The expectations of shareholders are changing. Until recently, COM/Energy, like most utilities, had been regarded as a safe investment. However, because of the franchise's limitations and changes in the business environment, COM/Energy's present operation is no longer seen to provide a significant growth opportunity and a minimal investment risk. The basis for many investors' historical preference for utilities in general — a guaranteed return on investment — is being called into question by the changing environment. Under the circumstances, there might be a transformation in shareholder profile indicating a preference for significant growth in earnings or a higher rate of return as compensation for the increased risk associated with this business.

Regulators have been caught between two apparently opposing expectations. One is to respond to politicians' and environmentalists' pressures to promote a costly social agenda. This has been accomplished by incorporating social justice issues into rate formulation to satisfy public expectations. However, using rate increases as a means of accomplishing these objectives is no longer acceptable; the regulators find themselves under public and political pressures to decrease rates to satisfy customers and promote economic development. The regulators therefore would welcome those who offer innovative solutions to their dilemma.

Employees realize that the game has changed. They would like an environment that assures them continued job security, a quality of work life in which they can develop, empowerment to pursue new ideas, differentiation based on their performance, and the ability to build a productive career. They have regarded COM/Energy as a preferred employer and have responded, in turn, with loyalty to the system.

Recently, however, the employees' sense of job security has been disturbed by the negative impact of emerging national economic and industry trends affecting COM/Energy. They seem willing to go out of their way to help secure the advantages of working for COM/Energy. Under the circumstances, the management has an unprecedented opportunity to gain the cooperation of the employees in introducing positive changes in the company's direction and organization.

Customers are responding to their own economic pressures by demanding that energy services be provided at the lowest possible cost. They believe that the cost plus monopolistic system is not responsive to their demands. They appreciate the reliability and other benefits that the system has provided, yet find the price for maintaining and improving it unreasonably high. Industrial customers' expectations are fueled by suppliers promising them lower prices if regulations did not keep them out. Customers, therefore, welcome the promises of deregulation that would give them the power of choice.

Some customers are equally frustrated by a limited set of utility services that ignores their emerging needs and problems just because they do not seem to fall into one of the categories of conventional services traditionally provided. Integrated total energy services are value-adding initiatives that customers expect to have in the future.

Suppliers have seen major changes in their own business areas. They are aware that the advent of new competition and the existence of chronic oversupply will usher in increased uncertainty and insecurity. They have a considerable level of investment to protect. They need to hedge their enormous vulnerability against an increasingly unpredictable environment. They would like to be considered legitimate members of the family and treated as partners who are equally affected by the system and who have genuine stakes in its success. They therefore expect to be included in companies' strategic planning processes, to make sure they have a chance to contribute to the viability of COM/Energy and ensure the future of their businesses. The suppliers are prepared to enter the entrepreneurial game. However, they expect fairness and equal opportunity to provide their services based on a level playing field. They would welcome participation in alliances that strike a balance between risks and rewards.

The public at large, and especially environmentalists, are worried about the environmental threats of energy generation and consumption. They welcome moves toward conservation and away from pollution. They support some form of internalization of external costs associated with pollution and safety, but believe these measures can be taken even at lower prices. The public in general seems resigned to the inevitability of changes in energy's economic equation. Taking some of their cues from European initiatives, they expect utilities to be efficient and reliable, to project a positive public image, and to be generally regarded as a benign “green” operation.

No one knows, with any degree of certainty, what the future of COM/Energy, and all utilities for that matter, will look like. What is certain, however, is that the future of COM/Energy will not be the same as its past. In a small, saturated franchise, growing pressures for further deregulation, inclusion of environmental costs, increasing cost-effectiveness, and intensified competition are among the major forces changing the company's familiar landscape beyond recognition. The only certainty will be uncertainty.

As to what directions the energy industry may take, we identified the following possibilities:

Whatever shape it takes, the emerging new reality will be abundant with unprecedented threats and opportunities. In light of its possible impact, different stakeholders have already begun reassessing their expectations. Most important, the prospect of limited growth is a source of anxiety not only for the stockholders but for all the stakeholders of the organization. This is so because the viability of the system has been essentially growth-based. Insufficient growth produces two disturbing effects: internally, it will upset the built-in cost increase system; and externally, the emerging new game will disrupt the peaceful coexistence of the peer utility companies. The game will turn zero-sum; some will win at the expense of others. While growth opportunities in the franchise area have become limited, promising new opportunities in the unregulated areas are emerging. The implication of these changes is that to preserve the beneficial environment COM/Energy has enjoyed, a new approach to conducting the business is required.

Although efficient performance in energy distribution is a prerequisite to COM/Energy's viability, this commitment in and of itself will not be sufficient for creating the results the stakeholders truly desire. Facing lack of growth within the existing franchise and emerging uncertainty in the energy industry as a whole, COM/Energy is required to adopt a three-pronged strategy that will make it possible to explore and exploit the most favorable opportunities that present themselves on all dimensions of the value chain—technology, product, and market. Such a multidimensional strategy will enable COM/Energy to effectively extend its operational reach beyond the existing franchise and regulated framework.

Working from such an advantageous platform, the system as a whole will become greater than the sum of its parts. In the context of an integrated value chain, we will therefore define our strategy in terms of the following three activities:

For COM/Energy, deregulation is filled with opportunities. Considering the limitations of our franchise, we stand to gain more from deregulation than our competitors. The franchise is land-locked, whereas consumers are everywhere. By capitalizing on the uniqueness of COM/Energy, the three-pronged strategy will allow us to exploit emerging opportunities in energy markets.

The customer-oriented business units, energy supply systems and energy management services, will constitute the second output dimension of COM/Energy's value chain. They will operate outside the regulated environment.

The experience that COM/Energy has gained as a gas and electric holding company provides it with a unique understanding of customers' needs, which can be met by combinations of energy products and services. With the full support of the gas and electric segments, COM/Energy will develop a wide range of energy products and services to complement its traditional offerings. These services will encompass industrial/commercial cogeneration, packaged cogeneration, operation and maintenance of existing generation, and residential/commercial energy management services.

With regulatory reform and rapidly escalating energy prices during the 1980s, the application of cogeneration to meet energy requirements became increasingly common. Throughout the United States, cogeneration now represents nearly 10% of total electricity production — in New England, cogeneration represents greater than 10% of electricity generation. In recent years, cogeneration activity has been expanding rapidly. From 1988 to 1992, total electricity generation in the United States increased 7.9% while cogenerated electricity increased 74%. By 1992, the total market for cogeneration had reached roughly $4 billion. Cogeneration applications can provide customers with a payback of 1–4 years and a return on investment of roughly 15–30%.

Although the market for cogeneration is maturing, it has proven its applicability in many energy-intensive industries and is likely to experience continued growth for the foreseeable future. Utilities are experiencing increased difficulties regarding transmission facilities. As a result, providing localized sources of power that obviate the need for transmission facilities will become increasingly necessary. This trend toward distributed generation is only in its infancy, with cogeneration being the first commercial step. However, cogeneration will be the beginning of a greater wave of activity that will ultimately include such technologies as fuel cells and photovoltaic arrays.

To meet the need for distributed energy generation, the energy supply systems business unit will be involved in commercial and industrial consulting, development, service, and financing for cogeneration projects. This subsidiary will:

These services will be offered both inside and outside the regulated businesses' service territories, with the primary market being driven by where the best opportunities exist. The services will be marketed to industrials, such as manufacturing companies, or large commercial establishments, such as hospitals. Energy-intensive industrial firms, such as pulp and paper producers, chemical plants, and large manufacturing plants, are sites that can benefit most from cogeneration.

Although cogeneration is generally targeted to single-plant sites, it has applicability to multiple associated sites as well. Industrial parks offer a particularly attractive target market. This subsidiary will offer products that meet all the energy-related needs of the companies within an industrial park, including electricity, gas, and/or steam. Similar opportunities exist in large office complexes, universities, and shopping plazas.

A related opportunity exists for the more standardized version of cogeneration, referred to as packaged cogeneration. This option will also be offered by the subsidiary to commercial operations such as restaurants, hotels, or multifamily housing units. The value of packaged cogeneration lies in its modularity, low cost, and minimal maintenance. To offer packaged cogeneration, the subsidiary will align itself with vendors of packaged cogeneration technology.

This energy supply systems subsidiary will become a member of the COM/Energy family of diversified energy suppliers (electricity, gas, and steam). Cogeneration will become a service that complements the traditional offerings of the regulated subsidiaries. With this new business opportunity, COM/Energy will achieve synergy between its current product and service offerings. Involvement in the cogeneration market will provide an expertise that can be shared with the system so that the system obtains a better insight into the needs of specific market sectors.

Synergy will also be achieved with COM/Energy's other new business endeavor: an energy management services business unit. As opportunities for applying cogeneration technologies are explored, it is likely that related opportunities for energy efficiency improvements will be uncovered. These opportunities can then be capitalized upon by the energy management services subsidiary. Similarly, the energy management services subsidiary will likely uncover situations where potential customers could benefit from cogeneration technology and pass such information along to the energy supply services subsidiary.

It is also possible that other synergies will arise between proposed subsidiaries. An energy brokerage subsidiary could act as a fuel supplier to potential cogeneration customers by providing natural gas and oil and/or marketing excess electrical energy. Cogeneration plant operation and maintenance will also complement COM/Energy's experience at the Canal plant and steam facilities.

The business structure for the energy supply systems subsidiary will entail acquisitions or joint ventures. Under the latter structure, the subsidiary could act as prime contractor and project manager with the partner generally supplying its technology.

The shared services unit of COM/Energy will provide accounting, legal, and basic information services to this nonregulated operation. These services will be charged to a separate chart of accounts set up specifically for this operation and will be funded from this operation's profits. The subsidiary may also procure services from outside the system.

In addition to “before-the-meter” activities of the energy supply systems subsidiary, the company will engage in “after-the-meter” activities offering customers services and products designed to save money on utility services. The electric and gas distribution companies typically have not offered new services to customers; they have merely provided either kilowatt hours or BTUs. However, as deregulation progresses, new services will be created.

These new services are already provided to industrial natural gas customers whereby the transportation and commodity portions of a previously bundled product have been separated with FERC Order 636. This separation has allowed customers to establish futures contracts as a means to hedge energy costs. Similarly, in the electric utility industry, once hourly pricing of electricity takes hold and the appropriate technology becomes available in appliances, customers will be able to regulate usage of appliances in the home based on hourly price signals from the local utility.

Preliminary research indicates that the energy management systems and home automation markets offer great potential. Surveys show that U.S. business spends $7 billion on energy conservation in commercial buildings annually. Studies also report that the home automation market could exceed $3.5 billion by the year 2000. Many sizable utilities, such as American Electric Power and Southern Company, envision great potential for this market niche and have become involved as equity participants and testers of advanced energy management systems. Pilot projects with this equipment have yielded dramatic results in terms of improving load management and increasing customer satisfaction. By pairing with technology players in this marketplace, the company can increase earnings from its nonregulated subsidiaries while preparing itself to face the challenges of more aggressive competition and the growing need for better customer service.

In addition to offering new services, this subsidiary would also offer the following energy management consulting services to customers both inside and outside the electric and gas distribution territories:

In addition to providing energy management services directly to ultimate customers for a fee, the company may also act as a performance contractor for utility companies. The growth rate for utility DSM budgets shows that the New England market is mature and will not be growing at the rapid rate of recent years. The North Central area of the country is the fastest growing, and the West and Northwest are also growing fairly rapidly.

Because COM/Electric has significant experience in the area of demand-side management, a great deal of knowledge could come from the electric distribution company. The shared services entity would provide accounting, legal, and basic information services to this nonregulated entity. These services would be charged to a separate chart of accounts set up specifically for the nonregulated entity and would be funded from this entity's profits.

By establishing an energy management services subsidiary to promote these energy utilization products and services, COM/Energy will position itself to participate in this newly created industry between the utility and the customer.

Canal is a wholesale electric company providing power to a number of electric utilities, including COM/Energy subsidiaries. A portion of the electric distribution company's supply comes from investments in a number of utility power facilities, including the Seabrook nuclear station, which are managed investments as part of a portfolio of earnings. Canal also owns and operates Canal Unit 1. This unit sells its power to Boston Edison, New England Power, Montaup Electric, and Cambridge/Commonwealth Electric. The existing contracts to this unit end in 2001, at which time Canal will have a fully depreciated power plant that may offer a significant business opportunity.

Recognizing the presence of other fully depreciated facilities and the fact that capital and operating costs are relatively consistent across many units, a newly structured power supplier can be effective only with a lower priced fuel supply (compared to other units) or an efficiency advantage. Since efficiency advantages cannot be captured with older units, Canal is negotiating a potential business alliance with major fuel suppliers. To prepare for 2001, Canal 1 will pursue a distinct business strategy to continue the life of the unit and market power to existing and new customers. To achieve this, Canal will enter into the necessary business partnerships to produce market-based pricing with a competitively priced fuel supply.

Canal Unit 2 is jointly owned with Montaup Electric Company, and its capacity is split evenly between Montaup and Commonwealth/Cambridge Electric. Canal Unit 2 will continue to supply power under its existing contracts through 2010. With its conversion to natural gas, Unit 2 will not only lower its emissions, but will also have the flexibility to instantaneously switch between oil and natural gas. By utilizing the existing oil storage facilities and securing various natural gas supplies, Canal will have the opportunity to broker significant quantities of natural gas, oil, and electricity as markets develop.

Canal, although currently part of the franchise businesses, will eventually be managed as an autonomous unit with customer and supplier relationships. As an autonomous unit, Canal will be responsible for managing its operations and associated costs to meet market expectations. The first phase of this transition will be to establish a project venture as part of the marketing and reengineering of Unit1 to obtain extended-life customer contracts.

Now known as Hopkinton LNG, this storage facility subsidiary will continue to supply natural gas to the gas distribution company during the coldest winter months. Given the prospect of deregulation, Hopkinton LNG management will be investigating other business opportunities, which include the marketing of liquefaction services, emergency backup services, and peak shaving services. The development of these opportunities depends upon the economics of the gas distribution company's continued usage of LNG for its own purposes.

This subsidiary also owns a satellite vaporization plant in Acushnet, Massachusetts, with additional storage capacity. The Hopkinton facility is operated and maintained by Air Products and Chemicals, Inc., under a long-term contract. The Acushnet plant is operated and maintained by gas distribution personnel.

Steam is currently supplied from two Cambridge Electric plants, Kendall and Blackstone, through a four-mile distribution system of steam supply and return piping. As a nonregulated entity, the steam company will continue to provide steam to commercial and industrial customers in Boston and Cambridge, including a hospital, a museum, two universities, a manufacturer, and a genetic researcher. This subsidiary will be developed as a separate entity with its own marketing and technical staff.

The concept of district heating systems using steam has received the backing of the state of Massachusetts. In its 1993 Energy Plan, the state recommended the support of district energy systems and thermally oriented cogeneration. With this state support and by applying the expertise it has gained in operating its Kendall and Blackstone cogeneration plants, the company will foster the development of other potential district heating systems established through its energy supply systems subsidiary.

Also, through business partnerships with MIT and Boston Thermal (organizations with contiguous steam systems), the company could establish interconnections to existing district heating systems and expand its customer base beyond the current geographic area. The current steam company system is economically more efficient for the customer than the Boston Thermal system because the latter contains no condensate loop. Last, turbine modifications to the Blackstone plant could also offer inexpensive incremental power to be brokered by the energy brokerage subsidiary.

Brokerage of energy is a major area of opportunity that is evolving. For many years, oil has been purchased on a commodity basis with associated futures options. With the implementation of Orders 436 and 636, natural gas can also be purchased on a commodity basis. Similarly, with the introduction of self-generation as a major source of power, electricity will be purchased as a commodity in the very near future. With these changes, financial instruments are now being introduced as a means to establish short- and long-term pricing options. The introduction of futures contracts is the result of the markets' need for greater certainty regarding energy prices.

With the utilization of oil, gas, and electricity hedges, new products will be launched to meet customer needs. These products will be required in the marketplace as a way for utilities and customers to minimize price risks. In addition, the coupling of fuel and electricity options will allow for contract innovations that will change the industrial and commercial markets.

COM/Energy is a major purchaser and supplier of oil, natural gas, and electricity. To effectively carry out its business in the future, it will be involved in futures markets. Recognizing the multitude of physical energy options that the system controls (i.e., Canal Unit 2 oil/gas interchangeability, LNG storage, multiple fuel supply contracts, oil storage, natural gas supply and transportation rights), the brokerage of energy represents a significant business opportunity.

Energy brokerage will serve all the units of the value chain. This subsidiary will be engaged in oil, electricity, and natural gas brokerage. The unit will coordinate and manage all activities necessary to develop energy sales opportunities outside of those that must be kept within the regulated entities. In the electricity market, the subsidiary will act as a power marketer of the low-cost power generated from Canal 1 and other units. In the natural gas market, the entity will procure natural gas for cogeneration customers, power generation, and other select customers.

In the oil market, the subsidiary will utilize various oil storage options and contracts to meet power generation requirements. Finally, this business unit will serve as the access mechanism into markets that are speculative, out of normal reach, or unfamiliar to existing business units.

Energy markets are becoming increasingly global in nature — events in Europe, the Far East, and Latin America have direct consequences for energy markets in the United States. This has been true in the oil industry for years and is becoming more the norm in other energy markets, including gas and electricity. Whether in the form of industry restructuring (British electricity markets) or cross-border transactions (Canadian natural gas), events throughout the world are directly affecting, or influencing the future of, domestic energy industries. As a result it is increasingly important that COM/Energy not limit its perspective to the United States, but rather keep a watchful eye on events and technologies evolving around the globe.

In this vein, the international operations unit will be responsible for monitoring and evaluating trends in energy markets outside North America. This unit will continually search for ways to leverage new ideas from other parts of the world into the other COM/Energy business units. Additionally, this unit will serve as the stepping stone for future overseas ventures that capitalize on competencies resident within other COM/Energy business units.

Already, COM/Energy has established alliances with organizations based in other countries (Venezuela and Canada). The international operations unit will continue to seek out and create further alliances in global energy markets. Whether leveraging a competency in a market outside the United States or capitalizing on an emerging global trend within the United States, the international operations unit will depend initially upon partnerships in any ventures it undertakes.

The service company intends to transform itself from an overhead center, engaged in providing support services to other units operating in a cost plus environment, to a viable, competitive, and state-of-the-art performance center generating profit while making positive contributions to the success of other members of the value chain. The transformation of the service company is contingent upon the development of the following core competencies:

The strategic intent of the service company is to integrate the above core competencies into customized packages of products and services that will significantly add to the competitive advantage of the value chain. Such multidisciplinary know-how is brought to bear on cross-functional teams of experts assembled to offer energy-specific products/services, turn-key operations, and consulting and education services. To make a clear and lasting break with its past as an overhead center, the service company will use the following guidelines for product offerings:

All preparatory work leading to drafting of proposed corporate policies will be carried out by ad hoc committees chaired by one of the parent company's corporate vice presidents and staffed by nonpermanent members drawn from relevant parts of COM/Energy System and/or its environment. These committees will dissolve once the issues have been resolved.

The service company will divorce all activities that involve providing COM/Energy with corporate control, monitoring, and auditing functions. Like any other customer, however, the corporate office of COM/Energy System may buy services from the service company.

Financial systems will play a critical role in realizing the value chain. It will act as the system's in-house investment center, and provide the businesses with the vital seed money and initial leverage that they need to achieve viability. It will effectively serve the capital and the cash-flow needs of all the business units. Leveraging COM/Energy's financial resources, financial systems will continue to develop relations with bankers and other institutions to reinforce the system's financial capacity in launching new projects and/or expanding the existing ones to further realize the potential of the value chain.

To discharge the responsibility for latency, synergy, and throughput processes, the executive office will be equipped with a core knowledge pool. The core knowledge pool will be the system's center of expertise that develops and disseminates state-of-the-art knowledge throughout the value chain. All the essential functions of the executive office will be carried out by professionals who operate in pools of expertise and work in an interdisciplinary manner on specific projects. Each member of the pool can be involved in more than one project. The main outputs of these projects include creation of startup businesses, improvement of existing operations' effectiveness, and design of measurement, reward, and early warning systems. Generating system-wide “bench strength” and fostering an entrepreneurial culture are among the by-products of these corporate activities.

The core knowledge pool will be staffed by a select group of top-notch experts who will rotate among all activities. They will be drawn, temporarily or permanently, from internal businesses and recruited or contracted from external sources to contribute to the richness and variety of the system's gene pool. Initially, the nucleus of the core knowledge pool will consist of the design team members who will be involved in the development of design details for the new architecture. These activities will provide an environment for learning by designing, learning by doing, and earning while learning. Core knowledge members will offer their expertise in the context of project teams designed to produce integrated solutions.

The core knowledge pool will also be responsible for creating a common language and acting as a center to reinforce organizational learning. Organizational learning will include reciprocal traffic of knowledge and mutual exchange of people. No new professional will enter the system without first being initiated through the core knowledge pool.

Members of the core knowledge pool will have a good insight into environmental trends, technological developments, and changing customer needs. They will operate in modular cross-disciplinary teams and, through the mechanism of project management, may be assigned to other shared services for systems development and/or to line-management roles for carrying out special missions. The core knowledge pool will also be responsible for developing models for the throughput system, target costing, the measurement and reward system, and an internal market mechanism.

The following description elaborates on the essence of a learning and control system. The system, which underlines COM/Energy's new concept of empowerment, will be compatible with the design's desired specifications and the preferred style of COM/Energy's management. The system will change the nature of control from “supervision” to “learning” and the nature of authority from “power-over” to “power-to.” Although learning and control are highly interrelated aspects of a single system, each aspect is described separately below to facilitate understanding.

Effective control involves, essentially, duplication of power. Duplication of power will be achieved if the decision process, rather than the individual decision makers, is the subject of control. This will happen when decision makers collectively develop a shared understanding and ownership of decision criteria.

Decision criteria define the rules of decision making. Decisions themselves are applications of the decision rule to specific situations. What operationally distinguishes decision criteria from decisions per se is the existence of some degree of freedom in decision criteria. The absence of at least one degree of freedom virtually converts the decision criteria to decisions.

Decision criteria can be grouped into two categories: policies and procedures. A policy is a decision criterion at a higher level of abstraction. Policy essentially deals with choice dimensions (variables involved), why questions, underlying assumptions, and expected outcomes. Policy decisions are value-loaded choices that are explicit about their implications for human, financial, and technical domains. Procedures, on the other hand, are derived from policies. They deal with how questions. They explicitly specify the method or the model to be used for applying policies to specific situations. Policy making will deal with at least three sets of decision categories:

Learning will include an early warning system that will call for corrective action before the problem has occurred. Such a system will monitor, on an ongoing basis, the validity of the assumptions on which the decision was made, the implementation process, and intermediate results.

At the corporate level, the management committee, consisting of the CEO and all direct reports, will be the vehicle for institutionalizing the learning and control system. In this case, the core knowledge pool will provide the technical support for designing and operationalizing the system.

At the business unit level (specifically the two regulated businesses), the operation of the learning and control system will be the responsibility of the internal boards of the business units, collectively referred to as the nested network. To maximize the effectiveness of the system, it is recommended that each board, which will consist of members of the executive office and the president of that unit, invite the president's direct reports to participate in the board's deliberations. Later on, the components at the business units, if so desired, may choose to create management committees in their own operation to adopt the learning and control system described above. Further evolutions would eventually cover the whole organization by a nested network. As such, the nested network will facilitate COM/Energy's vertical and horizontal integration. The ongoing activity of the nested network will provide integration along the time dimension as well. The vertical, horizontal, and temporal integration brought about by the activity of the nested network will also ensure the compatibility of ends and means at all levels of the organization, making coordination automatic and self-administered. Finally, the new design is expected to usher in a mode of organization that thrives on the following drivers for change: