By Carl Mycoff, Managing Director, Mycoff, Fry & Prouse LLC
When I was in high school, drivers’ education was a required course. The course included an Ohio State Police video showing the impact of crashes, to frighten adolescent drivers. I still remember what I learned from it — the most important part of a car is the driver.
A critical component of finding the right drivers for your utility is proper compensation.
Public power decision makers are constantly evaluating the costs and benefits of capital investments and equipment. However, hiring the right drivers is often based on emotion or politics. Utilities that take a logical, measured approach to hiring and pay experience better performance. It isn’t just about money — it’s really about the allocation of limited resources.
In my 45 years of recruiting, I’ve heard so many reasons why public power utilities should not pay competitively. Here are the top five myths and reasons to dispel them.
Myth: A public power utility can’t pay competitively because it’s a government or not-for-profit agency.
Public power utilities are not-for-profit entities, but it is wrong to think that they do not create a return for their communities. Public power utilities often offer lower rates and put revenues directly back into the community.
If the utility is a city department, there’s the myth that utility employees should be paid comparably to other city employees. But there are two huge flaws in this logic.
First, a city is largely a consortium of cost-based services for which the citizens have no competing offering. The utility is a revenue-based service providing net income. The public power utility has a ready competitor in the form of the neighboring investor-owned utility — not to mention new technologies such as rooftop solar power and home energy storage. The utility also often has the ability to generate additional revenue through innovative business, such as wholesale power market transactions and ancillary services.
Second, the supply of personnel with city administration skills matches the demand for those services at market compensation levels. But market compensation for utility experience is on a different curve. For example, municipally owned hospitals do not pay surgeons and anesthesiologists on the same level as city managers or other city administrators. The consequence is obvious. The citizens of Green Bay own the Green Bay Packers but I’m am certain the quarterback, Aaron Rogers, does not have his pay measured by how much the city administrators earn.
Personnel costs represent about 20 percent of a utility’s total costs. Increasing pay by 10 percent for all employees would result in only a 2 percent impact on the typical utility bill — a small price to pay to keep the lights on.
Myth: A public power utility is a monopoly and not subject to competition.
I hear the argument time and time again — consumers don’t have the option to choose a utility because most utility service territory is a monopoly. But consumers can choose where they live!
Being a “monopoly” does not make the utility immune to the marketplace.
Successful utilities don’t get much attention, but failures always make the news — outages, equipment failures, or dramatic rate increases. Customers that are unhappy with community-owned utilities can storm the castle with pitchforks and torches and elect new politicians.
Public power is not insulated from competition for intellectual capital, either. Many public power utilities can tell you how their prized lineworkers, engineers, accountants, marketing personnel and seasoned leaders are recruited away by cooperative or investor-owned utilities. Utility employees are a limited resource — and they can and will work in competing sectors.
Myth: Public power is too small to compete with neighboring utilities.
In the 1980s, investor-owned utilities, faced with the certainty of deregulation, abandoned the practice of abundant hiring and training. The resource pool of trained utility personnel declined dramatically as a result. In fact, about 60 percent of utility personnel today are baby boomers headed to retirement. To meet the demand for trained personnel, public power, cooperatives, and investor-owned utilities all compete for now even more limited human resources.
Increased demand for a limited resource will force its price to increase. Failure to recruit and retain properly trained personnel has obvious consequences. For community leaders faced with the need to provide a vital service at the lowest possible cost (and with a return that offsets other costs), paying for top talent is a no-brainer.
Myth: Competitive pay is politically unacceptable in my community.
Public power serves affluent as well as poor communities. Affluent and growing communities have an abundance of customers with high loads that provide high-paying jobs. Disadvantaged communities are usually experiencing declining loads and populations.
Affluent and growing communities must select utility leaders and staff who will ensure a trajectory of increasing loads and high-paying jobs or face an undesirable turnaround decline. As a recruiter, I’ve worked with clients that have enjoyed growth and success only to have poor business decisions made by unqualified utility leaders result in dramatic rate increases, financial distress, poor customer service, safety related incidents, and/or declining reliability. The lucky communities see those same villagers storming the castle demanding change. The unlucky ones see an exodus of load, resulting in the loss of high-paying jobs and declining payments-in-lieu of taxes.
Poor and declining communities have an even more difficult situation. Leaders that are courageous and act to improve the situation face criticism for hiring qualified leaders and staff at compensation levels that are among the highest in the community. Critics wonder why the community would hire a highly paid utility leader rather than put the money into schools. Other leaders succumb to the temptation to kick the can down the road and avoid that criticism.
Therein lies one of public power’s biggest challenges. It is governed by individuals facing a two or four-year election cycle while administering an industry with a 15- to 30-year planning cycle.
A well-run utility requires well-paid employees.
Myth: Tax-exempt bonds are the reason public power borrowing costs are low.
Public power utilities finance large capital investments with municipal bonds. It is true that tax-exemption for municipal bonds reduces borrowing costs for public power utilities. But, it is also true that accelerated depreciation, tax-exempt private activity bonds, investment and production tax credits, and reduced tax rates on dividends and capital gains reduce the cost of capital for investor-owned utilities by a roughly comparable amount.
Where public power utilities really stand out is in the quality of debt issued. These high bond ratings result in lower interest rates. A key factor in determining a utility’s bond rating is the strength – including tenure and experience – of its management team. Likewise, reliability – also driven by experience and expertise at all levels – is hugely important.
Yet another reason to hire wisely and pay well.