I should prepare you from the beginning that

this article contains some human emotion and

personal experience along with the technical in-
formation that the title might suggest. When-
ever I talk about changes needed in the utility
industry, I think about the people issues first and
the technology second.
For those of you who are new to the industry,
or just young, you may not know that the very
nature of the utility business was about provid-
ing service, lifestyle, and support to the commu-
nity. This was achieved through the efforts of
dedicated and proud employees who joined util-
ity companies believing they had a job for life.
Some might say good riddance to this notion
from the past. Others might miss the past like a
childhood friend who no longer calls.
The very nature of the utility business was about
providing service, lifestyle, and support to the
community.
Either way, I believe that the differences be-
tween our industrys embedded culture and
the newer, more competitive culture is part of
the reason for the communication gap be-
tween Finance and Production. Many of our
Production employees were hired in the good
FinanceOrganization
Bridge between Finance and Production
Is Information, Not Culture Change
Ralph Sargent
old days. These employees seem unimpressed
by the current trend to bow to the demands of
the dollar.
I am a fourth-generation utility person. My
great-grandfather was a mechanical engineer
and partnered with Thomas Edison on the first
US power plants. He later started Sargent and
Lundy and brought my grandfather into the
business. My father broke rank and went to law
school and then decided to enter utility man-
agement from the legal side. I started utility
work with a graduate degree in business. I grew
up enmeshed in the dialogue of the power busi-
ness. When I started my first job with a utility
in Colorado, I felt like I had come home. I knew
the issues and many of the players and I lived
the culture. I knew I wanted to play a part in
the family tradition.
WORLD OF FINANCE
A little more than a decade later, I was elected
vice president of finance and treasurer of Public
Service Company of Colorado. My path to that
position was circuitous and nontraditional. I
spent four years as a financial officer during
times of major debt restructuring, mergers, asset
acquisitions, cost-cutting programs, deregula-
tion, pending market competition, lowering of
the bond ratings, and environmental con-
sumerism. In addition, I participated in the de-
commissioning of a nuclear power plant that my
father had helped build. I learned the company
from the shareholder point of view: the goal is to
achieve the needed earnings per share (EPS) to
attract investors and maintain the financial sta-
bility to keep Wall Street supportive.
The numbers always made sense. There were
financial metrics that told an undisputable truth
Ralph Sargent is the vice president and general
manager of Global Power Consulting with In-
vensys in Houston. He has almost 30 years of
experience in the power industry, having worked
in executive positions for utilities, consulting
firms, and OEMs.
14 2005 Wiley Periodicals, Inc. NATURAL GAS & ELECTRICITY APRIL 2005
about the near- and long-term future of the
company. Most of the important issues could be
assessed by their contribution to shareholder
value, and the few that did not translate to EPS
were perhaps less relevant.
The following metrics were the signposts of
success:
EPS
Dividend payout ratio
Book value
Return on common equity
Return on rate base
Cash flow
Debt/equity ratio
Times interest covered
Net income as a percent of revenue and
Cost of capital
I believed that Finance was at the center of
the company, that it was the heartbeat that all
others needed to adhere to, and it was the fu-
ture. In fact, when it came to drawing a line on
the approved and disapproved capital projects
for the coming year, it was curious that the fi-
nancial organization would even be questioned
by line management as to the appropriateness of
budget cuts and disapproved capital expendi-
tures. It seemed clear that many of the line exec-
utives just did not understand the new reality of
the business. They seemed to be from the old
school and unwilling or unable to change.
I became a strong advocate of change man-
agement theory, believing in the importance of
a new utility culture that would be necessary for
utility companies to thrive in the deregulated
and competitive energy marketplace. It later be-
came apparent that the harder a company tries
to change its culture, the more embedded the
principles of resistance become. The voices of
opposition go underground, and even though
change seems eminent, it simply drifts along
without real progress or failure. The focus moves
from the reasons for change to battling the re-
sistance to change.
Thus, it was back to behavioral theory and
Pavlov. If we communicate better and provide
specific direction, well-defined expected behav-
iors, clear outcomes, performance measurement,
and appropriate rewards, everyone will fall in line
with a new direction. This approach has the ben-
efit of avoiding the values and belief systems
that get so intertwined with cultural change and
seems to make the issues less personal.
The downside of the behavioral approach is
that it is less personal and requires a level of ac-
countability and consequence that has been
lacking in the industry for decades. The first
thing that was needed was education. It seemed
clear that the line management would certainly
understand the importance of the financial met-
rics if they knew more about how the company
made money and compensated shareholders. A
great transfer of knowledge was under way, be-
lieving that every line executive, manager, su-
pervisor, and employee within the Production
Division needed to know the basics of utility fi-
nance. We missed the idea that it might also be
beneficial if the Finance Division knew some-
thing about Production.
WORLD OF ELECTRIC PRODUCTION
One fall morning, I arrived at the office to
find that I had been appointed by the board of
directors to a new position, vice president of
electric production and system operations. I had
been inside a few power plants and knew the
difference between a boiler and a turbine. I also
knew a little bit about the economic benefits of
various fuels. I was familiar with the budgets
and, like all people from Finance, I knew that
the Production budgets were padded and unre-
alistic. However, I wanted to appear humble.
Thus, I approached my first staff meeting as the
head of Production with reserve. We struck a
deal. I would help the plant managers under-
stand the utility business, and they would help
me understand electric production. I was in way
over my head.
During my first week in Production, I re-
ceived a call from our largest coal plant regard-
ing a derailed coal train sitting at a 45-degree
slant on a hill just inside the plant gates. I re-
moved my tie, grabbed my shiny new hard hat,
and raced to the plant. Once there, I realized
that I had no idea what to do next. Thus, I
started walking down the track to ponder the
situation. A coal handler walking toward me
asked if I was the new vice president and after
my affirmation, he proceeded to explain that the
problem was one that I had caused. I asked my-
self how I could have caused the problem in a
APRIL 2005 NATURAL GAS & ELECTRICITY 2005 Wiley Periodicals, Inc. 15
single week. He replied that in my role as vice
president of finance, I had excluded track re-
pairs from the capital budget three years in a
row. Welcome to the new world.
During my first year in Production, I became
familiar with the following performance metrics:
Equivalent availability
Equivalent forced outage rate (EFOR)
Lost-time incident rate
System reliability
Cost per megawatt-hour
Coal utilization rate and
Outage costs
The shareholder perspective seemed less
pressing in the plant, where the difference be-
tween success and failure could be measured in
the unexpected events of the moment. When a
plant, substation, or transmission line goes out
of service during a period of high demand, the
solution seems to have less to do with share-
holder profits than it does with keeping the
lights on.
During unplanned events that take a plant
off-line, the world inside a power plant be-
comes the center of concern, and success is all
about teamwork, cooperation, pride, and expe-
rience. The hours are long, and the environ-
ment is noisy and either too cold or too hot. It
did not take long to realize that the work was
not being done to put money in the sharehold-
ers pockets; it was being done for the neigh-
borhood without power, the employees pride
in outperforming another plant, or some other
personal rallying point. Employees exhibit a
level of commitment that can only be expressed
in terms of pride and determination in their
pursuit to provide better service to the commu-
nities in which they live.
During unplanned events that take a plant off-line,
the world inside a power plant becomes the cen-
ter of concern, and success is all about teamwork,
cooperation, pride, and experience.
To the employees working in a power plant,
electric production is the heartbeat of the com-
pany. Are they right? Not according to the fi-
nancial types on the executive floor of the cor-
porate office, who tend to give lip service to the
phrase in the Corporate Mission Statement
about valuing our employees.
Maybe the question is wrong. It appears that
all employees of any company wish to feel that
their work is at the epicenter of corporate suc-
cess. It seems only normal that both Production
and Finance would see their own responsibilities
as the most significant for the company. In
truth, both organizations are critical to success.
Thus, a better question might be, How can the
contributions of the two organizations be meas-
ured by a common set of metrics? Perhaps the
bridge between Finance and Production has
more to do with measurement than it does with
culture. I have arrived at a point where I believe
a few ideas to be true.
TRUTH NUMBER 1: INFORMATION VITAL
Financial metrics are the ones required by
the investors and owners of the business. As im-
portant as the production metrics are to Pro-
duction, they mean little to the driving forces
that provide financial support for the business
and enable its long-term growth. Truth Num-
ber 1 is that the production metrics need to be
converted into financial metrics. For example,
what is the economic value of a 1 percent im-
provement in availability, or the cost of a 1 per-
cent drop in availability? How much can you
invest to justify a 1 percent reduction in EFOR?
What is the opportunity cost of missed com-
munication between dispatchers and plant op-
erators? What is the value of a 1 percent im-
provement in coal utilization? How much does
it really cost to bring a plant back on-line 12
hours late?
Availability, EFOR, coal utilization, and outage
costs all have changing values depending on the
changing aspects of the market clearing price.
Admittedly, these are hard questions to an-
swer, especially if you want the answer in a
timely manner. With changing market rules,
deregulation, and competitive pricing of fuels
and electricity, the answers are complicated by
the timing factor. Availability, EFOR, coal
16 2005 Wiley Periodicals, Inc. NATURAL GAS & ELECTRICITY APRIL 2005
utilization, and outage costs all have changing
values depending on the changing aspects of
the market clearing price. The cost of being off-
line can vary from $30 a megawatt-hour to
$1,000 a megawatt-hour in the course of an
hour. Values are also impacted by contractual,
transmission, and environmental constraints
that may force suboptimal decisions regarding
dispatching priorities and fuel use. We thought
we needed more data to answer these questions.
Now we have more data than can we can accu-
rately assimilate.
TRUTH NUMBER 2: INFORMATION
SOMETIMES ILL-DEFINED
The second truth is that all production
metrics have a financial interpretation. Hav-
ing participated in hundreds of discussions
about financial and production metrics, it
seems safe to conclude that given an attitude
of cooperation and understanding, financial
and production employees can find the bridge
between the two ideologies. They may not
know how to get the information or how to
calculate the measurement but they can always
find the bridge that will link production per-
formance to a financial equivalent.
It seems safe to conclude that given an attitude of
cooperation and understanding, financial and
production employees can find the bridge be-
tween the two ideologies.
We asked for more data and now we have
more than we want. What we lack is informa-
tion, packaged in usable segments, and knowl-
edge about real-time changes in our forecast
assumptions. At present, most corporate of-
fices operate on more sophisticated IT plat-
forms than the power plants within the same
company. Following a merger or asset acquisi-
tion, this problem is compounded. There ap-
pears to be a universal frustration with wanting
something that is hard to describe and buying
a solution from a knowledgeable entity that
falls short of our expectations. Many compa-
nies have hired internal IT developers to build
their own solutions, believing that this is the
answer to controlling costs and managing sat-
isfaction. Most companies now have a combi-
nation of vendor software and legacy systems
and are dealing with the complexity of contra-
dictory information and an overabundance of
partially used software.
Most companies now have a combination of ven-
dor software and legacy systems and are dealing
with the complexity of contradictory information
and an overabundance of partially used software.
TRUTH NUMBER 3: ALL OF IT IS OUT
THERE SOMEWHERE
If people can accurately describe what they
want to see, define the format and time frame in
which they want to see it, and describe what
they want to do with the information, todays
technology can provide it. Executives and man-
agers seem to be waiting for technology to catch
up with the needs of the industry. In truth, tech-
nology is waiting for industry leaders to fully
comprehend what is already available. Maybe
the waiting is more about stalling because
most of us are skeptical; we have been over-
promised by software vendors for so long that
the idea of a technology solution that really
works seems improbable.
We have been overpromised by software vendors
for so long that the idea of a technology solution
that really works seems improbable.
BIG 5 CONSULTING
Enamored by this question of finding the
right connection between Production and Fi-
nance, in 1999, I joined a Big 5 consulting
firm that was deeply committed to solving this
complex issue in the power industry. The most
beneficial aspect of that experience was that I
finally got to the right question. If a utility ex-
ecutive could sit down at his/her laptop, desk-
top, Palm, or Blackberry and review anything
they wanted to see, in the right context, and at
the right time, what would he/she want to see?
What would a day in the life of an executive/
manager be like if he/she had access to the
right information, knowledge, people, and
APRIL 2005 NATURAL GAS & ELECTRICITY 2005 Wiley Periodicals, Inc. 17
statistics? And while we are at it, why not also
have the capability to do something with the
information and track the results of the deci-
sion against other alternative choices that
could be made?
I took the challenge and defined exactly what
I would have wanted to see when I was in the
executive chair. I did this without constraining
myself to the technology question of whether or
not it was possible. I then found a person, David
Bellman, who was more gifted in the field of in-
formation technology than I and asked him to
create a mock-demo version of my concept. I
did not need this demonstration to run on real
data; I just wanted to test the concept. Between
the two of us, it took less than a week to design
and develop a tool that would have made my life
as a production executive or finance executive
infinitely more efficient and ultimately more
valuable to the shareholders.
It took less than a week to design and develop a
tool that would have made my life as a produc-
tion executive or finance executive infinitely
more efficient.
This demo was shared with dozens of execu-
tives and managers from the power industry and
almost all of them, regardless of functional re-
sponsibility, agreed that the tool had tremendous
value. In fact, some asked if they could place an
order. One chief executive officer turned to his
executive team and simply said that he wanted
our idea and that it was up to them to work out
the details of getting it done. It was a moment
that every salesperson dreams about.
Unfortunately, there was not any real tech-
nological capability behind the demonstration.
Of course, one of the characteristics of the Big 5
consulting firms is that they can do anything
that the customer is willing to pay for. The con-
cept was right on target and the desire to de-
velop the idea was strong, but the ability to pull
data together from different databases, in the
right context, in real time was a limiting factor.
The advancement of middleware and portal
technology showed some potential but, in the
end, did not have the capability of delivering
what was required.
OEM EXPERIENCE
I am closing in on the solution. I have gained
a lot of knowledge about the performance met-
rics, decision processes and requirements of the
utility business. I have participated in hundreds
of discussions about defining the results of
shared metrics across functional boundaries and
I have reviewed the state-of-the-art offerings of
the consulting firms. The last stop to date is with
the original equipment manufacturers (OEMs)
that have been providing hardware and software
technology to the power industry since the first
light bulbs.
I accepted a job with Invensys Process Sys-
tems to lead a Power Consulting Group that
would focus on bringing new technology to the
market. Like its competitors, Invensys has sup-
plied technology to the power industry for
decades and continues to view the power indus-
try as a major market. However, my surprise was
finding the technology that could make the
demo real. The capability to pull together dis-
parate data from different data feeds and put
that data into the contextual format needed to
present real-time assimilated information to se-
cured recipients has been accomplished.
Technology today can get the right data to the
right person in the right context at the right time
to promote the right action for the right result.
In addition, the technology is capable of
monitoring performance of equipment from
different geographies, predicting failure, and
transferring information to those people who
manage the assets. Recordkeeping and report-
ing capabilities provide a history of results that
can be easily compared against possible scenar-
ios in the past, present, or future. Also available
are a number of programs that can help opti-
mize the dispatching of plants against changing
market rules, fluctuating prices, and fuel avail-
ability, as well as calculate a variety of financial
strategies with regard to hedging, buying and
selling environmental credits, buying futures,
and selling short. Plant managers can witness
the real-time performance of the plant opera-
tors as they move the plant in compliance with
dispatch instructions, and marketing can get
18 2005 Wiley Periodicals, Inc. NATURAL GAS & ELECTRICITY APRIL 2005
instant information on the availability or short-
fall of electricity, coal, or natural gas. In short,
the technology today can get the right data to
the right person in the right context at the right
time to promote the right action for the right re-
sult. All of this can be tracked, monitored, and
reported based on the needs of a companys
management team. If you can describe what
you want to see to improve your job, it can be
delivered.
It would be misleading to suggest that Inven-
sys is the only company with this capability be-
cause I do not really know if it is true or not.
What I do know is that we have successfully in-
stalled the first version of this technology for a
utility in North America and that the concepts
have become a reality.
BACK TO THE BRIDGE
For too many years, the prevailing opinion has
been that the bridge between Finance and Pro-
duction was about changing perspectives about
the business. Often not stated was the notion that
the perspective needing to change was that be-
longing to Production. I no longer believe that
the bridge between these two functional areas is
about changing anyone. The cultures of the fi-
nance types and the production types are well in-
grained, and they are good. Both cultures provide
what is necessary for the benefit of the sharehold-
ers as well as the communities that we serve.
We will miss some of that old school loy-
alty when the generation of baby boomers fi-
nally decides to retire. With an estimated 40
percent of the workforce scheduled to retire
within eight years, we will be challenged to staff
our production facilities with people who are as
skilled as the ones who are departing. Almost by
necessity, technology will have to play a more
prominent role.
Bridging the gap will require a concerted ef-
fort to define results and the specifics about
what needs to be measured, monitored, and
tracked. Production management should con-
tinue to view the metrics that are necessary for
Production, and these metrics can be con-
verted to dollars to provide a common lan-
guage with Finance. Each organization has the
responsibility to define its own, specific needs
in order that information shared is beneficial
to the entire company. The difficulty around
developing the right set of metrics is that it
sounds easier than it is. Companies will evalu-
ate and compensate for performance for an en-
tire year and often spend only a couple of hours
figuring out what metrics to use. The key to
bridging the gap between Production and Fi-
nance is taking the time to understand the
measurements of success.
SUMMARY AND CONCLUSION
My years of working in the power industry
have brought me to a set of generalizations that
will undoubtedly have some exceptions. That
being said, they are as follows:
The struggle between Finance and Produc-
tion regarding budgets and performance is
real and needs to be resolved.
The cultures of the two groups are different,
and that is perfectly okay. The resolution of
differences will not be based on the princi-
ples of change management.
Utilities tend to be lower on the technology
curve than many other industries and appear
reluctant to stretch too far ahead of what has
been well tested by their peers in the industry.
The opportunity for financial gain is in the
range of tens of millions of dollars a year, and
there are solutions available.
Most executives and managers cannot tell
you how the production fleet is really doing.
They do not know how much each plant is
contributing to shareholder value or what
each plants actual profitability was the day
before. They can approximate what they
made but they do not know how much
could have been earned if the fleet were per-
forming optimally.
Most executives believe that they are doing
the right things to be successful in this chang-
ing marketplace. They also indicate a lack of
confidence in the quality of their decisions
based on limited or conflicting information.
Today, when technology replaces itself every
two to three years, it is amazing that anyone can
actually stay on top of whats available in the mar-
ket. We have advanced our capability to send and
receive data but we all struggle with the difficulties
of trying to make sense out of what is available,
what works, and what does not.
APRIL 2005 NATURAL GAS & ELECTRICITY 2005 Wiley Periodicals, Inc. 19