Latvijas Gāze

Unbundling and Opening the Market in Just Two Years

While the gas sector’s liberalization started in the late 1990s, with the privatization and stock market flotation of the former state monopoly, it was the adoption of the EU Gas Directive in early 2016 that brought sweeping change to the market. In the space of just two years, the value chain and legal structure of the sector were unbundled, and the market opened to competition. Unbundling took place in two steps.

Effective January 2017, gas transmission and storage activities were demerged into a fully independent system operator called Conexus Baltic Grid (ownership unbundling). From December that year, a new gas distribution system operator (DSO), called Gaso, started to operate as a separate legal entity within the Latvijas Gāze group (legal unbundling).

In parallel, in April 2017, the business-to-business (B2B) gas supply market was opened to competition, followed by the business-to-consumer (B2C) market, in January 2019. Since then, all gas consumers have been able to freely choose their supplier; businesses could negotiate the pricing terms and conditions for their gas supplies, while households could actively shop for alternative offers.

By the end of 2018 (the first full year since the B2B market opening) a record 28 new gas suppliers had registered to operate in Latvia. In February 2019, the first new entrants started targeting household customers.

Transforming the Business with Critical Open-Market Capabilities

In 2016, incumbent Latvijas Gāze had two short years to reorganize as a group and transform as a business — a transition that was going to require a major shift in the mindset of the company and a step change in its business processes.

As the B2B market opened, the company faced two pressing issues, both of which had profound implications for its IT systems: legal unbundling and the ability to effectively operate as a competitive gas supplier.

Ensuring DSO Independence

During most of 2017, Latvijas Gāze (supplier) and Gaso (DSO) had operated as an integrated company using a single billing system. After the legal unbundling, on December 1, 2017, Gaso
retained ownership of the existing system, while Latvijas Gāze rented application functionality from it. While systems separation wasn’t mandatory, it soon became clear that, in order to fulfill the regulatory requirement of DSO independence vis-à-vis its parent company, Latvijas Gāze needed to procure a separate billing system for its supply business.

Adapting to a More Demanding B2B Market

In the meantime, the B2B market — the lifeblood of Latvijas Gāze’s business, accounting for around 90% of total gas demand in the country — was rapidly becoming more demanding and
complex. Price liberalization generated a variety of customer requirements for new product features. Large price-sensitive commercial and industrial (C&I) consumers, in particular,
demanded:

• Products with advanced pricing and flexibility options (e.g., fixed, hub-indexed, and formula-based pricing, sales in storage, virtual storage)
• Shorter and more variable contract durations (e.g., next-month, next-quarter), moving away from traditional one-year contracts to cope with higher short-term price volatility in European markets (German GASPOOL prices are mainly used as reference in the Baltics)
• More responsive suppliers, capable of bidding into short RFP windows, helping make energy procurement faster and more efficient

Meeting this demand required a host of new core system functionality for product configuration, contract management, and complex billing.

Growing product variety also required more advanced hedging, balancing, and demand forecasting capabilities, as well as the ability to deal with more frequent transactions. While renting functionality from Gaso’s legacy billing system enabled Latvijas Gāze’s operations to continue during the transition phase, it also restricted the supplier’s ability to influence system development and create new capabilities.

This in turn limited Latvijas Gāze’s ability to meet the evolving requirements of the B2B market and risked compromising its ability to do business in a scenario of rising competitive pressure and declining demand.

On the B2C side, with more than 400,000 household customers free to switch suppliers from the start of 2019, Latvijas Gāze was also going to need a revamp of its IT capabilities. Keeping up with evolving expectations for convenience and service quality (the main differentiators in the household market), in a highly digitized market such as Latvia, required modern digital customer experience management capabilities designed for an open retail market.

Laying the Foundation of a Competitive Supplier with MECOMS 365

Powerful Set of Drivers Behind the Choice

After reviewing four billing systems between the end of 2016 and early 2017, Latvijas Gāze selected MECOMS 365, the integrated utility business platform based on the Microsoft Dynamicsstack developed by Antwerp-based Ferranti Computer Systems. Specifically, Latvijas Gāze found MECOMS 365 to best match several of its top requirements, including:

• Open-market design and provision of comprehensive standard processes based on best practices from across Europe
• Advanced contract management functionality and support for complex, consolidated billing requirements for large C&I customers
• Support for automation and efficient process design for small business and household customers
• Proven multicommodity billing capabilities, including gas, electricity, and water, as well as support for non-commodity billing
• Competitive total cost of ownership (TCO) and localization track record in Europe
• Solid IT foundation for a long-term digital retail strategy targeting both the frontend and back-office process automation
• Legal unbundling had also created the opportunity for Latvijas Gāze to replace the ERP component of its supply operations and, having chosen MECOMS 365, the company went on to select

Microsoft Dynamics.

Other technology partners selected by Latvijas Gāze included the consulting arm of Ferranti, for select analysis and implementation and quality assurance activities, and Berlin-based MECOMS partner Consolware as the main systems integrator. Riga-based WeAreDots and ScandicFusion were selected respectively to develop a new customer portal and integrate the company’s business intelligence (BI) solution.

Implementing in a Race Against Time

Leveraging Standard Processes for Best Practice and Speed

The implementation of a new core IT system is always a watershed moment for a business organization. This was especially true for Latvijas Gāze, for which the deployment of MECOMS coincided with the separation of the two main business activities and the first steps as a competitive retailer. With this in mind, the company’s IT function and its business stakeholders decided to use this as an opportunity to redesign several of the company’s business processes.

Still, time was in short supply. So, when it came to defining functional specifications, the project team opted to adapt to standard processes rather than customizing the system.

This would not only help Latvijas Gāze capitalize on best practice developed by MECOMS over years of experience in competitive markets, but also reduce system TCO by enabling smoother
future upgrades.

Process Design with the Help of a Prototype

The process analysis and design phase lasted from November 2017 to March 2018. In this phase, Ferranti and Consolware provided Latvijas Gāze with a MECOMS prototype that served multiple purposes, from training of key users to fine tuning of business requirements, process development, and initial data migration.

The team delivered “to-be” descriptions for eight processes that would be core to Latvijas Gāze’s B2B operations, from contract registration to meter reading, bill calculations, and collections. In
addition, specifications were delivered for customizations and additional development, integrations, data migration, and a description of technical infrastructure.

System Implementation in Less than Six Months

System implementation kicked off in July 2018. The project scope covered the deployment of core MECOMS functionality for open-market customers, development of custom functionality for Latvia (e.g., market messaging, integration with the Latvian register of legal entities, customer credit checks), and migration of business customer data. A new customer portal was also designed and deployed and, finally, necessary integrations between MECOMS and the existing BI solution were implemented.

By the turn of 2019, the system was ready to go live, on budget and on time, less than six months after kick-off. However, approval of a new DSO tariff in October 2018 for entry into force on January 1 meant the launch date had to be moved back. Eventually, in March 2019, the MECOMS platform went live with the planned big-bang approach for Latvijas Gāze’s 6,000 business customers.

In August 2019, Latvijas Gāze was ready to kick off phase three of its IT transformation, involving the implementation of 400,000 household customers in the MECOMS platform — a project
requiring thorough process redesign and a phased approach to data migration. After testing data loads the team started migration in the spring of 2020. In August 2019, Latvijas Gāze was ready to kick off phase three of its IT transformation, involving the implementation of 400,000 household customers in the MECOMS platform — a project requiring thorough process redesign and a phased approach to data migration. Migration started in the spring of 2020 and by year-end all customer contracts were live on the new billing system.

Challenges and Results so Far “Changing the Engine at the Start of a Race”

Implementing a new business system in times of disruption is a bit like changing the engine of a car right before the start of a race. The slightest hitch can easily undermine the theoretical performance advantage and, when one is ahead of the pack (i.e., they are the market incumbent), they also stand to lose the most.

As it developed its new capabilities, Latvijas Gāze’s business imperative was clearly to try and retain as much of its customer base as possible. If that wasn’t challenging enough, in 2018, the company had launched an ambitious efficiency program aimed at further improving its competitive positioning. This meant the company’s IT had to provide all the necessary support for the business to continue to be competitive with the existing tools. At the same time, it needed to keep exceptional focus on implementing MECOMS 365, which was clearly the centerpiece of the process efficiency program.

Delivering Change with a Measurable Impact

Immediate Process Benefits, from Product Design to Campaign Management Latvijas Gāze’s new business platform has already helped to reduce the cost of core business processes by improving the effectiveness and efficiency of meter-to-cash. It also helped improve the company’s responsiveness on the product side and the service quality on the frontend. Specifically, some of the most immediately visible business value brought by MECOMS 365 includes:

• Faster, more standardized, and easier-to-use product design functionality available to business users with no programming skills or IT involvement required. This was critical to Latvijas Gāze’s ability to expand its supply solutions portfolio and marked a quantum leap over the previous system.
• End-to-end support for C&I billing. This helped ease the pressure on the billing department, where the amount of manual work for the calculation of individual pricing and other billing determinants was escalating quickly. In fact, the solution enabled Latvijas Gāze to provide an individualized service to many customers with the same staff count.
• Better data and information control. The solution helped establish flexible data access segregation and control of access to operations and functionality among authorized users.
• Risk management. Accurate, up-to-the minute information about Latvijas Gāze’s contractual position for risk managers to effectively hedge in the financial markets.
• Campaign and contract management. End-to-end support for the management of price campaigns and related contract switching.

Risk, campaign, and contract management functionality, in particular, enabled Latvijas Gāze to effectively react to the gas price crash that took place between October 2018 and September 2019, when the GASPOOL price dropped by more than 60%. Timely contract data from MECOMS 365 enabled the risk managers to limit the impact of the price decline on the company’s net financial position. Furthermore, the platform enabled Latvijas Gāze to quickly launch a campaign to switch customers to hub-index-based contracts and automatically manage all resulting contract switches. With over 4,000 of Latvijas Gāze’s 6,000 business customers switching to the new pricing, the campaign was a huge success.

Long-Term Benefits, from Process Simplification to Business Growth

Longer term, Latvijas Gāze expects the new platform to continue to deliver value in terms of:

• Process simplification and control. Helping to keep product design, contract management, billing and financial process control simple as competition drives complexity in the market.
• Process improvement. Providing a foundation and the necessary capabilities for continuous process improvement, automation, and cost saving.
• Digital strategy. Enabling Latvijas Gāze to deliver a fully digital customer experience built on convenience, personalization, and automation — one that matches the expectations of a highly digitized consumer base, building and expanding on the more than 90% of business customers and 50% of household customers that already use digital channels as their main interface with the company.
• Business growth. Ability to support multicommodity billing (giving Latvijas Gāze an option to enter other supply markets) and international expansion, something the company is actively pursuing. Despite a difficult operating environment during its first months in production, the new platform helped sustain some of Latvijas Gāze’s key long-term strategic goals, including strengthening its position in the Baltic market and becoming the gas supplier of choice for its customers.
• Customer retention. In 2018 (the first full year of open market operations), Latvijas Gāze still supplied more than 90% of all the natural gas consumed in Latvia. Overall, revenues from the supply business, including those generated in Latvia, held their ground in 2019 despite rising competitive pressure.
• International expansion. Latvijas Gāze successfully expanded B2B gas sales outside of its domestic market (the company has held natural gas supply licenses for both Lithuania and Estonia since 2017). This was particularly the case for the smaller Estonian market, where Latvijas Gāze quickly grew to become one of the top three gas suppliers with a 24% market share in 1Q19. Overall, revenues from supply contracts to foreign customers more than tripled during the first nine months of 2019. In January 2020, the commissioning of the Balticconnector pipeline between Estonia and Finland and the creation of a single market zone between Latvia, Estonia, and Finland opened new opportunities for Latvijas Gāze. MECOMS 365 development work supported Latvijas Gāze’s business across the Baltic region and in Finland, where the company launched commercially in 2020.
• Business growth. Despite a drop in natural gas demand in Latvia during the first months of 2019 on the back of a warm winter, Latvijas Gāze’s volumes sold were up by a healthy 23% during the first nine months of 2019, also due to strong deliveries in Estonia and higher demand from power generation.
• Cost control. The company’s cost savings program delivered good results in 2019, supported by new process efficiencies. Non-input operating costs, net of financial hedging, decreased by more than 3% year on year, during the first nine months of 2019, with selling, general, and administrative expenses down more than 45%
• International expansion. Latvijas Gāze successfully expanded B2B gas sales outside of its domestic market (the company has held natural gas supply licenses for both Lithuania and Estonia since 2017). This was particularly the case for the smaller Estonian market, where Latvijas Gāze quickly grew to become one of the top three gas suppliers with a 24% market share in 1Q19. Overall, revenues from supply contracts to foreign customers more than tripled during the first nine months of 2019. In January 2020, the commissioning of the Balticconnector pipeline between Estonia and Finland and the creation of a single market zone between Latvia, Estonia, and Finland opened new opportunities for Latvijas Gāze. MECOMS 365 development work supported Latvijas Gāze’s business across the Baltic region and in Finland, where the company launched commercially in 2020.
• Business growth. Despite a drop in natural gas demand in Latvia during the first months of 2019 on the back of a warm winter, Latvijas Gāze’s volumes sold were up by a healthy 23% during the first nine months of 2019, also due to strong deliveries in Estonia and higher demand from power generation.
• Cost control. The company’s cost savings program delivered good results in 2019, supported by new process efficiencies. Non-input operating costs, net of financial hedging, decreased by more than 3% year on year, during the first nine months of 2019, with selling, general, and administrative expenses down more than 45%
• International expansion. Latvijas Gāze successfully expanded B2B gas sales outside of its domestic market (the company has held natural gas supply licenses for both Lithuania and Estonia since 2017). This was particularly the case for the smaller Estonian market, where Latvijas Gāze quickly grew to become one of the top three gas suppliers with a 24% market share in 1Q19. Overall, revenues from supply contracts to foreign customers more than tripled during the first nine months of 2019. In January 2020, the commissioning of the Balticconnector pipeline between Estonia and Finland and the creation of a single market zone between Latvia, Estonia, and Finland opened new opportunities for Latvijas Gāze. MECOMS development work supported Latvijas Gāze’s business across the Baltic region and in Finland, where the company launched commercially in 2020.
• Business growth. Despite a drop in natural gas demand in Latvia during the first months of 2019 on the back of a warm winter, Latvijas Gāze’s volumes sold were up by a healthy 23% during the first nine months of 2019, also due to strong deliveries in Estonia and higher demand from power generation.
• Cost control. The company’s cost savings program delivered good results in 2019, supported by new process efficiencies. Non-input operating costs, net of financial hedging, decreased by more than 3% year on year, during the first nine months of 2019, with selling, general, and administrative expenses down more than 45%

Lessons Learned: A Thorough Process Analysis Is Time Well Spent

There were several key factors behind the successful implementation of MECOMS 365 for Latvijas Gāze and the positive results that the company achieved on the back of it, as well as a few lessons learned:

• A thorough process analysis phase helped mitigate implementation risk, improving the accuracy of the project’s scope and schedule.
• The use of a MECOMS 365 prototype enabled key users to familiarize themselves with the platform standard processes first hand, although it somewhat inflated initial expectations.
• The data migration exercise during the analysis phase enabled the project team to design the right migration approach and specifications.
• The MECOMS 365 Periodic Quality Assessment services offered an additional critical view of business challenges, helping Latvijas Gāze to make safer decisions.
• The mobile-first approach followed for portal design, where all screen mockups were developed for mobiles, proved to be very effective.
• A small team from the IT function was dedicated to the project, which proved to be critical to the project’s success. The lack of dedicated business resources was equally felt.
• A tight focus on the initially agreed scope and avoidance of scope expansion was key to the project’s success.