Fortnightly
Information Technology for Utillities
November 15, 1997
By Joseph F. Schuler, Jr.
IN THE DRIVE TO MATCH INFORMATION TECHNOLOGY SYSTEMS WITH THE
demands of "deregulatory" standards, utilities are investing billions in information technology \(em some launching new business lines from their experience.
Worldwide, utilities are investing $20 billion; electric utilities pony up the most: $12 billion each year, according to Newton-Evans Research Co. An average U.S. electric utility will invest $43 million this year; a gas utility will invest $9 million.
The research company defines IT as "enterprise-wide" systems, management information systems and technical information systems. The latter include applications found in utility control centers, notably those for energy management.
According to Newton-Evans, the most applications planned for rework or replacement at electric utilities are those for customer information, then financial systems, followed by systems in work order management, materials management and human resources.
One of the most significant trends, according to the data, is that utilities are teaming up with known vendors or consultants \(em IBM, EDS, Andersen Consulting, Price Waterhouse \(em to develop applications for themselves. They then spin off subsidiaries or start divisions to commercialize the technology. Some have been more successful than others.
"We helped Idaho Power spin off Stellar Dynamics Inc., which is turning into a very sharp leading edge little business out of Boise," says Charles W. Newton, Newton-Evans president. "Stellar has gotten multiple millions of dollars of business in its first two commercial years."
Northern Indiana Public Service Co., in its partnership with IBM, is projecting a $5 million-a-year business selling consulting and training services and utility know-how. Hydro-Quebec has spun off m3i. In June 1996, UtiliCorp United Inc. launched RiskWorks, whose nine customers include six utilities. Andersen Consulting has several alliances, including one with Florida Power Corp. that improved a line of customer service software. GE, Hewlett-Packard Co., Oracle and Microsoft are taking on utility partners.
Nearly half of the electrics surveyed by Newton-Evans say they've considered commercializing internal IT for resale to other energy companies. Most applications are for customer information systems (CIS), but that could be changing. Regulators are unbundling customer-related services, making metering and billing competitive. This could prompt reevaluation of investments in those "moneymaker" technologies.
But these changes aren't happening in a vacuum. There are external pressures from public utility commissions. The extent of California's gas and electric restructuring, for example, struck PG&E broadside, ending a $300-million CIS project with IBM-NIPSCO.
Internal pressures have surfaced. NIPSCO's IT changes have led to worker cutbacks. Its union now claims the company is compromising customer service to return more cash to shareholders and management and pump money into unregulated subsidiaries.
Other ventures have taught utilities they'd better stick with their core strengths, says J. Guerry Waters, of META Group Inc., a utility information technology strategies vice president and former chief technical officer at Southern Co. He says he knows of at least six commercializations that soured. They include a nuclear on-line records system and an executive information system. Hundreds-of-thousands to millions of dollars of investment were lost, he says.
Beyond Core Competence
Utilities are trying to mesh internal systems to come up with enterprise-wide solutions. Hopefully, these solutions overcome what engineering groups have done separately for years, Waters says.
"[Companies are] more focused on making that happen1/4 looking more from an acquisition strategy or a merger strategy than they are out there thinking they're going to take some of that intellectual knowledge and capital and go out and sell it to someone else," he says.
An interesting area, Waters says, is in energy trading and risk management. "There's very little in that area today as far as services and technology that would relate directly to a utility. And most [market players] are taking things like commodities and investment banking and trying to quickly to fill that niche for utilities now."
Some utilities have no qualms admitting they don't plan to get into the IT business. Cinergy Corp. is one. George Weston, the company's information technology general manager, says "developing systems for the use of others is not a core competency of ours. Most of what we've been doing recently is implementing and integrating purchased packages."
Several IT executives interviewed agreed that among the most critical needs for utilities is the ability to take customer information and leverage it to understand what a customer needs. Customer systems of the future that handle cable, phone and other services will be based on CIS systems installed now.
Meter information will become more valuable, says John W. Dunn, group vice president and chief technology officer of NIPSCO Industries Management Services Co. "And the ability to take that information and put it into an information warehouse and do some marketing studies will become increasingly important."
Northern Indiana Public Service Co. has started an information warehouse driven by CIS data with the idea of doing targeted marketing. It is using telephone company technology to predict "churn," to determine which customers are prone to switching to alternative suppliers. "Those are the ones you want to focus on," Dunn says. "The identification of those customers is sometimes difficult."
It has taken NIPSCO about seven years to come to the point where it can do this type of data gathering and offer it to others with partner IBM.
NIPSCO installed a CIS in November 1995 after working with IBM for five years. The client/server system, which includes wide and local area networks and a host processor, contains data for about 700,000 customers and about 1 million meters. The system's automatic call director processes and routes incoming calls to the appropriate customer rep. An interactive voice response unit allows customers to retrieve information.
The CIS enabled NIPSCO to streamline its business processes and trim the number of district offices from 28 to four.
"As we were developing CIS, we did not anticipate being in this business," Dunn says. "But as the market unfolded there was substantial opportunity for us to participate in it. We think with our participation, our success rate will be higher, because as we've implemented the system, we've done a lot of change management work. And we can at least provide guidance to other utilities on how to go about rolling this system out for employees."
Those considering buying IT services from utilities are a mixed bunch.
"It's like a bell-shaped curve where the peak is in the middle," Newton says. "'Sell me on the idea, but right now I just don't know.' And then you've got 15 percent who say, 'There's no way I'm going to let another utility know what our real strengths and weaknesses are.' But1/4 about 25 percent say, 'We're looking for better solutions. If they come from another investor owned, that's fine.'"
NIPSCO-IBM now has contracts with four utilities \(em Arizona Public Service Co., Yankee Energy System Inc., Michigan Consolidated Gas Co., and PECO Energy Co. The combined customer base is nearly five million. Prior to losing PG&E, the CIS business could have claimed 13 million customers. The four remaining projects will be completed from mid-1998 on.
While nursing its wounds from the loss of the PG&E contract, NIPSCO's work with MichCon began after the company decided to stop working on another system and convert to the NIPSCO-IBM product.
"We're certainly making more than our expenses," Dunn says. "We hope to grow the business so that it's a meaningful contribution to NIPSCO's earnings. But we're not there yet. Our people seem to be well accepted by other utilities because we speak the same language and we understand things like regulatory accounting and meter reading."
Dunn believes that sharing the utility's know-how will not hurt the company when energy markets open to competition across state borders.
"If we're not better at using our tools, then we deserve to lose," he says. "We've got enough of a head start, as long as we continue to invest and change and modify and move forward, we can do it. I'm not sure that view is uniformly held in the company, but I know the chairman shares it."
Unions, Regulators and Restructuring
On other more complex issues, such as challenges posed by regulators and unions, Dunn is equally confident.
NIPSCO's customer service system allowed it to trim "a couple of hundred" jobs and save "millions of dollars." Dunn declined to disclose figures because of NIPSCO's delicate company-union negotiations at press time.
"We have every confidence that in about a five-year period we will have paid back the full cost of our system," he says. "Our customer service is better today than it has ever been. Our customer service is achieving world-class numbers on call response and call answering."
Two locals for the United Steel Workers of America, which represents 2,600 workers, claim that customers and employees have been hurt by the downsizing and that only shareholders and management are benefitting. The workers' contract expired May 31; they've been negotiating with the company since June.
Regulatory challenges create another obstacle when it comes to new IT, especially in customer information.
The NIPSCO-IBM project for PG&E ended in April after beginning in February 1996, and after "tens of millions of dollars" were invested, according to an industry source.
According to the same source, PG&E dropped several IT projects this year because of deregulation. Apparently, the company didn't have the resources to "cost out" unbundled services, figuring how to price services in the open market while also doing other projects.
"There's a great deal of uncertainty about how re-regulation, deregulation is going to unfold," Dunn says. "But because in most cases, final rules have not been issued, the California initiative scared a lot of people. So people aren't spending the type of money on customer systems at this point in time as they did two or three years ago.
"The [PG&E] system was quite extensive. Until the regulatory system situation cleared up a little bit, they were unwilling to go forward with the investment necessary to complete CIS.
"I think we're going to encounter different regulatory issues in every state," Dunn says. "And the way the East Coast is developing, our systems seem to fit in quite nicely. California, being California I guess, chose a different mechanism to deregulate. Had the picture been clearer, I think PG&E would have gone ahead with it."
Diana Gapuz, a PG&E spokeswoman, admits the end of the NIPSCO-IBM project was partly caused by restructuring. When the project began, the utility didn't know when the PUC would deregulate the industry.
Then came word of the order on revenue-cycle services (May 6, 1997, r.94-04-031/i.94-04-032) and the Gas Accord settlement (Aug. 1, 1997, d.97-08-055. See, Courts and Commissions, this issue, p. 57.). Under the former, the metering and billing market were opened to any provider. Utilities lost their grip on the market. The Gas Accord took PG&E to task for its market power and conflicts of interest on brokering capacity, among other findings.
"We knew that we would have to have new line items placed in the billing, depending on who your supplier was or what kind of choice you made in terms of who you wanted to be billed by," Gapuz says.
Therefore, the utility didn't want to continue investing in the new system.
"It was sort of a decision that was not driven by what we had done with IBM, but a decision driven by the rapid pace of deregulation," Gapuz says.
California begins electric deregulation Jan. 1, with all customers able to choose power suppliers the following year. PG&E's new strategy is to stick with its old systems.
"There's a lot of hard work being done right now to make sure our current CIS is ready for the transition to the restructured electric industry," Gapuz says. "And then once we have gotten through that transition, they'll take a look at what we should be doing next. I think they want to leave things open to see what sort of system will be necessary.
"This unbundling, in terms of metering and billing, decision will have to be made eventually as to whether the services will be performed by the utility itself, whether it would be offered by another subsidiary1/4 But those are all questions that are open."
Andersen Consulting, which works with 20 utilities in the U.S. and claims its products will help in the billing of 40 percent of the customers served by U.S. IOUs by 2000, has a different take on working with utilities, perhaps modeled from experience.
The firm provides a customer information systems product called Customer/1 that gives IOUs a chance to supply services to other utilities. Utilities on both ends of the transaction, Andersen believes, benefit from its brand of IT. Brad Holcombe, managing partner-utilities at Andersen, pictures utilities using Customer/1 in order to contract with others as a billing service company, or BILLCO.
Holcombe says Customer/1 was first branded with Baltimore Gas & Electric Co. in 1989. In March 1995, the system moved to the client/server platform at Florida Power, serving more than a million customers.
That "very complex" arrangement is favorable to both parties, although "in terms of Customer/1 going forward, they really don't do anything," Holcombe says. "Florida Power's objective wasn't to be in the software business."
"It wasn't a decision they made later not to be involved. It was their decision from the beginning that they didn't want to be in the software business. They were interested in the capability1/4 their decision never changed."
Each company has to decide to step up or step back from IT commercialization, Holcombe says. "The battleground is littered with not just utilities \(em pick any industry \(em littered with people that strayed from their core competency."
Joseph F. Schuler Jr. is an associate editor with Public Utilities Fortnightly.
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