deregulation and management strategies a case study of georgia system operations corporation

This study examined the impact of deregulation upon a single nonprofit generation and transmission electrical cooperative.. This study examined the impacts on management strategies, orga

DEREGULATION AND MANAGEMENT STRATEGIES:

A CASE STUDY OF GEORGIA SYSTEM OPERATIONS CORPORATION

by Joseph B Baugh

TONI BUCHSBAUM GREIF, Ph.D., Faculty Mentor and Chair

JOHN LATHAM, Ph.D., Committee Member DOROTHEA BRAGINSKY, Ph.D., Committee Member

Kurt Linberg, Ph.D., Dean, School of Business & Technology

A Dissertation Presented in Partial Fulfillment

Of the Requirements for the Degree

Doctor of Philosophy

Capella University February 2008

3296749 2008

Copyright 2008 by Baugh, Joseph B.

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© Joseph Baugh, 2008

Deregulation has created framebreaking changes across multiple industries This study examined the impact of deregulation upon a single nonprofit generation and transmission electrical cooperative Deregulation and other market forces set into motion a

framebreaking change which restructured the former cooperative into three legally distinct cooperatives that developed symbiotic relationships with each other Based on the literature, significant impacts to management strategies, organizational structure, and organizational culture were expected Through a series of interviews, study participants articulated their experiences and perceptions about the impacts of deregulation at the cooperative Data analysis indicated that changes to management strategies and

organizational structure, while significant, were fairly straight-forward and consistent with the literature Changes in organizational culture during and after the restructuring initially created adverse effects among the workforce The central emerging theme indicated that positive changes in leadership across the three cooperatives were

significant in renewing organizational effectiveness and developing a strong customer service focus As related by the participants, transformational leaders restored trust, created a new vision, instilled values, improved communications, and developed

collaboration across the three cooperatives These transformational activities created a significant impact on the cooperative employees by improving performance, raising morale, and elevating job satisfaction levels, which increased workforce retention The study revealed that transformational leadership alleviated unfavorable cultural impacts within this organization in transition

I’d like to dedicate this paper to the women in my life who tolerated long hours, weeks, and months of neglect while I labored away on this project My dearly departed wife, Dorothy, encouraged me many years ago to put my feet on the path to pursue my lifelong dream of obtaining higher education and gave me the time and space to follow that dream to its logical conclusion After Dorothy’s death in 2005, my daughter, Sara Baugh-Harris, and my mother, Gaye Baugh, bolstered my spirits throughout those dark days as I floundered in sorrow and self-pity and helped me work my way back to the light through their constant caring and encouragement As I came down to the wire, my

girlfriend, Peggy Sue Davis, supported me and gave me the confidence I needed to stay the course and finish this dissertation I love all of you and I truly appreciate everything you did to help me work through despondency and despair as I struggled to finish the journey

This paper would not have been possible without the guidance, support, and occasional kick in the seat of the pants that I so desperately needed from my mentor, Dr Toni Buchsbaum Greif You are another one of those women in my life who helped make my dream a reality Although I sometimes resented all the additional research and multiple revisions that you recommended, this paper is a much better effort for heeding your advice

My committee members, Dr John Latham and Dr Dorothea Braginsky, delivered sage insight and guidance in a timely and helpful manner My good friends and fellow learners: Dr Anne Saber Hallcom, Dr Suzanne Minarcine, and

Dr Jerry Becker, provided me with indispensable support throughout the PhD program, particularly after the death of my wife What can I say to you three, but thank-you from the bottom of my heart for all of your caring and concern? Dr Marilyn Harris also labored mightily to help me find an appropriate study

organization when it looked like I might have to change directions and certainly deserves credit for her support

Finally, I could not have completed the fieldwork without the support of Gary Williamson and Connie Looney at GSOC They gave freely of their time and made my visit to Atlanta very productive Their unflagging efforts helped me pack 40 tightly scheduled interviews into one short week, which allowed me to generate the rich data set that I needed to draw this project to a close

Acknowledgments iv 

List of Tables viii 

List of Figures ix 

CHAPTER 1 INTRODUCTION 1 

Background of the Study 3 

Statement of the Problem 4 

Purpose of the Study 4 

Rationale for the Study 4 

Research Questions 5 

Significance of the Study 6 

Definition of Terms 6 

Assumptions and Limitations 11 

Theoretical and Conceptual Framework 13 

Organization of the Remainder of the Study 14 

CHAPTER 2 LITERATURE REVIEW 15 

Deregulation 17 

Developing Management Strategy 22 

Strategic Decision-Making 24 

Organizational Structure 29 

Organizational Culture 37 

CHAPTER 3 METHODOLOGY 46 

Setting of the Study 46 

Excluded Deregulation-Related Issues 48 

Research Design 48 

Sampling Design 51 

Data Collection Procedures 53 

Data Analysis Procedures 60 

Pilot Study 63 

Ethical Issues 64 

Limitations of the Study 65 

Research Timeline 68 

CHAPTER 4 DATA PROCESSES 69 

Brief History of Georgia System Operations Corporation 71 

Data Collection Processes 72 

Data Analysis Processes 77 

CHAPTER 5 PRESENTING THE DATA 89 

Participant Confidentiality 89 

The Research Question 91 

Population Demographics 92 

Management Strategy 95 

Organizational Structure 109 

Organizational Cultures 117 

CHAPTER 6 DISCUSSION, IMPLICATIONS, RECOMMENDATIONS 145 

Emerging Themes and Patterns 150 

Effects of Transformational Leadership on GSOC Associates 166 

Discussion 181 

Limitations of the Study 187 

Recommendations 190 

Concluding Remarks 193 

CHAPTER 7 EPILOGUE 194 

REFERENCES 197 

APPENDIX A STRUCTURED INTERVIEW PROTOCOL 220 

APPENDIX B UNSTRUCTURED INTERVIEW PROTOCOL 223 

APPENDIX C GSOC VISION, MISSION, & VALUES 224 

Table 1: First Level Codes 83 Table 2: Second-Level Codes 83 Table 3: Third-Level Codes 83

Figure 1: Original conceptual framework 13 

Figure 2: Data collection activities 72 

Figure 3: Data analysis activities 80 

Figure 4: Management strategy development 85 

Figure 5: Organizational structure evolution 86 

Figure 6: Organizational culture themes 87 

Figure 7: Oglethorpe Power Corporation before deregulation 95 

Figure 8: Planning for restructuring 110 

Figure 9: After the restructuring 111 

Figure 10: Operating efficiency curve 144 

Figure 11: Organizational evolution 146 

Figure 12: Post-deregulation organizational structures 148 

Figure 13: Development of organizational culture 150 

Figure 14: Transformational leadership themes 152 

Figure 15: Transformational leadership 187 

CHAPTER 1 INTRODUCTION

Management strategies, when they change, typically change incrementally and exhibit little adverse effect on organizations and their existing structures (Kouzes & Posner, 2003; Nadler & Tushman, 1990; Scott, 2003) However, given an exogenous shock, the future viability of an organization may well depend on more rapid change When sufficiently strong, a stimulus can create frame-breaking change (Tushman,

Newman, & Romanelli, 1986), which will impact all areas of the organization creating changes in management strategies, organizational structures, and organizational culture This study examined the impacts on management strategies, organizational structure and organizational culture that were caused in a nonprofit electrical cooperative by the

external event of deregulation Deregulation has occurred over the last decades in

numbers of industries that were once considered natural monopolies These natural monopolies were formerly regulated at the state and/or federal level by public utility commissions to protect the public from avaricious monopolistic tendencies to exercise market power (Wolak, 2005) In the United States, regulation generally held natural monopolies to a specified rate-of-return basis for pricing their products (Rothwell & Gomez, 2003) Deregulation introduced free-market principles and competition into these natural monopolies (Hirsch, 1999; Kahn, 2004; Navarro & Shames, 2003; Rassenti, Smith & Wilson, 2002) and created the frame-breaking changes

Other industries, such as telecommunications, airlines, and banks that have faced deregulation in earlier years were examined through a literature review to see how these industries responded to deregulation as competition and the concurrent drive to cut costs expanded England, Wales, and Norway (Green, 2005; Mikkelsen, Nybø, & Grønhaug, 2002; Rothwell & Gomez, 2003; Thomas, 2004) privatized their electrical companies in the latter part of the 20th century The electrical companies in these countries were examined to draw on their histories and experiences relative to deregulation While the fates of investor-owned utilities have been explored in the literature (Baldick & Niu, 2005; Hirsch, 1999; Thompson, Scott, & Berger, 2004), no descriptions of deregulated nonprofit electrical cooperatives, which are owned by the members they serve rather than investors, were located

Taking the information drawn from the literature review as a basis for a

qualitative case study, an electrical cooperative was studied through structured interviews with key executives and unstructured interviews with rank-and-file employees to address the gap in knowledge about how the cooperative met the new demands of deregulation while maintaining the customer focus that was often lacking in the pre-deregulation investor-owned utilities (Mikkelsen et al., 2002; Ray & Sumic, 2005) In an effort to triangulate the data drawn from these interviews and discussions, publicly accessible documents were also scrutinized to determine cost-effectiveness and other efficiencies gained or lost through management strategy changes induced by deregulation

Background of the Study Deregulation in many industries, such as telecommunications, airlines, and

banking, has introduced frame-breaking change by eliminating protected service areas which previously created a monopolistic dynamic among the participant companies Numerous studies (Ali & Gstach, 2000; Avkiran, 2000; Becher, Campbell & Frye, 2005; Bengtsson & Marell, 2006; Griffin & Puller, 2005; Hira, Huxtable & Leger, 2005;

Hirsch, 1999; Hogan, 2002; Jeon & Miller, 2003; Kahn, 2002, 2004; Kole & Lehn, 1997; Macey, 2006; Massey, 2002; Meyer & Menzies, 1999; Moore, 2004; Noulas, 2001; Rassenti et al., 2002; Robinson, 2000; Scharpenseel, 2001; Sidak, 2003; Thornton & Thornton, 1997) examined the changes imposed upon these industries By opening competitive service territories for customers, deregulation has forced electrical utilities to change from a technical focus to a more customer-oriented focus (Bengtsson & Marell, 2006; Mikkelsen et al., 2002; Moore, 2004; Ray & Sumic, 2005)

The last of the natural monopoly industries, the electrical utility space, was

deregulated – or re-regulated as some observers have noted (Griffin & Puller, 2005; Hira

et al., 2005; Kahn, 2004; Klevorick, 2005; Rossi, 2002) – over the past decade As with other industries that have undergone deregulation, external stimulus in the electricity industry required changes in management strategy, which in turn spurred changes in organizational structures and organizational cultures This study examined changes that occurred in management strategies, organizational structure, and organizational culture as

a result of deregulation in a nonprofit electrical utility cooperative

Statement of the Problem Deregulation in the electrical industry introduced frame-breaking change by eliminating protected service areas, which had formerly created a monopolistic dynamic among electrical utilities This study examined how management strategies,

organizational structures and organizational culture changed in a nonprofit electrical cooperative as a result of deregulation in the electrical industry

Purpose of the Study Through the application of a qualitative case study, this study examined how a specific electrical cooperative, Georgia System Operations Corporation, addressed the changing environment and market conditions that it faced during its origin as

deregulation and the accompanying restructuring of its parent cooperative, Oglethorpe Power Corporation, occurred Specific items of interest to this study will include how cooperative managers developed new strategies to deal with deregulated marketplaces; how organizational structures changed; and how the organizational culture (i.e., the relationships between the employees, business units, and other entities) changed

Rationale for the Study The primary impetus for deregulation is to expose natural monopolies to open competition in the marketplace and to reduce consumer pricing Several recent studies related to the impact of deregulation in the electricity industry exist (Griffin & Puller, 2005; Hira et al., 2005; Hirsch, 1999; Hogan, 2002; Klevorick, 2005) Most of these studies concentrated on the technical aspects of changes caused by deregulation in

Investor Owned Utility [IOU] environments There has been very little work examining the impact of deregulation on management strategies overall and nothing was found that specifically addressed deregulation within the electrical cooperative Electrical

cooperatives are owned by the members they serve and already possess a strong customer

focus (The Cooperative Difference, n.d.) There is a gap in the knowledge base about how

deregulation impacted management strategies in nonprofit electrical cooperatives, which may have reacted somewhat differently than investor owned utilities This study sought

to fill that gap

Research Questions The primary research question was phrased in this manner: How did deregulation have an effect on management strategies, organizational structures, and organizational cultures at Georgia System Operations Corporation? Management strategies are

intertwined with organizational cultures (Kasper, 2002; Locander, Hamilton, Ladik & Stuart, 2002; Schein, 1984) and changing strategies can play a major role in the

development and evolution of organizational structures and cultures (Thompson,

Strickland, & Gamble, 2003), just as culture can play a role in evolving and

implementing strategy (Schein, 1996b) This role was often underestimated (Schein, 1996a) This study sought to understand how organizational culture in the cooperative changed or did not change as a result of deregulation taking into account how the

organizational structure and organizational cultures may have changed? Topic specific questions related to organizational structural and cultural changes were developed

throughout the next chapter to address each these issues in detail

Significance of the Study Because of the lack of research that specifically targeted the impact of

deregulation on management strategies in nonprofit electrical cooperatives, this study sought to add new knowledge to the literature The results of this study may support practitioners in the field by establishing a set of best practices for those electrical

cooperatives in states that have not yet been deregulated The study also aimed to help currently deregulated cooperatives identify areas where they may be able to better cope with the turbulent market conditions (Vaill, 1989) imposed by deregulation

Definition of Terms Any examination of a given industry must necessarily involve some industry-specific terminology The electrical industry is no different and uses numerous acronyms and other terms that are not intuitive to the layman To assist the reader, terms used frequently in this study are defined in this section

Cooperative An entity that is owned by the consumers it serves Typically more

customer-oriented than most electrical utilities, such as IOU's, cooperatives are common

in many industries including farming, telecommunications, and electrical industries Electrical cooperatives originated in the United States with the creation of the Rural Electrification Administration [REA] formed by presidential order in 1935 as part of Roosevelt's New Deal and financed by the Rural Electrification Act passed by Congress

in 1936 to provide electricity to rural citizens who did not meet the density requirements

of IOU's (Hirsch, 1999; Wasserman, 1999)

Electrical Member Cooperative (EMC) A local electrical distribution

cooperative established to serve the consumer end of the energy value chain As

cooperatives, EMCs are owned by the members they serve In turn, 39 EMCs in the State

of Georgia own the Family of Companies and govern them through three boards of

directors

Energy Value Chain Similar to the value chains found in other industries

(Christensen, 2001; Porter, 1996; Thompson et al., 2003), the energy value chain consists

of the value that is added along the path originating with the fuel sources for electricity generation through to and including the end consumer (Ray & Sumic, 2005)

Energy Policy Act of 1992 (EPAct) Federal legislation that expanded the role of

FERC in regulating interstate utility activities and allowed greater flexibility for

independent power producers to access the electrical transmission grids (Hogan, 2002; Joskow, 2005)

Federal Energy Regulatory Commission (FERC) This independent federal

agency is mandated to maintain oversight of the interstate activities of electricity, natural gas, and oil industries The Energy Policy Act of 2005 added additional roles and

responsibilities to FERCs legal authorization to regulate electrical transmission grids and

oversee energy markets (What FERC does, 2006).

Generation and Transmission Cooperative (G&T) G&Ts began to appear in the

1950s and 1960s as local distribution cooperatives (LDCs) banded together to consolidate efforts to ensure a reliable source of electricity by owning and controlling generation and transmission assets G&Ts were formed and are owned by the LDCs The main impact of deregulation efforts to date in the United States has been felt at the G&T level

Georgia Electrical Member Cooperative (GEMC) This entity is the statewide

organization for Georgia electrical cooperatives GEMC supports training and other programs for the benefit of all of its members The CEO of GEMC is often included in discussions with the CEOs of the three Georgia G&T cooperatives to help develop

collaborative solutions for the EMCs

Georgia Family of Companies A name used to describe the three electrical

cooperatives (GSOC, GTC, OPC) formed in 1997 from the restructuring of the original Oglethorpe Power Corporation It is also a common reference used by employees of all three cooperatives to describe the relationship between these three electrical cooperatives

It is frequently referred to by associates as the FOC

Georgia System Operations Corporation (GSOC) The study organization located

in Atlanta Georgia, GSOC is part of the Georgia Family of Companies GSOC is a

services cooperative that provides services and support to the Family of Companies, the EMCs, and others

Georgia Transmission Corporation (GTC) One of the sister cooperatives of the

study organization located in Atlanta Georgia and part of the Georgia Family of

Companies GTC controls and manages the cooperative transmission system assets and partners with other utilities to provide reliable service

Investor Owned Utility (IOU) These utilities are owned by their stockholders and

are managed for their benefit They tend to be generally more responsive to shareholder demands than customer need Most electrical utilities are IOUs (Baldick & Niu, 2005; Wasserman, 1999)

Independent Power Producer (IPP).This term describes any entity that owns or

controls electrical generation capability, regardless of whether based on fossil-fuels or alternative energy – wind power, solar power, biomass, etc NUGs and QFs are

considered IPPs

Independent System Operator (ISO) Also known variously as a Regional

Transmission Operator (RTO) or a Transmission System Operator (TSO), these entities typically do not own transmission network assets, although they assume responsibility for the reliable operation of a defined segment of the transmission grid (Navarro & Shames, 2003; Ray & Sumic, 2005; Wolak, 2005)

Local Distribution Company or Cooperative (LDC) These utilities are the

component of the energy value chain attached to the end consumer and own the wires connecting directly to consumers While LDCs may or may not own generation assets, depending on their public or private status, they generally integrate the distribution and retail activities in the energy value chain In general, LDCs will enter long-term power supply contracts with generation owning entities to provide their customers with reliable and adequate energy (Ray & Sumic, 2005) The EMCs that own the Georgia Family of Companies are LDCs

Merchants Entities spawned by deregulation that provide both energy and

marketing expertise These entities may be subsidiaries of established electrical utilities

or may own or manage IPPs, NUGs, or QFs Merchants typically focus on operational excellence to establish a low-cost position in the energy value chain (Joskow, 2005; Ray

& Sumic, 2005; Wolfram, 2005)

Municipal Power Public power entities owned by governmental groups such as

cities, towns, or counties These utilities generally do not have significant generation resources and therefore contract and purchase power from federal government, IOU's, and/or cooperative sources in an effort to keep taxpayer power costs as low as possible

National Rural Electric Cooperative Association (NRECA) Established in 1942,

NRECA is the national association of over 900 member entities, most of which are consumer-owned cooperatives, although some members are public power entities

(National Rural Electric Cooperative Association Overview, 2006) NRECA manages a

wide variety of programs dedicated to the benefit of its member cooperatives and their employees

Non-Utility Generator (NUG) These entities are independent power producers,

which are not affiliated with a traditional electrical utility NUGs were allowed open access to the transmission grid under PURPA in 1978 (Joskow, 2005)

North American Energy Reliability Corporation (NERC) Formed in 1968, NERC

is mandated to provide reliability, adequacy, and security to the North American electric system, including the transmission grid and electrical generators Comprised of eight different reliability councils, each of which has regional oversight, NERC depends on the mutual self-interest of utilities that are interconnected and provide electrical generation,

transmission, and distribution (North American Energy Reliability Corporation, 2006)

The Georgia Family of Companies actively participate in both SERC and NERC

activities

Oglethorpe Power Corporation The original monolithic electrical cooperative

generation and transmission utility in the state of Georgia Owned by 39 EMCs,

Oglethorpe was restructured into OPC, GTC, and GSOC in 1997 partially in response to deregulation forces and partially due to the desire of the EMCs to better control their own destinies in a deregulated energy market

Oglethorpe Power Corporation (OPC) One of the sister cooperatives of the study

organization located in Atlanta Georgia and part of the Georgia Family of Companies OPC retained the original Oglethorpe name and manages the generation assets and other power supplies for the benefit of the EMCs

Public Utilities Regulatory Policies Act of 1978 (PURPA) Federal legislation

passed in 1978 that provided the initial impetus for deregulation in the electricity

industry PURPA forced utilities to buy power from independent power producers

(Hirsch, 1999; Joskow, 2005; Wasserman, 1999)

Qualifying Facility (QF) Qualifying Facilities were originally defined by PURPA

under section 210 FERC liberally interpreted the provisions of this section (Hirsch, 1999) to encourage the creation of QFs to provide competition to traditional utilities prior

to actual deregulation

Southeastern Electrical Reliability Council (SERC) One of the eight NERC

reliability councils, SERC is located in the southeastern United States The Georgia Family of Companies are active participants in SERC activities and help establish the direction of SERC policies

Assumptions and Limitations This researcher assumed that electrical cooperatives would be willing to support this study by providing access to their employees and documentation This researcher has

an extensive background in cooperative operations from power line maintenance, power dispatching, power trading, as well as experience across all business units gained from managing multiple projects, which enhanced his ability to speak the "lingua franca" or common language of the cooperative environment and to integrate into the organization (Schein, 1992) This background helped him to build a trusting relationship with the participants in the study because of their common experience and commitment Another key assumption was that this study would adhere to its time and cost constraints while obtaining a rich and thick description (Denzin, 2001a; Geertz, 1973) necessary for the creation of an illustrative case

Developing a good relationship with study participants may avoid a potential failure to develop trustworthiness within the study group (Lincoln & Guba, 1985), which could limit the credibility of the data collected Taking a skeptical perspective to the data and maintaining reflective awareness (Atkinson & Hammersley, 1994) avoided

researcher biases (Denzin, 2001b; Malterud, 2001; Miles & Huberman, 1994; Sadler, 1981) Being upfront and clear about the purpose of the study to all participants and expanding the pool of interviewees minimized respondent bias (Miles & Huberman) Understanding the political dynamics within the organization (Punch, 1994) and how conflict can arise within the study cooperative (Shelton & Darling, 2004) helped avoid inadvertently losing the trustworthiness built through a shared background Hiring a third party transcriber to convert the taped data to text and keeping the purpose of the study clearly in mind helped minimize the effects of ignoring disconfirming evidence

(Eisenhardt, 1989; Robson, 2002; Sadler, 1981 Keeping these potential limitations in

mind and accounting for their presence minimized their harmful effects on the study and its participants

Theoretical and Conceptual Framework The study examined the changes that occurred at the intersection of management strategy, organizational structure, and organizational culture in a nonprofit electrical cooperative as a result of deregulation in the electrical industry The intersection of these four elements in the original conceptual framework (see Figure 1) was defined for the purposes of this study as frame-breaking change The changes at the intersection were examined to better understand how deregulation impacted management strategies, organizational structures, and organizational cultures in the nonprofit electrical

cooperative environment

Figure 1:Original conceptual framework

Organization of the Remainder of the Study The remainder of the study was organized into five chapters Chapter 2 examines the literature as it pertains to deregulation, management strategies, organizational

structures, and organizational cultures Chapter 3 describes the methodological approach

to the study, the data collection and analysis procedures and other items of interest

pertinent to the mechanics of performing the fieldwork Chapter 4 discusses the field study and issues that arose from the on-site visit, as well as defines the processes as used

in on-site data collection and ensuing data analysis activities Chapter 5 presents the data

in the voices of the participants (Creswell, 1998) to examine how the restructuring of Oglethorpe Power Corporation impacted GSOC and its personnel Chapter 6 delineates major themes and patterns that emerged from the data, draws conclusions drawn from the study, describes additional limitations that arose during the study, and recommends possible future research directions in this field along with suggestions for managerial action This report concludes with an epilogue that examines the impact of the study on the researcher and how the findings at GSOC compared and contrasted with the situation

at the researcher’s home cooperative

CHAPTER 2 LITERATURE REVIEW

The electricity industry in the United States began at the onset of the 20th century

as a disjointed mixture of public power and private concerns Open competition for customers reigned as power companies installed multiple sets of poles and wires in metropolitan areas Potential electrical customers in rural areas were largely ignored until

1935 when the Rural Electrification Administration was established by Congress (Hirsch, 1999) Pressure from the public and the press impelled government agencies to examine ways to bring order to the chaos in the electricity industry After a decade of incoherent growth, Thomas Edison and his former assistant, Samuel Insull, began moving the

private electricity companies toward what was ultimately to become a monolithic and vertically integrated natural monopoly format (Hirsch)

Seeing municipal utilities and other public power concerns as a threat to profits, Insull, in particular, recognized early on that clear advantages existed for private

electricity companies to accept governmental oversight and become natural monopolies Working through electricity industry associations, Insull lobbied for rate-of-return

regulation by public utility commissions that guaranteed electricity companies a fixed return for all capital and operating expenses and passed the burden of managerial

mistakes on to consumers (Griffin & Puller, 2005; Robinson, 2000; Wolfram, 2005) This regulatory model persisted through the 1970s and made electrical utilities a favored

holding of institutional investors due to the guaranteed return on investment derived from the regulated environment (Moore, 2004)

Although several commentators on deregulation recognized the value of retaining certain natural monopoly components of the electricity industry, primarily the

transmission and distribution networks (Bengtsson & Marell, 2006; Griffin & Puller, 2005; Hirsch, 1999; Hogan, 2002; Wood, Kuhn, & Barton, 2005), beginning in the 1970s economists and other proponents of deregulation argued that open competition in the electrical generation market would lower the consumer cost of electricity through market-driven cost efficiencies and productivity gains in electrical utilities (Rothwell & Gomez, 2003) This position was not contained solely to the United States, but was prevalent throughout the world (e.g., Green, 2005; Massey, 2002; Mikkelsen et al., 2002; Thomas, 2004) as governments across the globe sought to open electricity markets to competition However, a key difference existed between the deregulatory experience in the U.S and other regions The U.S electricity industry migrated from a rate-of-return model toward open market competition while other countries — such as the United Kingdom and other European countries — privatized utilities that were formerly operated by the government (Green; Griffin & Puller; Hirsh; Hogan; Rassenti et al., 2002; Ray & Sumic, 2005; Scharpenseel, 2001; Thomas)

Two key legislative acts hastened the change in the United States from the natural monopoly model for the electricity industry to a deregulated format that saw parts of the formerly monolithic model opened to competition while other parts remained subject to the natural monopoly model These acts were the Public Utilities Regulatory Policies Act

of 1978 (PURPA) and the Energy Policy Act of 1992 (EPAct) With the opening of the

electrical generation sector to competition and access to the transmission grid ensured to IPPs, the electricity industry was now poised to travel down the road of deregulation as other industries like the banking, telecommunication, and airlines had prior to 1992 in the United States Each of these industries carried similarities, as well as industry specific differences, in their experiences and reactions to their newly deregulated environments The deregulation experience in these industries and the lessons learned from each one may be applicable to the electricity industry

Deregulation Exogenous shocks, such as deregulation, introduce dramatic levels of volatility into a formerly stable environment (Moore, 2004) The impact of those shocks has been described in the literature as deregulation occurred in numerous industries that were formerly thought of as natural monopolies These natural monopolies were typically regulated at the state and federal level to curb the tendency of a monopoly economy to maximize profits at the consumers' expense Most of these natural monopolies, including the electricity industry, were regulated on a rate-of-return basis that allowed consumer rates to be set by public utility commissions as a percentage of capital investments made

by the organization (Griffin & Puller, 2005; Klevorick, 2005; Ray & Sumic, 2005;

Robinson, 2000; Rothwell & Gomez, 2003; Wolfram, 2005)

Proponents of deregulation described public regulation of utilities and other natural monopolies as promoting inefficiencies due to misconstrued incentives and protecting inefficient operations from the grim realities of managerial mistakes These commentators advocated the opening of protected industries to competition in order to

seek efficiencies in response to market conditions Robinson (2000) developed a detailed, yet concise, definition of how regulation adversely impacted consumers in a number of industries of interest to this study:

Regulatory pathologies were identified in the airline industry, where price floors stimulated cost-increasing competition through amenities and flight frequency; in the electric power industry, where rate-of-return limits induced a substitution of capital for labor and the construction of overly large generating facilities; in the railroad industry, where restrictions on track abandonment led to excess capacity, under-maintenance, and demands for public subsidy; in the banking industry, where constraints on product and market diversification limited the number and type of financial instruments and protected inefficient and poorly managed firms; and in the natural gas industry, where uniform rates prevented conservation-enhancing seasonal and time-of-day pricing (p 16)

Changes in the financial arena due to deregulation in the banking industry, which may be similar to deregulation driven changes wrought in the electrical cooperative space, can be found in the credit unions Both credit unions and electrical cooperatives were founded by consumers aggregating their resources toward a common good Avkiran (2000) found that deregulation in the Australian banking industry allowed credit unions and other formerly peripheral players, such as building societies and new mortgage entities, to become more competitive with traditional banks This competitive dynamic may also have occurred between electrical cooperatives and IOUs as a result of

deregulation in the U.S electricity industry and was explored as part of this study

Originally PURPA was largely resisted by the electricity industry Some utilities recognized the advantages of PURPA by setting up subsidiaries to exploit the rules established by this act These projects were typically easier to finance with debt than regulated business lines (Hirsch, 1999) This increased facility for debt may have laid the foundations for problems in the future similar to those created by the relaxation of debt restrictions that precipitated the Savings & Loan crisis (Macey, 2006) However, Moore

(2004) expected electrical utilities to restructure debt and capitalization to focus on technology to improve the utility's financial position and enhance governance This study sought to understand how Georgia System Operations Corporation addressed the issue of setting up unregulated subsidiaries and perhaps used the rules established by regulatory entities to better its financial position

Kole and Lehn (1997) examined organizational change through studies of the airline industry of the adaptation of governance structures to deregulation The speed of adaptation was examined to correlate long-term survival with adaptation Becher et al (2005) discussed higher levels of governance in the post-deregulation banking industry Drawing implications from these and other industries that were undergoing deregulation

at that time, primarily telecommunications and health care, a follow-up of how Georgia System Operations Corporation's governance structure adapted to deregulation may be appropriate

Lessons learned from the natural gas industry that partial deregulation only exacerbated consumer exposure to higher prices (MacAvoy, 2000) evidently were not captured by the proponents of deregulation in the electrical industry space The role that the natural gas industry played in creating some of the problems found in California during the electricity industry crisis in 2000 and 2001, which has largely forestalled further efforts to deregulate the electricity industry (Griffin & Puller, 2005; Wasserman, 1999), cannot be overstated Electrical utilities that owned natural gas affiliates were able

to take advantage of Federal Energy Regulatory Commission (FERC) soft pricing caps to raise spot prices on natural gas and thereby justify higher electricity prices (Wolak, 2005) Navarro and Shames (2003) found that a heavy reliance on natural gas generators

also caused a tendency for electricity prices to rise as the basic laws of supply and

demand operated on the natural gas industry

Thomas (2004) described the changes in the British electricity industry as one that introduced regulation into a formerly public-held enterprise As the British government relinquished its hold on the electricity industry, the industry moved toward incentive regulatory environment Although the British model "has been held up as the example that other countries should follow" (Thomas, p 367), it appears that British deregulation may be evolving more toward the pre-deregulation U.S model as electrical companies begin to vertically integrate under the impetus of regulatory incentives While this is an area that future researchers may find fruitful, it is beyond the scope of this paper Of pertinent interest, however, is that the lofty promises of deregulation did not come to fruition in the British model (Thomas)

This dynamic was also observed in the deregulatory efforts in the United States

(Rossi, 2002) Just as the British deregulation model evolved from its original promise

into rate-of-return regulation (Ray & Sumic, 2005; Thomas, 2004), California realized the importance of long-term power contracts as a means of stabilizing and averting the ravages of market power in a short-term shortage situation Allowing inappropriately designed markets to control prices and forcing the adverse impacts upon retail customers was shown to be ineffective (Rassenti et al., 2002; Rossi) The ineffectiveness of the market design caused a reversion to former practices and regulations in some areas and supported efforts to re-regulate the electricity industry The California electrical fiasco of 2000-2001 spurred calls from consumer groups and other entities to re-regulate the electricity industry (Gurgen, 2003, Hira et al., 2005) to prevent systemic abuses and

increased costs to consumers These calls found sympathetic ears in legislative bodies (Robinson, 2000)

Griffin and Puller (2005) explored price volatility in the short-term electrical market and described it as more a function of market power on the part of relatively small incremental movements during times of peak capacity FERC attempted to address this volatility by implementing price caps (Wolak, 2005), which only increased the problems

in California through poor market design Just as Robinson (2000) found that price floor practices in the airline industry served to increase overall consumer costs, after-the-fact price fixing was not the answer to addressing the problem of increasing competitive costs

in the electricity industry, particularly in California

Until exposed by the problems created in California in 2000 by higher natural gas market prices and the use of market power during peak periods to justify higher electrical prices, FERC policy depended on market forces to maintain competitive consumer prices (Bushnell, 2005) This federal policy was at odds with California state energy policy Rossi (2002) expanded on MacAvoy's (2000) work with the natural gas deregulation experience to describe the problems caused by variances found in state jurisdictions on a national effort to deregulate the U.S electricity industry The electrical meltdown in California further highlighted the problems associated with multiple jurisdictions driving deregulation (Navarro & Shames, 2003; Rothwell & Gomez, 2003; Wolak, 2005)

Consolidation activity, typically merger and acquisitions, also occurred in the post-deregulation British electricity industry Similar to the consolidation effects seen in the post-deregulation airline and banking industries (Scharpenseel, 2001), the weeding out of weaker players in a deregulated electricity industry may also be expected Moore

(2004) predicted that utilities will focus more on improved performance than growth As nonprofit electrical cooperatives are owned by their members, mergers and acquisitions seldom occur in this business segment One notable exception occurred when Tri-State Generation and Transmission Association, based in Colorado, acquired many of the generation and transmission assets of an overextended and bankrupt New Mexico-based Plains Electric Cooperative in 1998 (M & A Report, 1999) Although this event occurred

on the cusp of U.S deregulation in the electricity industry and Plains' assets were split between Tri-State and a New Mexico IOU (Public Service Company of New Mexico), this acquisition cannot be attributed solely to deregulation forces However, since

nonprofit electrical cooperatives are owned by their customers, consumer welfare under Georgia System Operations Corporation's strategic responses to deregulation, as

impacted by possible merger, acquisition, or other consolidation activities, is of interest

to this study

Developing Management Strategy Impelled by rapidly changing economic factors, the development of management strategy has expanded far beyond the classic industrial age strategy of optimizing

production (Hamel & Prahalad, 1989; Hamel & Valikangas, 2003) to a more current model that understands the need to quickly shift strategy into new directions as the

demands in the marketplace shift Identified by various monikers such as emergent or emerging and adaptive strategies (Hamel, 1998; Kay, 1993; Mintzberg, 1987a, 1993), this new strategic development paradigm draws from a better knowledge of the strengths and weaknesses internal to the organization – acquired from Porter's Five Forces Model (1979) – organizational capabilities and competencies, and focuses organizational

strategic efforts more clearly on the customer Rather than merely attempting to optimize production, emergent strategies track consumer demand for the organization's current products and monitor incipient consumer demand for new products Tracking and

monitoring consumer demand allows organizations to shift strategic plans relatively quickly to reassign scarce resources and meet new consumer demands that have been discovered through a closer relationship with the consumer population

Operating on the opposite end of the strategy continuum from Porter's (1979,

1980, 2001) classic long-term strategic development model, Mintzberg (1987a, 1987b,

1993, 1994) espoused an amended form of emergent strategy In Mintzberg's adaptive model, strategy is expected to be formulated as a response to the environmental context

by participative organizational members who collectively create strategy rather than being developed as a result of long-term forecasts and strategic planning offices In turbulent deregulated markets, Mintzberg's model indicates that organizational strategy should target the consumer end of the value proposition, allowing the organization to maximize profits by creating mutual value for the consumer and the organization

(Prahalad & Ramaswamy, 2003)

Regulatory pressure is one of the key influencers for strategy in industry

(Goodstein & Boeker, 1991) and this is particularly true in the electricity industry (Kole

& Lehn, 1997; Mikkelsen et al., 2002; Moore, 2004) Understanding how organizations respond to exogenous shocks, such as deregulation, may provide some insight into the strategic decision-making processes utilized within the organization An examination of various theoretical strategic decision-making models may provide a better understanding

of how these differing models may be applicable in a cooperative environment

Strategic Decision-Making Strategic decision-making is often driven by external events Numerous strategic decision-making models are extant in the literature although only a few of them may be applicable to deregulation in the electrical utility space Senior managers in electrical utilities may have retained existing strategic decision making models to deal with the impact of deregulation in a formerly stable environment (Moore, 2004) It may be fruitful

to examine the controversy between Porter and Mintzberg as it pertains to strategic decision-making models to lay a foundation for examining the strategic decision-making models in place at Georgia System Operations Corporation prior to deregulation and in the ensuing years since the deregulation event

Mintzberg and Waters (1985) described strategic development models as existing

on a continuum This continuum is anchored by the different approaches to strategic development that were proposed respectively by Porter (1979) and Mintzberg (1987a, 1987b, 1993, 1994) Porter's methodology for developing strategy is based heavily on SWOT analyses and his "Five Forces Model" (1979, p 141) In applying Porter's model, organizational planners analyze the business environment in terms of internal strengths and weaknesses coupled with external opportunities and threats to formulate strategic plans The outcome of this process is known as deliberate strategy and is predicated on creating a long-term strategic plan Porter's model may have been effective in a stable environment such as that found in the pre-deregulation era and was often tied to classic management strategy for production optimization (Hamel & Prahalad, 1989; Hamel & Valikangas, 2003) At the other end of the strategic model continuum, Mintzberg

proposed that Porter's model was ineffective for responding to turbulent market

conditions like those created by deregulation

Mintzberg (1987a, 1987b, 1993, 1994) acknowledged and incorporated the

strengths of some components of Porter's model, as Mintzberg's model also considered the strengths, weaknesses, competencies, and capabilities of an organization Emergent strategy development diverged from Porter's model by adding a stronger focus on

customers and customer demand Known variously as adaptive, emerging, or emergent strategy (Hamel, 1998; Kay, 1993b; Mintzberg, 1987a, 1993), this new model of strategic development advocated the recognition and understanding of market shifts to enable rapid shifts in strategic direction to respond appropriately to changing consumer demand

According to Gryskiewicz (2005), Jashapara (2003); Kuivalainen, Sundqvist, Puumalainen, and Cadogan (2004), Rigby and Rogers (2000), Schellenberg and Miller (1998), Stonebraker and Liao (2004), and Vaaler and McNamara (2004), strategy

development and decision-making immediately prior to and during the deregulation event may be defined by high levels of risk, ambiguity and uncertainty Consistent with rapidly changing market forces characteristic of a deregulated environment, Vaill (1989)

described this environmental state of flux as "permanent white water" (p 2) Vaill (1996) also described the effect that deregulation had on multiple industries in a similar manner

Argyris (1966) wrote, "the effectiveness of decision-making activities depends on the innovation, risk taking, flexibility, and trust in the executive system" (p 84)

Analyzing risk and determining an appropriate response is a central element of strategic decision-making (Jarrett, 2000), since accurate predictions of business outcomes in a turbulent environment are practically impossible Decision-makers must make a best-

effort guess at these predictions In a deregulated environment, understanding and

accepting risk tolerance levels becomes even more critical in developing sound and effective business decisions than in a relatively stable environment Because of variances

in risk tolerance levels, the human element is also a critical factor in strategic making As electrical utilities tend to be risk-averse overall (Moore, 2004), the human factor may play an even more significant role in avoiding difficult decisions

decision-Effective decision making is critical to the success of the enterprise and is a core management function (Potocan & Treven, 2005) Strategic decisions carry a significant impact on resource allocation and the selection of business objectives In a deregulated environment, resources which were once abundant may become increasingly scarce, requiring different strategies to effectively allocate those resources (Componation,

Sadowski & Youngblood, 2006) The array of choices available for business objectives may also change, which may drive a parallel shift in decision-making processes

However, Potocan and Treven also created a case for standardization in decision making, which suggests that all decisions will be determined in some consistent method, despite environmental impacts Bourgeois (1980) found that strategic decision-making tends to

be an iterative process, thus decision-makers may be less inclined to change a proven and effective decision model in response to environmental shifts Perhaps more importantly, though, various studies (Flood, Hannan, Smith, Turner, West, & Dawson, 2000; Norman, 1967; Nutt, 1990; Ordione, 1986) established that strategic decision-making cannot be separated from the human factor

Norman (1967) explored this human tendency in decision-making in a laboratory study He described two common approaches as the objective approach and the

phenomenological approach The objective approach takes the business environment into context This decision-making model seeks to observe cause-and-effect relationships between specific decisions and the outcomes derived from those decisions Norman's objective approach is similar to other rational decision-making models such as Drucker's (1967) effective decision model, the garbage can model (Cohen, March, & Olsen, 1972) and Ordione's (1986) general problem solving model Widely propagated by business schools, rational models are still in widespread use in today's organizations As an

engrained practice, an extant rational model may not be abandoned in the face of external environmental forces, since the model may be used to identify impending changes and to seek alternatives for dealing with those changes

Norman's (1967) study revealed that, although most strategic decision-making models are results-oriented, the phenomenological decision-making approach tended to

be more common in actual practice As organizations reevaluate their strategic decision processes, if and when their environments experience significant changes generated by external forces such as deregulation, the evidence indicates that most business decision-makers will respond to environmental shifts with the same business decision processes that previously worked for them Norman's finding on this tendency of decision makers

to retain prior decision-making models may explain whether or not electrical

cooperatives retained their extant strategic decision-making processes in the face of deregulation in the electricity industry This research effort sought to understand what decision making processes were in place prior to deregulation and if, or how, these processes changed as a result of deregulation

Moore (2004) described the pre-deregulation perspective of electrical utilities as a long-term view on return on investment, which was guaranteed under the rate-of-return model in the regulated environment Given the tendencies of stakeholders to expect immediate return on investment (Cowling & Sugden, 1987; Cyert, Dill & March, 1958; Hamel & Prahalad, 1989), deregulated market dynamics that drive prices down may have forced electrical utilities, particularly IOUs, to take a shorter term perspective on

investment recovery (Moore) Since strategy at nonprofit electrical cooperatives is not dictated by stock market returns, but rather by consumer-owners' expectations of

adequate and reliable power supplies, this difference may also have caused a divergence

in the strategic decision-making processes between cooperatives and IOUs This

differentiation may have further caused nonprofit electrical cooperatives to continue to develop strategy based on pre-deregulation strategic decision models

Lawrence and Lorsch (1967) described the disruption that senior managers can create when attempting to apply their background and experience from one operational system upon an vastly different system Deregulation in other industries like banking, telecommunications, and airlines required changes in organizational structures to meet changing marketplace demands (Kole & Lehn, 1997; Mikkelsen et al., 2002; Robinson, 2000) It may be expected that similar organizational changes were required in the

electricity industry Electrical utilities in the pre-deregulation era were typically led by technically-oriented employees, such as engineers (Mikkelsen et al.) As a result of this technical orientation, utilities were organized from a rational systems perspective to accomplish well-defined goals (Scott, 2003) to provide reliable and adequate electrical

supplies Faced with turbulent market conditions stimulated by deregulation, however, the rational systems approach may no longer be an appropriate organizational structure

Although Scott (2003) suggested that the technical core of an organization should retain a rational systems approach, a natural systems approach based on collective action may be more appropriate to cope with rapidly changing conditions and ill-defined goals Traditional command-and-control hierarchical organization structures may not be

appropriate for this new approach A key decision accruing to cooperative managers who face deregulation in their environment rests in choosing the appropriate organizational structure that will best allow the organization to thrive under turbulent market conditions

Organizational Structure

In his seminal work, Levitt (1960) wrote, "The entire corporation must be viewed

as a customer-creating and customer-satisfying organism" (p 56) Prescient of the

requirement to change from a technical emphasis to a more customer-focused strategy fostered by deregulation, Levitt's statement implies that developing an emergent strategy

is not the sole purview of the organization's executives Different skills are required to develop and implement an effective strategy (Kay, 2003) and these skills must be either

be developed internally or contracted externally Strategy focused on customer needs originates with and may be implemented by the organizational members who are most familiar with customer issues (Mintzberg, 1987b, 1994; Prahalad & Ramaswamy, 2003) Organizational members who directly interact with customers may be in the best position

to monitor these trends and better understand consumer demand Schlesinger and Heskett (1991a) described these organizational members as customer contact personnel