Deregulation of the electricity Industry is occurring in real-time, but there are still many undecided features and rules in the evolving competitive electricity marketplace. Information technology will drive the new electricity marketplace in ways that the old regulated industry never Imagined. Aggressive and imaginative providers of IT solutions have a "field of dreams" to play in, but it does not come without its risks.

SINCE 1978, THE ELECTRICITY INDUStry has been on an evolving path toward becoming a competitive industry. This change in the nation's largest industrial sector (as measured by production) went largely unnoticed by the public, until the summer of 2000 when problems in California's deregulation of the electricity marketplace caused electricity prices to double or triple.

What the public does not see is the enormous amount of infrastructure change that must occur to support a competitive electricity marketplace, and nowhere is there a greater need for new infrastructure than in the industry's information technology (IT) platforms. Industry analysts have estimated the amount of investment required for IT infrastructure in the electricity industry to be several billions of dollars. This article examines three of the areas where it is believed the most significant changes in IT will be required.

The notion that electricity might be in some way a competitive industry is counter-intuitive to most people. People wonder, for example, if this means that many utility companies will crowd the roadsides and countrysides with utility poles, transformers, and towers; each wing against the other to hook up customers.

Believe it or not, that scenario started to take hold in the early part of the twentieth century. As a result, legislators of the early 1900s determined that electric service was a "natural monopoly," which would be granted under a franchise to one and only one company in each distinct area.

In return for the grant of monopoly, electric companies were, and continue to be, heavily regulated in almost every area of activity. There is regulation not only of rate setting for customers and materials purchase from affiliated companies, but even structuring of the companies' finances and setting of an appropriate profit margin.

Although the establishment of electric service in virtually every country around the world has been as a monopoly service, an interesting difference between the United States and most other countries is that in the United States, more than 90 percent of the electricity has been provided by investor-owned, private companies. In most other parts of the world, it is the government itself that has stepped into the role of electric service provider.

The U.S. system of regulation resulted in the early foundation of the United States as the most intensively industrialized nation in the world. However, because monopoly regulation does not fully substitute for free-market discipline, U.S. utility companies -- including not just electrics, but arguably gas, telephone, and others as well -- came to be known as inefficient, inwardly focused, and not very customer-friendly. The final nail in the coffin of electricity monopolism was the nuclear program, undertaken by the industry in the 1960s and 1970s. Encouraged by government incentives and policies, as well as, their own desire to build ever more plants, American utilities aggressively built nuclear power stations under the mantra of "too cheap to meter."

Many mark 1978 as the year that monopoly control over utilities started to break down. Previously, only a utility company could own or operate a power plant. In that year, however, the U.S. Federal Government passed the Public Utilities Regulatory Policy Act (PURPA) which, among other things, allowed certain types of companies -- other than utilities -- to construct, own, and operate power plants. Moreover, the local utilities had to agree to purchase the power output of these non-utility-owned plants. Although it was not known at the time, PURPA laid the foundation for the deregulation of the electricity industry.

The common way to view the structure of the electricity industry is in terms of four basic functions -- (1) production, (2) transmission, (3) distribution, and (4) customer service -- as depicted in Exhibit 1.

A utility company is considered to be vertically integrated if it incorporates all of the above four elements. Traditionally, most utilities did so. However, deregulation is forcing utilities to unbundle these four elements, and, in some cases, to sell them off, or spin them off as separate businesses.

Thus, current deregulatory schemes in the United States, which are proceeding on a state-by-state basis, call for lifting monopoly protection on the production function, thereby opening it up to any qualified company that wishes to construct, own, or operate a power plant. For their part, transmission and distribution functions are still heavily regulated and continue to be provided under monopoly control.(n1) Various state and federal laws, passed over the last 15 years or so, have effectively changed the status of the wires end of the industry (i.e., transmission and distribution) into that of common carriers -- much as was done in the telephone industry. As common carriers, the owners of the wires -- still what is thought of as the old utilities are required to carry the power output from any power plant company to any customer with whom the plant's owner has contracted for electricity. In return, the utility gets reimbursed for the use of their wires, but receives no revenue for the actual production of electricity. Exhibit 2 depicts the new deregulated model of electricity.

One thing that should be obvious from Exhibit 2 is that deregulation has made things a lot more complicated. In the newly emerging deregulated markets, many companies can own power plants and sell power directly to customers. This power is delivered to the customer over the transmission and distribution lines that are still owned by the utility companies. Federal and state laws have been enacted to ensure that the delivery of power is done in an open, nondiscriminatory fashion.

Another element of change is in the customer service function. In the old, vertically integrated model, there was one customer service number for consumers to call for outages, billing complaints, new hookups, and general information. Such is no longer the case. Depending on the nature of the call, the customer may have to call the old utility customer service number or his chosen power supplier. In the case of billing complaints, which are the most common of all customer phone calls to a utility, it may be very unclear which customer center the customer must contact. It will depend on whether the customer receives separate bills for the power consumed and the delivery of that power, or receives a consolidated bill from both the electricity producer and the electricity deliverer.

Although much more complicated for the ordinary customer than the old system of monopoly provider, the scheme does work, and has been in effect for several years in some U.S. states and Canadian provinces, as well as in the whole of the United Kingdom, Australia, Chile, Argentina, and New Zealand. In the United States, this electric deregulation movement is in full swing in California, Pennsylvania, New Jersey, New York, Massachusetts, and others. Some states are approaching deregulation more cautiously, while states such as Colorado, Nebraska, and most of the South do not intend to move down this path at all, unless or until mandated by the federal government -- a move it has not as yet been willing to take. Exhibit 3 is a map showing the deregulation status of the U.S. states.

The Impact of Deregulation on IT

It is demonstrably true that when an industry goes from being heavily regulated by the government to being deregulated, or even partially deregulated, the value of information increases dramatically. This is certainly the case in the telecommunications and airline industries. Many companies are investing huge sums of money in the belief that this will be true for the electricity industry as well.

In the old, regulated, monopoly model of the utility industry, utilities tried to minimize their information technology (IT) investments for several reasons. First, because there was no assurance that regulators could be convinced of the need for sophisticated IT systems, the recovery of millions of dollars in IT investments was uncertain. Second, there was no clear-cut way that regulated utilities could make unregulated profits from investments in IT; therefore, the desire to make these investments was blunted.:

Under the new sets of rules being developed for providing electricity, different forces are coming to bear on energy companies' IT investment strategies. First, traditional utilities must invest large sums of money in their "old" IT systems to make them capable of handling the new sets of rules. This presents major challenges. Most utility IT systems are homegrown legacy systems that were architected for a vertically integrated utility. The new rules require that this vertical integration of IT systems be undone and re-done along horizontal lines of business. Therefore, many utilities are finding it easier and cheaper to simply throw away their legacy systems and buy all new systems.

Second, new entrants are coming into the marketplace, which are not hamstrung by the same set of cost-recovery rules that plague the regulated utility companies. These new companies (or the "new energy cos") are looking to create market share and develop competition in areas that have been noncompetitive since 1900.

Although there are many areas of the utility business that are being affected by these forces, this article focuses on the three of greatest impact: (1) balancing and settlement systems, (2) customer services and marketing, and (3) automatic metering systems.

Moving electricity from the plant to the plug is not as easy as depicted in Exhibit 2. There are multiple issues that must be dealt with, not least of which is how to coordinate usage of the transmission system by multiple suppliers and customers. Under the old vertically integrated monopolies, because one company was producing and delivering the electricity, there was not much of a problem in determining how much each customer used and how much to bill that customer. That is what an electricity meter does.

Under the new deregulated system, however, multiple power station owners are selling electricity to many different customers, as depicted by Exhibit 3. Because one electron is indistinguishable from another in the wires, there must be a way to determine which power supplier has provided power to which customer and how much money each customer should pay to the supplier. This is known as balancing and settling.

The amount of money that is at risk in the balancing and settling activity is staggering. For example, in the mid-Atlantic region of the United States, there is an area known to electricity industry specialists as Pennsylvania-New Jersey-Maryland Interconnect (PJM), the largest electric market in the United States, where about $30 million of electricity is bought and sold every day.(n3) Because electricity has the property that demand and supply always equal each other on an instantaneous basis, this means that if one supplier is not producing enough energy to meet its demand, then that demand is being met by some other supplier (unbeknown to that other supplier) -- and the latter may not be getting fairly compensated for that production. As one can see, an error of even 5 percent is more than $1 million per day. Just a few days of inaccurate balancing and settling of accounts would mean that most suppliers would be either rich or broke.

A leading example of a company that has gotten an early start in this arena is Logica, a U.K. software and consulting firm that won the first contract to write a comprehensive balancing and settling system for the entire U.K. wholesale electricity market. In 1999, the U.K. regulatory agency determined that the rules for balancing and settlements should be rather dramatically overhauled. Logica led a consortium to rewrite the system, including companies OSI and Epfal. The system designed by Logica is also in use in California, Arizona, and parts of Australia and Canada.

Today, Logica has agreements to write such settlement systems for various U.S. companies. The Market Data Clearinghouse, or MDCH, is a service provided by Logica to provide balancing and settling services to utilities on what is effectively an outsourced basis, rather than being sold as a software system to those utilities.

Other organizations that are actually responsible for doing the balancing and settling process, such as the PJM organization, have developed their own balancing and settling systems. They may ultimately attempt to sell those systems, or the balancing and settling service itself, to other organizations and utilities around the world.

While balancing and settling systems are truly huge, complex, real-time(n4) software systems that cost millions, perhaps even hundreds of millions of dollars, to develop and install, the market for such systems is relatively small. In any given region, there can be only one entity that has the responsibility and the authority to perform the balancing and settling process, because if more than one entity performed this process, it would inevitably lead to conflicting accounts about who owes how much to whom.

Thus, for example, the entire United Kingdom has a single entity responsible for the balancing and settling of trades. Consequently, there is a market of one in the United Kingdom (a situation that economists would call a monopsony). In the United States, the country will be divided into regions and, because each region is likely to write its own balancing and settling rules, it will need its own balancing and settling system. However, the number of such regions (as yet undetermined) will probably be greater than three and fewer than 20 --again, a rather slim market for such complex systems. This is probably the main reason why so few traditional software developers seem to be making an offering in this area.

Although the number of entities accountable for balancing and settlement will be relatively few, almost all market participants doing business in these regions will carry some sort of settlement reconciliation system. This will perform, at a minimum, the necessary calculations to ensure their financial positions, as well as to establish audit trails necessary to maintain accounting standards. The market for these reconciliation and settlement systems appears to hold a greater opportunity.

At present, the primary factor restricting even greater investment in settlement systems is the continued evolution of the settlement rules and regions. Aggressive marketers, with the assistance of their software partners, are attempting to establish the rules, rather than wait for them to be delivered.

Retail competition in the energy industry continues to expand and evolve throughout the world. Therefore, information systems that enable business processes to fulfill customer services are becoming increasingly important to the "new energy companies" that wish to participate and prosper in these markets.

Customer information systems (CIS) have evolved to become the hub for most market transactions in competitive markets, providing the necessary foundation for efficient and effective market operations. The need for growing functionality has required product providers to continually innovate, install, and deliver at lightning speed. In addition, the rate at which market participants will require future enhancements shows no signs of slowing and will most likely increase.

In the past, traditional, vertically integrated utilities installed and utilized CIS for many years, making only incremental modifications to products and services, prices, tax calculations, etc., as required. This is no surprise because the primary role for CIS regulation was billing and collections. At that time, the utilities' primary business concern, like other for-profit corporations, was to ensure that customers' use of the product was accurately measured, priced, and billed. Also, utilities were appropriately concerned with receivables (such as cash receipts, credit, and collections).

Because the business environment for traditional utilities had not changed in decades, little innovation was necessary in the information systems used to administer these markets. It was to be expected and came to pass that monopoly utilities operating in a regulated rate-of-return environment would focus their efforts on engineering concerns (i.e., asset performance) and financial issues (i.e., consistent, stable earnings growth). Using these measures of success, the industry has performed very well during the past several decades.

However, the twentieth century has passed, and this is a new day. As energy companies are redefined, the definition of successful customer service is being redefined accordingly. And, as one might expect, measures of success for customer service now vary, depending on the business focus of the company.

For example, utilities that are continuing to focus on transmission and distribution may decide to provide their customers with realtime information regarding the performance of their networks. By contrast, those companies that focus on retail marketing may be interested in providing a 24-hour self-service capability over the Internet. In each case, excellent customer service is achieved through different means.

It is clear that the implementation of customer services appropriate to companies' business models will vary and thus require information systems that have somewhat different functionality to achieve desired results. Nevertheless, there is common ground for companies focusing on transmission and distribution and companies focusing on retail marketing, respectively; both have the need to manage information about customers connected to and utilizing the network.

Needless to say, the massive structural changes in the energy industry are driving change in the information systems built to automate the business processes that support the industry. Indeed, these changes are an evolution of sorts for CIS. The role of a CIS now extends well beyond revenue management and depends on the business emphasis of the company utilizing the system.

In a very real sense, CIS act as the hub for business processes that are increasingly viewed as critical to success in the newly competitive energy industry. For example, major business processes, such as customer relationship management, outage management, World Wide Web self-service, and enrollment (sometimes called registration), among others, rely on much of the information carried by CIS. As a result, CIS have developed capabilities, either through product development or partnership, that are necessary in competitive markets.

In general, CIS are evolving in three areas: (1) multi-vendor management, (2) multisystem communications, and (3) technology platforms.

This describes the systems' capability to administrate the selection of many vendors that could provide services related to energy. Prior to deregulation, nearly all electricity services were provided by a single source: the vertically integrated utility. In today's competitive energy markets, however, multiple vendors provide components of service that must be coordinated and billed properly.

For example, standard residential electric service in Pennsylvania may actually involve services from two primary providers: the electricity supplier and the electricity distributor. In some regions of the state, it is possible that metering services are provided by yet a third supplier, acting as a subcontractor for one of the primary providers, or directly under contract to the customer. Electricity supply, distribution, and metering services, regardless of which entity supplies the services, must be coordinated and tracked through CIS.

This refers to the ability of separate information systems to speak to each other, exchanging data as necessary. In competitive energy markets, it is critical that customer information be exchanged seamlessly with other service providers, so that the market operates efficiently. This information exchange can be accomplished through a variety of formats, such as EDI and XML. However, regardless of format, the CIS must be able to cooperatively work with other systems to administrate business processes that, ideally, are transparent to the energy user.

The Edison Electric Institute and the Gas Industry Standards Board are currently involved in a multi-year effort to create standards, known as Uniform Business Practices (UBP), for the interchange of customer data between the various players in the newly deregulated electricity game. They determine, for example, how the various suppliers of services are notified of the following information: a new customer is enrolled, an existing customer decides to change to a different supplier, consumption data for the customer is on a monthly or daily basis, there is a collections problem, and many other types of information requirements in order to seamlessly facilitate a competitive electricity market.(n5)

CIS must also communicate well with other in-house systems. As an example, in the past, there was no great need for a CIS to exchange data with a work management system. Each system was written to accomplish distinct roles within the traditional utility, with few gains achieved through data leveraging and consistency. However, the pressure for energy distribution companies to become more cost efficient while increasing service standards is driving companies to pursue process automation whenever possible and to extract leveraging opportunities where they may exist.

Recent advances in technology have made it possible for CIS to achieve functionality and performance requirements at an affordable price. Innovative systems design on top of increasing hardware and software capability has resulted in state-of-the art CIS that do more for greater value.

CIS product offerings are plentiful, particularly because so many organizations will need these systems and will deem the information that they house to be proprietary. Therefore, there will be little sharing of systems, other than through the communications protocols required by UBP.

Major vendors in this space include Peace, SAP, SCT, and SPL WorldGroup. Their products have various attributes that meet customers' specific circumstances. For example, the SAP Customer Care System (CCS) is a new offering from the provider of the world's most implemented enterprise resource planning (ERP) system. Although SAP has not focused on the utility business in prior years, the industry's deregulation provides a growth opportunity for SAP, as well as for every other ERP developer.

The SAP ERP system philosophy is that of "best practices" through integration of the enterprise. By means of the ERP system, SAP purports to make available to the enterprise all of the best practices that are available in each of the mission-critical areas, including customer care. The great strength of SAP CCS is, as one would imagine, its seamless integration into the SAP ERP system. This would be of interest to those utilities looking for full-scale or nearly full-scale replacement of their systems.

ERP systems, as is frequently noted in the trade press, tend to be difficult and expensive implementations. Once successfully implemented, however, they purport to provide a level of business integration that cannot be matched by a multiple-vendor platform. In this context, it is worth noting that, recently, Accenture purportedly dropped its own venerable CIS in favor of supporting the SAP CCS system.

A different approach is taken by another type of system, which is offered by SPL WorldGroup. Their new-generation CIS product, CIS Plus, is a "best-of-breed" system. In contrast to the "best practices" architecture of SAP, best-of-breed systems are designed to easily integrate and communicate with other information systems, whether they be ERP or best-of-breed. A best-of-breed architecture has the advantage of being easier and less expensive to implement than ERP systems.

SPL WorldGroup's system allows energy companies to invest in needed technology without having to prematurely replace valuable legacy systems. Also, retail energy companies that have neither the need nor the resources to adopt an ERP strategy can readily implement SPL's scalable, best-of-breed approach. As its name suggests, SPL WorldGroup has substantial experience with implementation in competitive, international energy markets such as the United Kingdom, Australia, and France, as well as the United States.

Automatic meter reading (or AMR, as it is known colloquially) has been around for quite a long time. The concept is simple. Traditionally, a platoon of human meter readers would walk daily routes to manually read about 1/21st of the utility's total meters, and then report those results at the end of the day. This was most frequently done through a handheld computer that resembles a very large palm computing device.

By contrast, AMR approaches the problem of collecting consumption information through more automated methods. Because they are less reliant on human activity, they are purportedly more accurate and timely. Under the vertically organized utility of the monopoly era, investments in AMR were seen as unnecessary and unjustifiable. In addition, they put workers out of jobs, which was never a happy circumstance for most regulatory agencies to which utilities reported.

Now, in a more competitive marketplace, many argue that there must be an increased emphasis on accuracy and timeliness of data, so the need to consider AMR has once again surfaced. However, while a few utilities have recently jumped on the AMR bandwagon,(n6) it is fair to say that there has not been a wholesale rush to implement AMR. Still, many utility companies are seriously considering AMR, and wondering if the time is right.

While the evolution of a robust, competitive marketplace depends on many things, economists and regulators agree that one of the most important ingredients for a successful electricity market is the development of a "demand response." Traditionally, electricity has been viewed by consumers and suppliers alike as an "inelastic" commodity; that is, demand for electricity is pretty much set by consumer habit, rather than by price signals, as is the case in other commodity markets. When consumers do not respond to price signals, then, in effect, suppliers can charge whatever they like when demand starts to grow faster than supply.(n7)

Consumers of electricity cannot really respond to price signals because, traditionally, they have not known what their electricity bill was until about a month after the usage occurred. In other words, the information is not available to allow consumers to make informed choices about how much electricity to use. This very situation was evidenced in California in the summer of 2000, as consumers experienced price increases of 200 and 300 percent long after the electricity had been consumed. The result was a predictable consumer revolt.

AMR could provide a solution to the inelasticity problem by implementing the technology at the consumer site. This would allow the consumer to see on a real-time basis not only what his consumption is, but also what it is costing him.(n8) Unfortunately, however, AMR start-up costs can be staggering, well over $100 million for a large-sized utility. Proponents argue that savings will pay back the investment in just a few years, while skeptics contend that this has yet to be proven. The stalemate will likely be broken in the not-too-distant future by some state's regulators, who will want to see the inelasticity problem resolved and are willing to effectively guarantee the recovery of investment.

The types of AMR offerings vary widely. For example, the very sophisticated Cellnet system utilizes cellular technology to report data back to a central data clearinghouse. By contrast, Itron specializes in what might be called a semi-automated system, whereby a vehicle drives by, sensing the consumption statistics on the premises from several yards away. For its part, a product known as the "Turtle" uses slow-speed telephone connections to read meters in remote places where sending a meter reader would be cost prohibitive. However, it can take several hours to transmit one meter reading using Turtle.

Obviously, these solutions appeal to different needs and requirements. Today, obtaining an elastic response to demand would only be achievable with those solutions that are the most expensive to deploy. However, these authors find it inconceivable that in 50 years' time, there will still be human meter readers walking from house to house to read dial-type meters. We just do not know whether the changeover to a more digital, real-time technology will occur in the near future or closer to 50 years from now.

Changing times are both a threat and an opportunity. The utility world, although never completely forgotten by IT (and vice versa), was never seen as a hotbed of technology innovation and change. All of that is changing, however, with the emergence of the utility industry as a competitive, vibrant sector in need of dramatic IT investments.

As with most other competitive industries in the early part of the twenty-first century, the winners in the marketplace will be those that have invested in technology solutions early and wisely. What is not entirely clear just yet, however, is whether "wisely" will describe those that have bet the ranch on complex systems or those that have preferred to utilize simpler, less expensive solutions.

Some companies will not make it. For example, Cellnet declared bankruptcy and was bought by Schlumberger. Others, like Enron Online, are propelling their profits to new heights in a deregulated energy marketplace. One thing is for sure; information technology is now part of the discussion in every new and old energy company's boardroom.

The views expressed by the authors are their own and do not represent the views of either SPLWorldgroup, Inc., or GPU, Inc., or its subsidiaries.

DIAGRAM: EXHIBIT 1 The Four Elements of the Electricity Industry

DIAGRAM: EXHIBIT 2 Deregulated Model of Electricity

MAP: EXHIBIT 3 Deregulation Status in the United States