful utilities are the ones that significantly enhance the inclusion of natural gas and natural gas services and products into their business strategies.

Regulators’rule

Microgrids and distributed energy

supply

Gasworld

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How are utilities responding?

Are not actively seeking change, but rather only reactingto regulatory requirements. The state often drives the paceof change

Complacency

Foresee an extended time frame of a hybrid model betweenthe current hub and spoke model and some aspects of the disaggregated model

Measured embrace

Incumbent utility is committed to the disaggregated futurestate and is actively investing in defining that future stateand getting ready

Drive the future

© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 383650

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The great unbundling has begun

© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 383650

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Forces at work raising and expanding customer expectations

Customer experience in analog settings

Down-stream product expansion

New energy and related choices and services

Technology advancements

A new standard for

customer excellence in utilities

© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 383650

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Key variables in the race for the customer

Customer focuses on pricing and service, which drives retailers to focus on establishing electricity distribution capabilities

Mass adoption of home

connectivity

Distributed resources

Traditional distribution model Customers choose between

Distribution and Retail competitors who offer the most compelling suite of related products

Customer expectations for access to energy services becomes part of a broader offering around full home connectivity and service

Customer focus shifts to full spectrum energy service providers (energy supply, management and maintenance needs)

Customer expectations

Dis

trib

utio

n ev

olut

ion

Cheap and predictable

energy costs

A

C D

B

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Competition to ’Own the Customer’

“Race for the customer”

Traditional energy service

providers

Crowd-sourced service

providers

Down-stream product

providers

Telco and security

providers

Energy retail and services providers

© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 383650

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Emerging business challenges

Technological innovationThe lack of prioritization and incentive to rapidly adopt new technologies to drive efficiencies in the business and better relationships with customers

MobilityThe need to develop and implement enterprise mobility strategies in areas such as customer operations and field work management

Attracting and retaining the new professional workforce (Millennials)The ability to attract, motivate and retain the best and brightest from the new generation entering the workforce.

DER and infrastructureThe need to rethink and reprioritize how capital is invested in the business

Cyber threatsThe ability to measure up to the growing threat of Cyber crime and warfare in the business

© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 383650

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Emerging regulatory challenges

CapEx versus OpExRegulatory mechanisms needed to encourage or incent the adoption of new ways of doing business such as SaaS (Cloud Computing) or outsourcing non-core operations

Mobile technology and applicationsRegulators don’t understand the benefits of mobile technology and applications. Utilities need to educate the regulators.

DERNeed for updated regulatory policies to allow for items such as: non-utilities to enter the DER market, needed infrastructure to be built to allow for efficient operations, and both the purchase & sales of needed/excess energy produced by DER

Network integratorNeed to develop a new business model, development plan and business case to create a deeper network integrator capability

Data protectionNeed for regulatory policies which allow for the proper use of customer and operational data for the benefit of customers

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Case study: Powershop – NZ incumbent utility establishes new company to reinvent customer engagement model

Case study overview■ New Zealand utility incumbent recognized the

need to reinvent their approach to customer service. Formed a separate subsidiary to do so.

■ Instead of ’pushing’ power and presenting 12 demand payments, they set out to enable the customer to pull power on demand and interact as they wanted.

■ “From our inception, we had the internal philosophy of bringing ’power to the people’,– our whole idea was to give control to our customer base.” – Ari Sargent CEO

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Case study: Powershop – NZ incumbent utility establishes new company to reinvent customer engagement model (continued)

What they did

■ Targeted the connected and mobile customer segment.

■ Leveraged emerging technologies and social media to be able to stay connected with their customers.

■ The customers can track their usage, buy power as they need it, in multiple product forms, remotely.

■ Fundamentally changed the way their customers view their buying experience.

What results they achieved

■ Increased customer contact from 12 billing instances a year plus ’issue contacts’ to an average of 64 logins a year, excluding issue generated.

■ The innovative approach has led to over 90% satisfaction, limited churn, and high referrals.

© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 383650

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Questions to ask

As power and utility executives and leaders assess the changing landscape of the industry, we believe they should be asking the following questions of their organizations:

Are we able to respond to changing customer demands?

How are we monitoring marketplace activity?

How are we monitoring risk and evaluating new risks?

Are we conducting scenario planning on a regular basis?

Can we anticipate and shape what our regulators are planning?

Do we have the right technology to support our business objectives?

Do we have the right talent to get the job done?

Do we have the right strategic partners and alliances?

Are we agile enough to respond to disruptive forces in the industry?

© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 383650

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Customer excellence requires companies to evaluate their business models and operating models from end to end

Have we established an overall brand and vision around which the organization is aligned?

Has the brand been translated into delivery requirements around which we can differentiate? Have we successfully managed to leverage our brands as a bundled service for our residential customers? Have we segmented customers and developed customer specific delivery strategies?

Have we defined the capabilities needed to win? Do we have the processes, organization, and technology support in place necessary to support these requirements? Are we as efficient in these areas as we need to be?

Do we have the right metrics and ability to measure and report to sustain our ambition?

Ambition

Propositions and brands

Markets

Customer segments

Core business processes

Operational and technology

infrastructure

Organisational structure, governance

and risk controls

People and culture

Measures and incentives

Businessmodel

OperatingmodelIncreased visibility

and control

Management information and key performance indicator dashboards

© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 383650

The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.

John KunasekPartner, National Sector Leader forEnergy, Natural Resources & Chemicals