Case study

Strategic Management: Power Company Case

Across the United States, regional power companies have had (and still have) some degree of monopoly in their respective trading areas. They normally do not compete against one another, there are major barriers to entry in the region of each, and in some ways, they are almost quasi-governmental. Basically, they distribute electricity and natural gas to customers through infrastructure that is aging throughout the country. General sources of their electric power are hydroelectric dams, coal-fired plants and a reducing number of atomic fission plants, among others. They are mostly a regulated industry, though there has been some limited deregulation (with some negative results as California experienced with Enron) as affects their larger customers. Many of the major power companies, besides generating their own power, need more capacity and thus are also buyers of power through independent producers on what is called the “daily spot market”. This includes the principal utilities in California.
There are various alternative sources of power that are complicating the environment for the major power companies—solar, wind power, etc. They can be a source of power to the power companies, but they can get the utilities entangled with requirements to buy power therefrom, or their customers themselves may have the power source (e.g. solar on roofs). Adding to that, it is possible a new energy source could be in the offing, currently estimated as being readied for 2040 (see article, “Inside the Quest for Fusion, Clean Energy’s Holy Grail,” by Lev Grossman, Time Magazine, Oct. 22, 2015), called fusion.
However, the pace of scientific accomplishment can never be predicted, so for purposes of this assignment, we will assume the odds are high that it will arrive between five and ten years from the present…in other words, it is likely a disruptive change to the monopoly utilities is soon coming, but the industry does not know precisely when. This could vastly change the economic foundations and perhaps the existence of these monopolies, since the cost for the power from fusion could be far less than what is paid now for fossil fuels. If this alternative power source comes to pass, the various parties in the industry (1. The major utilities; 2. The current “alternative” power sources—solar, windmills, etc., and 3. The fusion company(ies) themselves) could (or should) devise strategies to lead them into the near and mid-term future. Thus, there are three separate levels of entities that need to do strategies.
To approach this group project, the tools learned thus far can be applied, to understand the industry, its capabilities and the challenge before it.

The assignment:
1.
First Section:

Provide an analysis of the power industry in the U.S., its history and how it works in general, how as a rule the individual power companies work, how power company costs and prices are developed, how they are regulated (and deregulated), how power (electricity) is moved from place to place and so forth. From this paper, we should be able to achieve an understanding of the industry’s history, how it works today, and if there are widely known alternative approaches or if most of the companies conform to the industry.

This first section should include the history of the industry and how the system currently works, then apply an analysis of the industry’s external factors affecting (or pressuring) the industry. From that platform, give some preliminary thoughts on what the likely reaction would be were fusion to be developed in the next 5-10 years, meaning, how the external factors are likely to react.

Note: At any point, it will make the project more approachable and manageable to focus on a single large utility, e.g. PG&E, Southern Companies, So. California Edison, Pennsylvania Power and Light). However, you should avoid smaller regional applications like SMUD, Peninsula Clean Energy, because they are really smaller usages of the larger entities. So, for the history, it can be done on the industry, you can decide for such tools as PESTEL whether you want to limit the focus to a single company there, or when you get to the next section.

1. Second Section:

Using the tools you now have, develop an analysis for your selection of a major power utility (e.g. PG&E, PP&L, Georgia Power, So. Cal. Edison) of the power industry (i.e., Porter’s Five Forces), including its competitive environment, and (from what you can research and see from outside), of the internal environment (Core competency, RBV, VRIO, SWOT, etc.) Then, going from a “snapshot to a movie”, predict what would happen if the government further deregulates, or does not continue with the regional “awards” bestowed on the power companies (meaning their territories that are more or less protected), or the fusion area develops and considers how best to reach the public and its own profitability.
The purpose of these two sections will be laying the groundwork for creating strategies (in the second paper of what the power utilities (and the other players) should do, if fusion comes. You might want to think of the paper as doing a backgrounder for a magazine article or a report to regulators, so you need to portray the status quo, the pushes and pulls, and what forces could come at the utility.