The effects of the financial crisis are now well in the rearview mirror and the forecast for spending in the utility sectors is strong. A combination of improving state and local budgets, low natural gas commodity prices, regulatory and environmental requirements related to electric generation, transmission and distribution and a backlog of needed work in most sectors will drive spending through the end of the decade.
The availability of workers will be an increasing challenge moving forward. U.S. unemployment bottomed out at 4.4 percent in June 2007 and peaked at 10 percent in October 2009.
Unemployment remained above 7 percent until November 2013 before falling to the current rate of 5.1 percent. The utility workforce is older than other industries. As of 2012, the largest percentage of utility employees were in the 48 to 52 and 53 to 57 age groups; 38 percent of electric and natural gas employees will be eligible to retire in the next decade1.
The financial crisis led to a three- to four-year period where the workforce shrank and labor needs were limited. The strong growth of pipeline work, both in transmission and distribution, led to rapid growth of this workforce beginning in 2011. The recent decline in this growth rate is more a function of limited availability of additional workers as opposed to declining demand. The electric workforce has seen steady growth since 2010, while the water/sewer workforce only began to expand in 2013.
From 2000 to 2013, the labor participation rate in the United States fell by 4 percent. Roughly 65 percent of the decline is accounted for by retirement and disability. Since 2012, 80 percent of the decline is because of retirement2. As the economy has improved, the number of discouraged workers who could be enticed back into the workforce is falling while the overall workforce is growing at a slower rate due to retirements. The lowering unemployment rate — in combination with an aging and soon-to-retire workforce — will create significant challenges for the utility industry and its contractors over the next decade.
The utilities are responding to this labor challenge by outsourcing and using contractors particularly for their engineering, construction and maintenance needs. This trend is forecast by the Bureau of Labor Statistics through 2022 as shown in Exhibit 2 with utility workforces declining or flat while contractors’ workforces expand.
Contractors will need to expand their workforces by 30 percent by 2022. The shortages in contractor labor will drive up cost in the utility industry.
This shift to a more contractor-centric approach will also continue to stress the ability of utilities to buyout, manage and control the work. A superior ability to collaborate and integrate with contractors will be a key success factor for utilities over the next decade. Industry-wide efforts to encourage workers to enter the industry and then train, develop and retain them will be needed.
Utility Spending Forecast
Electric and Gas —Transmission & Distribution
Continuum Advisory Group, a management consulting firm working exclusively with the stakeholders of the homebuilding and construction industry, projects a pullback in 2015 Electric and Gas T&D spending due to reductions in power generation spending and transmission pipeline spending because of continued low oil prices and a dramatic reduction in transmission pipeline activity. Modest growth is forecasted through 2017 driven by strong electric T&D and gas distribution spending. A gradual rise in oil prices in 2017-2019 will fuel more widespread growth in this segment as transmission and power generation spending increases.
Who will do the electric work?
The Bureau of Labor and Statistics (BLS) forecast a decline in the internal electric T&D workforce among electricians, equipment operators and foremen through 2022, while the number of line installers is expected to remain stable. The contractors will need to increase the overall size of their workforce in these key trades by one-third over this time period.
Based on an analysis of the current workforce and future projected spending, Continuum Advisory Group forecasts that an additional 40,000 field staff will be needed in the electric space by 2020. There will also be a need for 7,500 foremen and 2,500 construction managers. Further complicating this picture is the changing nature of the work. The increase in distributed generation and renewables is requiring a new workforce with different skill sets.
Who will do the gas work?
The natural gas distribution workforce has experienced the most stress to date. The improvements in the overall economy and the declining unemployment rate are quickly driving labor availability in this space to crisis levels. Many utilities in the Mid-Atlantic, Northeast and Midwest are just beginning large multi-year replacement programs. These utilities have made commitments to replace specific infrastructure by specific dates in areas already experiencing significant labor shortages.
Continuum forecasts the following new workers will be needed in the overall oil and gas pipeline workforce, including gas distribution, by 2020 in Exhibit 5.
On a regional basis, the need for pipeline labor is greatest along the East Coast and in the Midwest.
Water Supply and Sewage and Waste Disposal
The water/wastewater market has entered a period of slow growth supported by improving state and local budgets and a housing market demonstrating consistent growth. A short recession in 2016-2017 is predicted to slow growth slightly before an improving economy at the end of the decade along with a significant backlog of needed maintenance and capital spending drives a significant expansion of spending in both 2018 and 2019.
Who will do the water/wastewater work?
The water/wastewater industry has the oldest workforces in the utility industry. An American Water Works Association (AWWA) study found that nearly 30 percent of the utility workforce was eligible to retire within five years3. In addition to this, years of underinvestment have not only created a need to increase spending to replace aging infrastructure but have left the utilities without the time and resources to train and develop new staff.
The Mazars Group 2015 water industry outlook surveyed water/wastewater industry leaders about key challenges. The aging workforce was the third ranked item behind only aging infrastructure and regulatory compliance4. The trades with the most need for new workers in the water/wastewater space are plumbers, pipefitters and steamfitters.
Unlike the other major utility segments, water/wastewater utilities are not forecast to shrink their workforce in coming years with the overall workforce expected to increase from 47,000 in 2012 to 55,000 in 2022.
The next five years of communications spending is forecast to both improve and be more stable than the last 10. The industry spending is focused on base level maintenance, incremental system expansion and performance improvement over the forecast timeline. This period of stability and modest growth will likely not be disrupted until the implementation of 5G networks begin around 2020. The current uncertainty around what 5G will look like and require makes forecasting its effect on industry spending in 2020 and beyond difficult.
Who will do the communication work?
The communication workforce internal to telecommunication firms is forecast to decline through 2022. There are currently 858,000 individuals working for communication companies in the United States in all functions. By 2022, this number is forecast to decline to 807,000.
The traditional telecommunication line installer workforce internal to the telecommunication firms is forecast to decline by 10 percent through 2022. In raw numbers, this workforce will decline from 76,300 in 2012 to 68,300 in 2022. The contractor line installer workforce is expected to increase from 15,800 to 22,500. The communication industry is moving gradually toward more of an outsourced construction workforce. In 2012, 17 percent of the line installers were external. By 2022, 25 percent of this workforce will be external.
Who will do the work? The utility market — and particularly the gas distribution market — is stressed from the rapid growth of spending. The electric T&D, water and sewer markets are facing similar concerns over the long-term. It is Continuum’s belief that the shortages currently faced in the utility market will persist and prove either a hobbling constraint or competitive advantage. To utilities, telecommunication firms and contractors that see the opportunity to create a competitive advantage, it’s vital to look forward and determine how to control a scarce resource like a competent and capable workforce and management. Stress is perhaps the best motivator and forward-thinking companies will use it to be successful over the coming decade.
Mark Bridgers and Nate Scott are Consultants with Continuum Advisory Group, which provides management consulting, training and investment banking services to the worldwide utility and infrastructure construction industry. For more information, visit www.ContinuumAG.com.
1 QER Report: Energy Transmission, Storage and Distribution Infrastructure. April 2015
2 Shigeru Fujita. “On the Causes of Declines in the Labor Force Participation Rate” Federal Reserve Bank of Philadelphia. Feb. 6, 2014
3 Workforce Planning for Water Utilities —Successful Recruiting, Training and Retaining Operators and Engineers to Meet Future Challenges, American Water Works Association (AWWA) Research Foundation, 2008.
4 2015 Water Industry Outlook, Mazars Group, 2015, pg. 2.