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High Wire Act

High Wire Act

Once upon a time, electricity and natural gas companies sat happily in their natural habitats -- regional markets roped off by law from competition. But over the past decade the government has been removing its legal protection and opening energy markets. The result: a feeding frenzy much like the one the telecommunications industry has already undergone. Indeed, while the current setting may focus on watts and amps, this is not just a story about life in the utilities industry; it is a parable that all businesses can heed in these predatory times.

Before deregulation, the US electricity business had three functions: generate power, transmit it to substations and distribute it to homes and businesses.

Each utility had a geographic area all to itself. "In effect, the government said, 'We'll give you a monopoly and you'll set your rates to reflect your costs and make a little profit,'" says Bob Welch, a partner at Boston-based consultancy Ernst & Young LLP. Now the first step of the process-generation-remains a regulated monopoly, but the other elements of the business are coming open for competition. In addition, a fourth stage of the business, called "merchant," has been created, which is essentially a marketing and billing organisation with no actual generation or transmission capabilities itself. Utilities must separate the generation arm of the business from the other functions so that competitors in the transmission, distribution and merchant functions can buy and resell the juice on a fair basis.

Staggering ramifications follow for the information infrastructures at these utility companies. Nicholas Ioli, vice president and CIO of Citizens Utilities in Stamford, Connecticut, sums it up this way: "When you're a regulated monopoly, your file structures and data structures are all centered basically around the meter or the premises. The customer is just the name you put on the envelope when you send the bill." In the new competitive landscape, IT must elevate the customer from commoner to king in very short order, which means revamping-or creating-marketing and billing systems, call centers, data warehouses and much more.

Deregulation is happening gradually on a state-by-state basis. CIOs at existing utility companies are putting in overtime to get IS ready as a pack of new competitors sniff hungrily around their customer base. They speak of both defensive and aggressive tactics: protecting their existing markets and customer bases while simultaneously scouting for new sources of revenue and new markets to enter. CIOs in any industry would do well to pay attention to the lessons they are learning.

Keep Your Balance

If the old saw holds true -- that it is cheaper to keep an old customer than to sign up a new one -- then it makes sense that defending the existing customer base must be a top priority. To accomplish that goal, utilities aim to "rightsize" their companies, create an agile infrastructure and put in new systems that focus on the customer.

Rightsizing in this instance isn't a euphemism for laying off workers. Instead, Welch says, it means answering the fundamental question, What sort of company do we want to be? A transmission company? A distribution company? An end-to-end service provider? Mergers, acquisitions, divestitures and spinoffs are the rage among utility companies striving to get into fighting trim.

Some utilities follow the example of Duke Energy , based in Charlotte, North Carolina. Duke's response to impending deregulation has been to bulk up. A series of acquisitions over the past few years has turned Duke from a regional monopoly into a US$17.6 billion conglomerate with end-to-end capabilities in numerous geographic markets. Cecil Smith, the company's CIO, gives an example of Duke's scope. The company is building a new power generation plant in Edinburgh County, Texas. One business unit will operate the plant, another is designing and building the facility, a third will provide the plant with fuel resources, and a fourth unit will transmit the output to the marketplace. "The integration of all these unregulated subsidiaries results in a solid asset that we can use to make money going forward," says Smith. Duke has operations and interests not only domestically in 25 states but also in more than 50 countries, such as Indonesia. Many business units have their own small IT group. But the units depend on Smith's central department for common services such as networking and telecommunications. That model allows each subsidiary to build systems that address its peculiar needs while still gaining economy-of-scale benefits.

Citizens Utilities uses a similar organisational setup to enable divestitures as well as acquisitions. The company got regulatory approval last April to separate its current business into two distinct pieces: utilities and telecommunications. Chairman and CEO Leonard Tow says the split will allow each of the two operating companies-with different investment features, valuation criteria, capital structures, dividend policies, customer requirements and regulatory concerns-to operate more nimbly and effectively in its own competitive market. Like Duke, Citizens' recent growth has come primarily through acquisition. Each new acquisition brought its own unique IT systems into the fold. At one time, Ioli counted as many as 19 billing systems and 25 payroll systems within Citizens' walls. "We developed an enterprise business model and determined which processes and systems could be shared across the business and which had to be controlled locally," Ioli says. A simple example: The telecom and utilities units cannot use the same billing system because of differing functionality requirements, but both billing systems by decree must be based on relational and open-standards technology. By September the company aims to turn off its two data center mainframes and run the entire business on a common, three-tier client/server architecture. Financials will run on software from SAP AG; human resources on software from PeopleSoft Ioli says the new structure makes it easier for the company to integrate any future ac-quisitions. Of greater immediate significance, it simplifies the split-up of telecom from the utilities business. "We have common servers, applications and databases. When we separate, we just get a similar server [to run the newly independent telecom company] and replicate the application to scale," Ioli says.

Common infrastructure can also translate into a competitive advantage. For example, Citizens deals with a different regulatory commission in each of the 22 states in which it does business. The IS group acquired and modified a Lotus Notes-based legal and regulatory application to foster information sharing within the two utility subsidiaries (Citizens Energy Services and Citizens Water Resources). "Most utility companies don't look at this [regulatory application] as mission-critical, but it has saved us a lot of time and effort," Ioli says -- $18 million in savings and cost avoidance, in fact.

Because of the exchange of information within Citizens, for example, filings get to the commissions faster as much of the information due in one state has often already been submitted elsewhere.

Traditional utilities have one other IT-related advantage over incoming competitors: historical data. Consumers Energy, a subsidiary of CMS Energy , will face deregulation at the beginning of 2002 in its primary marketplace in Michigan. To get ready, the Jackson, Michigan-based company has created a sophisticated new retail billing system, says Jim Suprinski, general manager of information services and technology. The new system will record energy usage on an actual basis for large customers, while residential consumers will still be billed on a profile basis that will be reconciled later with actual usage. The company has also modified its legacy billing system on the transmission side, which will handle the fluctuations in energy prices every hour. When power can be purchased from any market and transmitted to any other, it becomes a true commodity, subject to price fluctuations depending on demand, Suprinski explains. And Consumers will be able to provide its industrial and commercial customers, who have more sophisticated energy needs and usage patterns than do residential customers, with historical data that allows them to better manage their current usage. That makes it less attractive for customers to switch to a new provider.

Extend Your Reach

Of course, it's no fun being the hunted all the time. The next step is to become the hunter.

Duke Energy is looking for new areas of business that extend from its existing competencies. Energy services is one example. "We are making a business out of doing energy management for large customers," says Smith. "In some cases, we just come in to manage a given building; in others, we are consolidating their energy bills across several states and finding economies for that particular customer." To that end, Duke Energy has created a subsidiary, DukeSolutions The business unit, formed in 1997, booked 24 contracts in 1998 with revenue potential of $1.2 billion over the life of the contracts. The more services Duke provides for a given customer, the more difficult it becomes for a competitor to jigsaw one or more pieces of the puzzle. The CIO is in a prime position to explore these kinds of information-based services.

Of course, new systems can open new doors. Consumers Energy's retail billing system positions the company to move quickly into the merchant function in any state as its regulatory status changes. Going further afield, CMS has branched out to create businesses related to financing purchase and repair of home appliances. "We're looking at a lot of ancillary products and services that were not necessarily part of the standard utility business," says Suprinski.

That brings the utility into a whole new sphere of competitors, all of which have their own potentially vulnerable customer bases. And some opportunities lie entirely outside the normal domain of energy utilities. Enron , a major conglomerate based in Houston with units in virtually every energy-related business, also has a business unit that is building fiber-optic network loops to provide communications bandwidth-on-demand in metropolitan areas. "It's a bit of a head-slapper, I know," says Mark Palmer, a spokesman for the company, explaining that the networking business came into Enron's fold through the acquisition of another utility.

Creating these products and marketing them to the right customer falls in many instances on the IS team. As Welch says, "If you build systems assuming you have a bilateral relationship with your customer, and then all of a sudden there are several other parties involved in the transactions, those systems have to fundamentally change." Meter MarketWill the torrent of dot-coms ever end? Utility.com professes to be the world's first Internet electric company. No, customers won't plug their curling irons into their PCs. The company offers sign-up, billing and power usage data via the Web.

The company has several tricks up its sleeve to lure customers in newly deregulated states away from their current providers. For example, Utility.com customers can hook up "smart" meters to their homes using wireless communications technology from San Carlos, California-based CellNet Data Systems These meters automatically signal the power distribution company if power goes out at a particular home or business; they also post current power consumption data to the Web for close monitoring, so the guys in accounting can call the plant and tell them the factory-floor workers forgot to turn off the machines when they left for lunch. Customers will soon be able to use the CellNet connection to control their home thermostats from the office via the Web. That means they can keep the heating bill down during the day and crank up the temperature at home just before they get there -- no matter how unexpectedly early or late they leave work.

Sounds good, but CEO Chris King, based in Albany, California, formerly an executive at Pacific Gas & Electric, says convincing customers to switch energy providers takes a lot of work. "There's a significant education effort required," he says. For example: King says that in California, one of the first states to throw the deregulation switch, the state commission has spent $90 million in advertising to make consumers aware that they can choose the power company they use. Eighty-five percent of consumers say they now know they can change, but only 1 percent have actually done so.

As for Utility.com, the company relies on its Web site to draw in new business but has also bulked up on more traditional mass media advertising-radio, television and billboards.

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