Canadian power utilities need to get serious about cutting costs as regulators get tougher: KPMG
Firm says utility providers need to recognize importance of developing cost-optimization programs
TORONTO—Canadian utility providers “know they must gain more control over operating costs” to secure rate increase approvals from regulators, according to a new KPMG report.
“Across Canada, regulators at all levels are pushing back on rate increase requests, and insisting providers demonstrate a strategic approach to cost-cutting before agreeing to further rate increases,” KPMG Canada partner and national cost optimization leader Tom Vandeloo said in a statement.
According to results from KPMG’s Between the Regulator and a Hard Place survey, 86 per cent of respondents cited the need for capital investment in infrastructure renewal and expansion as the number one reason for requesting rate increases, with rising operating expenses coming second at 67 per cent.
Over 62 per cent of respondents have sought rate increases in excess of three per cent over the past three years, according to KPMG, and regulators have granted that level of increase less than half the time.
Another 62 per cent of respondents noted reducing operations, maintenance and administration costs as the number one cost-cutting measure in light of regulator push-back, with cutting capital programs (38 per cent) and eliminating staff (29 per cent) as other key cost-cutting measures.
Almost all of respondents (95 per cent) felt the level of regulator resistance to rate increases was moderate to high, with only five per cent declaring it low.
Recognizing the study’s findings, KPMG says it is clear utility providers recognize there is much work to be done in developing formalized cost-optimization programs in a complex economic climate.
In addition, the firm says if $300-billion is needed between 2012 and 20301 to maintain and upgrade the country’s power supply, then it is “imperative providers devise strategies to work with regulators to deliver reliable, cost-efficient and environmentally-friendly power.”
According to KPMG national leader of power and utilities Muriel McGrath, the firm found utility providers are not taking on the level of systematic and strategic cost-cutting regulators want to see before they allow ratepayers to be taxed any further.
“We know better alignment between regulator expectations and the industry’s truly controllable cost drivers is critical in developing an effective cost-optimization plan,” she said.
According to report recommendations, utility providers need to improve efficiency metrics, better manage risk on larger infrastructure projects and use highly structured cost-optimization approach to manage operational expenses.
By identifying the areas where cost-optimization opportunities are the greatest and applying strategies and approaches that go beyond cursory, optical cuts, the report says businesses can greatly improve regulator relations and the probability of rate increase approvals.
“Utility companies insist that rate increases are critical to funding infrastructure renewal,” Vandeloo continued. “Despite their efforts to cut costs, regulators are pushing for formalized cost-optimization programs and, more importantly, results.”