Commonwealth Energy Systems: Business Units and Shared Services
This is post 21 of 23 in a series on Systems Thinking: Managing Chaos and Complexity by Jamshid Gharajedaghi (ISBN: 978-0-7506-7973-2).
Previous: Commonwealth Energy - Stakeholders and Environment
In Part 1, we covered the mess that Commonwealth Energy (COM/Energy) was dealing with: deregulation, shifting stakeholder expectations, and an industry that was changing under their feet. Now we get into what they actually designed. This is where the systems thinking methodology stops being theory and becomes a real organizational blueprint.
The Core: Gas and Electricity Distribution
Every redesign needs a stable foundation. For COM/Energy, that’s gas distribution and electricity distribution. These two units stay regulated. They’re the franchise businesses, and all signs pointed to them staying that way for the foreseeable future.
Each unit reports to an internal board of directors. Each one is fully autonomous. They control everything they need to run their franchise well. The point is simple: these are the cash cows. They provide the stability that lets everything else get built.
But “stable” doesn’t mean “frozen.” Each unit still has the job of finding unrealized potential within the existing franchise. They need to keep getting better at what they do. The goal is to become a model of efficient distribution in a regulated industry. Boring? Maybe. Essential? Absolutely.
Customer-Oriented Units: Energy Supply and Management
Here’s where it starts getting interesting. COM/Energy’s redesign creates two customer-facing business units that operate outside the regulated environment: energy supply systems and energy management services.
The logic is straightforward. COM/Energy has been a gas and electric company for a long time. That gives them real knowledge about what customers actually need. The redesign says: stop sitting on that knowledge. Turn it into products and services.
Cogeneration and Packaged Energy
Cogeneration was already a big deal when this case study was written. By 1992, the US cogeneration market had hit roughly $4 billion. Between 1988 and 1992, cogenerated electricity grew 74 percent while total electricity generation grew only 7.9 percent. Those numbers tell a clear story.
The energy supply systems unit would offer the full package: consulting, equipment installation, maintenance contracts, and financing. They’d target energy-intensive industrial sites like chemical plants and paper mills, plus hospitals, industrial parks, and universities. There’s also a standardized version called packaged cogeneration for smaller commercial operations like restaurants and hotels.
What I like about this design is how it creates deliberate synergy. The energy supply unit finds cogeneration opportunities, and some of those lead to energy efficiency work, which gets passed to the management services unit. The management services unit finds customers who could benefit from cogeneration, and passes them back. It’s a two-way referral system built into the organizational structure.
Energy Efficiency and Electrotechnologies
The energy management services unit handles what Gharajedaghi calls “after-the-meter” activities. This is everything on the customer’s side of the meter: energy audits, management programs, investment strategies, and help with new technologies.
The market was real. US businesses were spending $7 billion on energy conservation in commercial buildings annually. The home automation market was projected to hit $3.5 billion by 2000.
This unit would also act as a performance contractor for other utility companies, essentially selling COM/Energy’s demand-side management expertise to competitors. That’s a confident move. You’re saying: we’re so good at this, we’ll help you do it too, and charge you for it.
Technology and Supply Units: Energy Generation
The third dimension of the value chain covers generation, conversion, and storage. This includes Canal (power generation), Hopkinton LNG (gas storage), and Steam Services.
Canal is interesting because of timing. Their contracts for Canal Unit 1 were ending in 2001, at which point they’d have a fully depreciated power plant. That’s either a problem or an opportunity depending on how you think about it. The redesign treats it as an opportunity: negotiate fuel supply partnerships to offer market-based pricing with competitive fuel costs.
Canal Unit 2, jointly owned with Montaup Electric, had contracts through 2010 and was being converted to natural gas with the ability to switch between oil and gas instantly. That flexibility opens up brokerage opportunities. The LNG storage and steam subsidiaries would similarly look for new business beyond their traditional roles.
The key shift: each of these units gets treated as an independent business with its own customers and suppliers. They stop being internal cost centers and start being businesses that need to justify their existence on their own terms.
Energy Brokerage and International Operations
This is the part that feels most forward-looking. COM/Energy controlled real physical energy assets: oil storage, gas supply contracts, LNG storage, dual-fuel generation capacity. The brokerage unit would use all of that to trade in energy futures, hedge prices, and create new financial products across oil, gas, and electricity markets.
The international operations unit might sound ambitious for a regional energy company, but the logic holds up. Energy markets were globalizing. What happened in British electricity deregulation or Canadian natural gas markets had direct effects on the US market. This unit’s job was to watch, learn, and find ways to bring ideas and partnerships home. They’d already started with alliances in Venezuela and Canada.
Shared Services: The Internal Market
This is one of the most clever parts of the whole design. Shared services, meaning the service company and financial systems, would operate under an internal market mechanism.
Here’s how it works. Business units can buy services from shared services. But if a business unit finds a cheaper outside provider, they can outsource. The catch: they still have to pay their share of corporate fixed costs as an internal tax. So the decision to go outside only makes sense if the external price plus the tax is still cheaper than the internal price.
This creates real pressure on shared services to be competitive. They can’t coast on being the default choice. They have to earn the business. And they’re encouraged to find external clients too.
The service company specifically is expected to build three core competencies: information know-how, industry know-how (regulatory and utility expertise), and process redesign capability. The goal is to transform from an overhead center into a profit-generating performance center.
Financial systems acts as an in-house investment center, providing seed money and managing capital needs across all business units.
The Executive Office and Core Knowledge Pool
The executive office has three responsibilities: latency, synergy, and throughput.
Latency means constantly searching for new business opportunities. Every three years, COM/Energy would run a full interactive planning exercise: bottom-up mess formulation followed by top-down redesign.
Synergy means building the systems and incentives that make the whole value chain worth more than the sum of its parts. Internal markets, target costing, measurement systems, reward systems.
Throughput means operational efficiency. TQM, continuous improvement, reducing cycle time, eliminating waste.
To actually do all this, the executive office gets a core knowledge pool. This is a group of top experts who rotate across projects, get drawn from inside and outside the company, and work in cross-disciplinary teams. No new professional enters the system without going through the knowledge pool first. That’s a strong statement about how seriously they take organizational learning.
The Learning and Control System
The final piece is maybe the most important. COM/Energy’s redesign replaces supervision-based control with learning-based control. Instead of managers watching and correcting, the system focuses on shared ownership of decision criteria.
Decisions get split into two layers: policies (the “why”) and procedures (the “how”). The system includes early warning mechanisms that monitor the assumptions behind decisions and flag problems before they fully materialize.
At the corporate level, a management committee runs the learning system. At the business unit level, internal boards handle it. These boards form what Gharajedaghi calls a nested network that provides vertical, horizontal, and temporal integration across the whole organization.
The Big Picture
What strikes me about this redesign is how everything connects. The core businesses provide stability. Customer-oriented units create growth. Technology units become independent businesses. Brokerage captures value from market volatility. Shared services operate under market discipline. The executive office manages the system’s evolution. And the learning system ties it all together.
It’s not just an org chart. It’s a system designed to evolve. Whether COM/Energy actually pulled all of this off is a different question. But as a demonstration of what systems thinking looks like when applied to a real company, this chapter delivers.