Achieving Decentralized Coordination In the Electric Power Industry

For the past century, the dominant business and regulatory paradigms in the electric power industry have been centralized economic and physical control. The ideas presented here and in my forthcoming book, Deregulation, Innovation, and Market Liberalization: Electricity Restructuring in a Constantly Evolving Environment (Routledge, 2008), comprise a different paradigm – decentralized economic and physical coordination – which will be achieved through contracts, transactions, price signals and integrated intertemporal wholesale and retail markets. Digital communication technologies – which are becoming ever more pervasive and affordable – are what make this decentralized coordination possible. In contrast to the “distributed control” concept often invoked by power systems engineers (in which distributed technology is used to enhance centralized control of a system), “decentralized coordination” represents a paradigm in which distributed agents themselves control part of the system, and in aggregate, their actions produce order: emergent order. [1]

Dynamic retail pricing, retail product differentiation and complementary end-use technologies provide the foundation for achieving decentralized coordination in the electric power industry. They bring timely information to consumers and enable them to participate in retail market processes; they also enable retailers to discover and satisfy the heterogeneous preferences of consumers, all of whom have private knowledge that’s unavailable to firms and regulators in the absence of such market processes. Institutions that facilitate this discovery through dynamic pricing and technology are crucial for achieving decentralized coordination. Thus, retail restructuring that allows dynamic pricing and product differentiation, doesn’t stifle the adoption of digital technology and reduces retail entry barriers is necessary if this value-creating decentralized coordination is to happen.

This paper presents a case study – the “GridWise Olympic Peninsula Testbed Demonstration Project” – that illustrates how digital end-use technology and dynamic pricing combine to provide value to residential customers while increasing network reliability and reducing required infrastructure investments through decentralized coordination. The availability (and increasing cost-effectiveness) of digital technologies enabling consumers to monitor and control their energy use and to see transparent price signals has made existing retail rate regulation obsolete. Instead, the policy recommendation that this analysis implies is that regulators should reduce entry barriers in retail markets and allow for dynamic pricing and product differentiation, which are the keys to achieving decentralized coordination.

THE KEYS: DYNAMIC PRICING, DIGITAL TECHNOLOGY

Dynamic pricing provides price signals that reflect variations in the actual costs and benefits of providing electricity at different times of the day. Some of the more sophisticated forms of dynamic pricing harness the dramatic improvements in information technology of the past 20 years to communicate these price signals to consumers. These same technological developments also give consumers a tool for managing their energy use, in either manual or automated form. Currently, with almost all U.S. consumers (even industrial and commercial ones) paying average prices, there’s little incentive for consumers to manage their consumption and shift it away from peak hours. This inelastic demand leads to more capital investment in power plants and transmission and distribution facilities than would occur if consumers could make choices based on their preferences and in the face of dynamic pricing.

Retail price regulation stifles the economic processes that lead to both static and dynamic efficiency. Keeping retail prices fixed truncates the information flow between wholesale and retail markets, and leads to inefficiency, price spikes and price volatility. Fixed retail rates for electric power service mean that the prices individual consumers pay bear little or no relation to the marginal cost of providing power in any given hour. Moreover, because retail prices don’t fluctuate, consumers are given no incentive to change their consumption as the marginal cost of producing electricity changes. This severing of incentives leads to inefficient energy consumption in the short run and also causes inappropriate investment in generation, transmission and distribution capacity in the long run. It has also stifled the implementation of technologies that enable customers to make active consumption decisions, even though communication technologies have become ubiquitous, affordable and user-friendly.

Dynamic pricing can include time-of-use (TOU) rates, which are different prices in blocks over a day (based on expected wholesale prices), or real-time pricing (RTP) in which actual market prices are transmitted to consumers, generally in increments of an hour or less. A TOU rate typically applies predetermined prices to specific time periods by day and by season. RTP differs from TOU mainly because RTP exposes consumers to unexpected variations (positive and negative) due to demand conditions, weather and other factors. In a sense, fixed retail rates and RTP are the end points of a continuum of how much price variability the consumer sees, and different types of TOU systems are points on that continuum. Thus, RTP is but one example of dynamic pricing. Both RTP and TOU provide better price signals to customers than current regulated average prices do. They also enable companies to sell, and customers to purchase, electric power service as a differentiated product.

TECHNOLOGY’S ROLE IN RETAIL CHOICE

Digital technologies are becoming increasingly available to reduce the cost of sending prices to people and their devices. The 2007 Galvin Electricity Initiative report “The Path to Perfect Power: New Technologies Advance Consumer Control” catalogs a variety of end-user technologies (from price-responsive appliances to wireless home automation systems) that can communicate electricity price signals to consumers, retain data on their consumption and be programmed to respond automatically to trigger prices that the consumer chooses based on his or her preferences. [2] Moreover, the two-way communication advanced metering infrastructure (AMI) that enables a retailer and consumer to have that data transparency is also proliferating (albeit slowly) and declining in price.

Dynamic pricing and the digital technology that enables communication of price information are symbiotic. Dynamic pricing in the absence of enabling technology is meaningless. Likewise, technology without economic signals to respond to is extremely limited in its ability to coordinate buyers and sellers in a way that optimizes network quality and resource use. [3] The combination of dynamic pricing and enabling technology changes the value proposition for the consumer from “I flip the switch, and the light comes on” to a more diverse and consumer-focused set of value-added services.

These diverse value-added services empower consumers and enable them to control their electricity choices with more granularity and precision than the environment in which they think solely of the total amount of electricity they consume. Digital metering and end-user devices also decrease transaction costs between buyers and sellers, lowering barriers to exchange and to the formation of particular markets and products.

Whether they take the form of building control systems that enable the consumer to see the amount of power used by each function performed in a building or appliances that can be programmed to behave differently based on changes in the retail price of electricity, these products and services provide customers with an opportunity to make better choices with more precision than ever before. In aggregate, these choices lead to better capacity utilization and better fuel resource utilization, and provide incentives for innovation to meet customers’ needs and capture their imaginations. In this sense, technological innovation and dynamic retail electricity pricing are at the heart of decentralized coordination in the electric power network.

EVIDENCE

Led by the Pacific Northwest National Laboratory (PNNL), the Olympic Peninsula GridWise Testbed Project served as a demonstration project to test a residential network with highly distributed intelligence and market-based dynamic pricing. [4] Washington’s Olympic Peninsula is an area of great scenic beauty, with population centers concentrated on the northern edge. The peninsula’s electricity distribution network is connected to the rest of the network through a single distribution substation. While the peninsula is experiencing economic growth and associated growth in electricity demand, the natural beauty of the area and other environmental concerns served as an impetus for area residents to explore options beyond simply building generation capacity on the peninsula or adding transmission capacity.

Thus, this project tested how the combination of enabling technologies and market-based dynamic pricing affected utilization of existing capacity, deferral of capital investment and the ability of distributed demand-side and supply-side resources to create system reliability. Two questions were of primary interest:

1) What dynamic pricing contracts do consumers find attractive, and how does enabling technology affect that choice?

2) To what extent will consumers choose to automate energy use decisions?

The project – which ran from April 2006 through March 2007 – included 130 broadband-enabled households with electric heating. Each household received a programmable communicating thermostat (PCT) with a visual user interface that allowed the consumer to program the thermostat for the home – specifically to respond to price signals, if desired. Households also received water heaters equipped with a GridFriendly appliance (GFA) controller chip developed at PNNL that enables the water heater to receive price signals and be programmed to respond automatically to those price signals. Consumers could control the sensitivity of the water heater through the PCT settings.

These households also participated in a market field experiment involving dynamic pricing. While they continued to purchase energy from their local utility at a fixed, discounted price, they also received a cash account with a predetermined balance, which was replenished quarterly. The energy use decisions they made would determine their overall bill, which was deducted from their cash account, and they were able to keep any difference as profit. The worst a household could do was a zero balance, so they were no worse off than if they had not participated in the experiment. At any time customers could log in to a secure website to see their current balances and determine the effectiveness of their energy use strategies.

On signing up for the project, the households received extensive information and education about the technologies available to them and the kinds of energy use strategies facilitated by these technologies. They were then asked to choose a retail pricing contract from three options: a fixed price contract (with an embedded price risk premium), a TOU contract with a variable critical peak price (CPP) component that could be called in periods of tight capacity or an RTP contract that would reflect a wholesale market-clearing price in five-minute intervals. The RTP was determined using a uniform price double auction in which buyers (households and commercial) submit bids and sellers submit offers simultaneously. This project represented the first instance in which a double auction retail market design was tested in electric power.

The households ranked the contracts and were then divided fairly evenly among the three types, along with a control group that received the enabling technologies and had their energy use monitored but did not participate in the dynamic pricing market experiment. All households received either their first or second choice; interestingly, more than two-thirds of the households ranked RTP as their first choice. This result counters the received wisdom that residential customers want only reliable service at low, stable prices.

According to the 2007 report on the project by D.J. Hammerstrom (and others), on average participants saved 10 percent on their electricity bills. [5] That report also includes the following findings about the project:

Result 1. For the RTP group, peak consumption decreased by 15 to 17 percent relative to what the peak would have been in the absence of the dynamic pricing – even though their overall energy consumption increased by approximately 4 percent. This flattening of the load duration curve indicates shifting some peak demand to nonpeak hours. Such shifting increases the system’s load factor, improving capacity utilization and reducing the need to invest in additional capacity, for a given level of demand. A 15 to 17 percent reduction is substantial and is similar in magnitude to the reductions seen in other dynamic pricing pilots.

After controlling for price response, weather effects and weekend days, the RTP group’s overall energy consumption was 4 percent higher than that of the fixed price group. This result, in combination with the load duration effect noted above, indicates that the overall effect of RTP dynamic pricing is to smooth consumption over time, not decrease it.

Result 2. The TOU group achieved both a large price elasticity of demand (-0.17), based on hourly data, and an overall energy reduction of approximately 20 percent relative to the fixed price group.

After controlling for price response, weather effects and weekend days, the TOU group’s overall energy consumption was 20 percent lower than that of the fixed price group. This result indicates that the TOU (with occasional critical peaks) pricing induced overall conservation – a result consistent with the results of the California SPP project. The estimated price elasticity of demand in the TOU group was -0.17, which is high relative to that observed in other projects. This elasticity suggests that the pricing coupled with the enabling end-use technology amplifies the price responsiveness of even small residential consumers.

Despite these results, dynamic pricing and enabling technologies are proliferating slowly in the electricity industry. Proliferation requires a combination of formal and informal institutional change to overcome a variety of barriers. And while formal institutional change (primarily in the form of federal legislation) is reducing some of these barriers, it remains an incremental process. The traditional rate structure, fixed by state regulation and slow to change, presents a substantial barrier. Predetermined load profiles inhibit market-based pricing by ignoring individual customer variation and the information that customers can communicate through choices in response to price signals. Furthermore, the persistence of standard offer service at a discounted rate (that is, a rate that does not reflect the financial cost of insurance against price risk) stifles any incentive customers might have to pursue other pricing options.

The most significant – yet also most intangible and difficult-to-overcome – obstacle to dynamic pricing and enabling technologies is inertia. All of the primary stakeholders in the industry – utilities, regulators and customers – harbor status quo bias. Incumbent utilities face incentives to maintain the regulated status quo as much as possible (given the economic, technological and demographic changes surrounding them) – and thus far, they’ve been successful in using the political process to achieve this objective.

Customer inertia also runs deep because consumers have not had to think about their consumption of electricity or the price they pay for it – a bias consumer advocates generally reinforce by arguing that low, stable prices for highly reliable power are an entitlement. Regulators and customers value the stability and predictability that have arisen from this vertically integrated, historically supply-oriented and reliability-focused environment; however, what is unseen and unaccounted for is the opportunity cost of such predictability – the foregone value creation in innovative services, empowerment of customers to manage their own energy use and use of double-sided markets to enhance market efficiency and network reliability. Compare this unseen potential with the value creation in telecommunications, where even young adults can understand and adapt to cell phone-pricing plans and benefit from the stream of innovations in the industry.

CONCLUSION

The potential for a highly distributed, decentralized network of devices automated to respond to price signals creates new policy and research questions. Do individuals automate sending prices to devices? If so, do they adjust settings, and how? Does the combination of price effects and innovation increase total surplus, including consumer surplus? In aggregate, do these distributed actions create emergent order in the form of system reliability?

Answering these questions requires thinking about the diffuse and private nature of the knowledge embedded in the network, and the extent to which such a network becomes a complex adaptive system. Technology helps determine whether decentralized coordination and emergent order are possible; the dramatic transformation of digital technology in the past few decades has decreased transaction costs and increased the extent of feasible decentralized coordination in this industry. Institutions – which structure and shape the contexts in which such processes occur – provide a means for creating this coordination. And finally, regulatory institutions affect whether or not this coordination can occur.

For this reason, effective regulation should focus not on allocation but rather on decentralized coordination and how to bring it about. This in turn means a focus on market processes, which are adaptive institutions that evolve along with technological change. Regulatory institutions should also be adaptive, and policymakers should view regulatory policy as work in progress so that the institutions can adapt to unknown and changing conditions and enable decentralized coordination.

ENDNOTES

1. Order can take many forms in a complex system like electricity – for example, keeping the lights on (short-term reliability), achieving economic efficiency, optimizing transmission congestion, longer-term resource adequacy and so on.

2. Roger W. Gale, Jean-Louis Poirier, Lynne Kiesling and David Bodde, “The Path to Perfect Power: New Technologies Advance Consumer Control,” Galvin Electricity Initiative report (2007). www.galvinpower.org/resources/galvin.php?id=88

3. The exception to this claim is the TOU contract, where the rate structure is known in advance. However, even on such a simple dynamic pricing contract, devices that allow customers to see their consumption and expenditure in real time instead of waiting for their bill can change behavior.

4. D.J. Hammerstrom et. al, “Pacific Northwest GridWise Testbed Demonstration Projects, volume I: The Olympic Peninsula Project” (2007). http://gridwise.pnl.gov/docs/op_project_final_report_pnnl17167.pdf

5. Ibid.

The Customer-Focused Utility

THE CHANGING DYNAMICS OF CUSTOMER RELATIONSHIPS

The utilities industry is in transition. External factors – including shifts in governmental policies, a globally felt sense of urgency about conserving energy, advances in power generation techniques and new technologies – are driving massive changes throughout the industry. Utilities are also under internal pressure to prevent profit margins from eroding. But most significantly, utilities must evolve to compete in a marketplace where consumers increasingly expect high-quality customer service and believe that no company deserves their unconditional loyalty if it cannot perform to expectations. These pressures are putting many utility providers into seriously competitive, market-driven situations where the customer experience becomes a primary differentiator.

In the past, utility companies had very limited interactions with customers. Apart from opening new accounts and billing for services, the relationship was remote, with customers giving no more thought to their power provider than they would to finding a post office. Consumers were indifferent to greenhouse gas (GHG) emissions and essentially took a passive view of all utility functions, only contacting the utility if their lights temporarily went out.

In contrast, the utility of the future can expect a much more intense level of customer involvement. If utilities embrace programs to change customers’ behaviors – for example, by implementing time-of-use rates – customers will need more information on a timelier basis in order to make educated decisions. In addition, customers will expect higher levels of service to keep up with changes in the rest of the commercial world. As consumers get used to checking their bank account and credit card balances via mobile devices, they’ll soon expect the same from all similar services, including their utility company. As younger consumers (Generation Y and now Generation Z) begin their relationships with utilities, they bring expectations of a digital, mobile and collaborative customer service experience. Taking a broader perspective, most age segments – even baby boomers – will begin demanding these new multichannel experiences at times that are convenient for them.

The most significant industry shifts will alter the level of interaction between the utility grid and the home. In the past, this was a one-way street; in the future, however, more households will be adopting “participatory generation” due to their increased use of renewable energy. This will require a more sophisticated home/ grid relationship, in order to track the give and take of power between consumers as both users and generators. This shift will likely change the margin equation for most utility companies.

Customer Demands Drive Technology Change; Technology Change Drives Customer Demand

Utilities are addressing these and other challenges by implementing new business models that are supported by new technologies. The most visible – and arguably the most important – of the new technologies are advanced metering infrastructure (AMI) and the technical components of the smart grid, which integrates AMI with distribution automation and other technologies to connect a utility’s equipment, devices, systems, customers, partners and employees. The integration of these technologies with customer information systems (CIS) and other customer relationship management (CRM) tools will increase consumer control of energy expenditures. Most companies in the industry will need to shift away from the “ratepayer” approach they currently use to serve residential and small business customers, and adapt to changing consumer behavior and emerging business models enabled by new network and generation technologies.

Impacts on the Customer Experience

There are multiple paths to smart grid deployment, all of which utility firms have employed to leverage new sources of data on power demand. If we consider a gradual transformation from today’s centralized, one-way view to a network that is both distributed and dynamic, we can begin to project how technological shifts will impact the utility-consumer relationship, as illustrated in Figure 1.

The future industry value chain for grid-connected customers will have the same physical elements and flow as the current one but be able to provide many more information-oriented elements. Consequently, the shift to a customer-focused view will have serious implications for data management. These include a proliferation of data as well as new mandates for securely tracking, updating, accessing, analyzing and ensuring quality.

In addition, utilities must develop customer experience capabilities in parallel with extending their energy information management capabilities. Taking the smart grid path requires customers to be more involved, as decision-making responsibility shifts more toward the consumer, as depicted in Figure 2.

It’s also important to consider some of the new interactions that consumers will have with their utility company. Some of these will be viewed as “features” of the new technology, whereas others may significantly change how consumers view their relationship with their energy provider. Still others will have a profound impact on how data is captured and deployed within the organization. These interactions may include:

  • Highly detailed, timely and accurate individuated customer information;
  • Interaction between the utility and smart devices – including the meter – in the home (possibly based on customers’ preferences);
  • Seamless, bidirectional, individual communication permitting an extended dialogue across multiple channels such as short message service, integrated voice response, portals and customer care;
  • Rapid (real-time) analysis of prior usage, current usage and prediction of future usage under multiple usage and tariff models;
  • Information presented in a customer-friendly manner;
  • Analytical tools that enable customers to model their consumption behavior and understand the impact of changes on energy cost and carbon footprint;
  • Ability to access and integrate a wide range of external information sources, and present pertinent selections to a customer;
  • Integration of information flow from field operations to the customer call center infrastructure; and
  • Highly skilled, knowledgeable contact center agents who can not only provide accurate information but can advise and recommend products, services, rate plans or changes in consumption profiles.

Do We Need to Begin Thinking About Customers Differently?

Two primary factors will determine the nature of the interface between utilities and consumers in the future. The first is the degree to which consumers will take the initiative in making decisions about the energy supply and their own energy consumption. Second, the amount and percentage of consumers’ disposable income that they allocate to energy will directly influence their consumption and conservation choices, as shown in Figure 3.

How Do Utilities Influence Customers’ Behavior?

One of the major benefits of involving energy customers in generation and consumption decisions is that it can serve to decrease base load. Traditionally, utilities have taken two basic approaches to accomplishing this: coercion and enticement. Coercion is a penalty-based approach for inducing a desired behavior. For example, utilities may charge higher rates for peak period usage, forcing customers to change the hours when they consume power or pay more for peak period usage. The risks of this approach include increased customer dissatisfaction and negative public and regulatory opinion.

Enticement, on the other hand, is an incentive-based approach for driving a desired behavior. For example, utilities could offer cost savings to customers who shift power consumption to off-peak times. The risks associated with this approach include low customer involvement, because incentives may not be enough to overcome the inconvenience to customers.

Both of these approaches have produced results in the past, but neither will necessarily work in the new, more interactive environment. A number of other strategies may prove more effective in the future. For example, customer goal achievement may be one way to generate positive behavior. This model offers benefits to customers by making it easier for them to achieve their own energy consumption or conservation goals. It also gives customers the feeling that they have choices – which promotes a more positive relationship between the customer and the utility. Ease of use represents another factor that influences customer behavior. Companies can accomplish this by creating programs and interfaces that make it simple for the customer to analyze information and make decisions.

There is no “silver bullet” approach to successfully influencing all customers in all utility environments. Often, each customer segment must be treated differently, and each utility company will need to develop a unique customer experience strategy and plan that fits the needs of its unique business situation. The variables will include macro factors such as geography, customer econo-graphics and energy usage patterns; however, they’ll also involve more nuanced attributes such as customer service experiences, customer advocacy attitudes and their individual emotional dispositions.

CONCLUSION

Most utilities considering implementing advanced metering or broader smart grid efforts focus almost exclusively on deploying new technologies. However, they also need to consider customer behavior. Utilities must adopt a new approach that expands the scope of their strategic road map by integrating the “voice of the customer” into the technology planning and deployment process.

By carefully examining a utility customer’s expectations and anticipating the customer impacts brought on by innovative technologies, smart utility companies can get ahead of the customer experience curve, drive more value to the bottom line and ultimately become truly customer focused.

Advanced Metering Infrastructure: The Case for Transformation

Although the most basic operational benefits of an advanced metering infrastructure (AMI) initiative can be achieved by simply implementing standard technological features and revamping existing processes, this approach fails to leverage the full potential of AMI to redefine the customer experience and transform the utility operating model. In addition to the obvious operational benefits – including a significant reduction in field personnel and a decrease in peak load on the system – AMI solutions have the potential to achieve broader strategic, environmental and regulatory benefits by redefining the utility-customer relationship. To capture these broader benefits, however, utilities must view AMI as a transformation initiative, not simply a technology implementation project. Utilities must couple their AMI implementations with a broader operational overhaul and take a structured approach to applying the operating capabilities required to take advantage of AMI’s vast opportunities. One key step in this structured approach to transformation is enterprise-wide business process design.

WHY “AS IS” PROCESSES WON’T WORK FOR AMI

Due to the antiquated and fragmented nature of utility processes and systems, adapting “as is” processes alone will not be sufficient to realize the full range of AMI benefits. Multiple decades of industry consolidation have resulted in utilities with diverse business processes reflecting multiple legacy company operating practices. Associated with these diverse business processes is a redundant set of largely homegrown applications resulting in operational inefficiencies that may impact customer service and reliability, and prevent utilities from adapting to new strategic initiatives (such as AMI) as they emerge.

For example, in the as-is environment, utilities are often slow to react to changes in customer preferences and require multiple functional areas to respond to a simple customer request. A request by a customer to enroll in a new program, for example, will involve at least three organizations within the utility: the call center initially handles the customer request; the field services group manages changing or reprogramming the customer’s meter to support the new program; and the billing group processes the request to ensure that the customer is correctly enrolled in the program and is billed accordingly. In most cases, a simple request like this can result in long delays to the customer due to disjointed processes with multiple hand-off points.

WHY USE AMI AS THE CATALYST FOR OPERATIONAL TRANSFORMATION?

The revolutionary nature of AMI technology and its potential for application to multiple areas of the utility makes an AMI implementation the perfect opportunity to adapt the utility operating structure. To use AMI as a platform for operational transformation, utilities must shift their thought paradigm from functionally based to enterprise-wide, process-centric environments. This approach will ensure that utilities take full advantage of AMI’s technological capabilities without being constrained by existing processes and organizational structures.

If the utility is to offer new programs and services as well as respond to shifting external demands, it must anticipate and respond quickly to changes in behaviors. Rapid information dissemination and quick response to changes in business, environmental and economic situations are essential for utilities that wish to encourage customers to think of energy in a new way and proactively manage their usage through participation in time-of-use and real-time demand response programs. This transition requires that system and organizational hand-offs be integrated to create a seamless and flexible work flow. Without this integration, utilities cannot proactively and quickly adapt processes to satisfy ever-increasing customer expectations. In essence, AMI fails if “smart meters” and “smart systems” are implemented without “smart processes” to support them.

DESIGNING SMART PROCESSES

Designing smart future state business processes to support transformational initiatives such as AMI involves more than just rearranging existing works flows. Instead, a utility must adopt a comprehensive approach to business process design – one that engages stakeholders throughout the organization and that enables them to design processes from the ground up. The utility must also design flexible processes that can adapt to changing customer, technology, business and regulatory expectations while avoiding the pitfalls of the current organization and process structure. As part of a utility’s business process design effort, it must also redefine jobs more broadly, increase training to support those jobs, enable decision making by front-line personnel and redirect rewards systems to focus on processes as well as outcomes. Utilities must also reshape organizational cultures to emphasize teamwork, personnel accountability and the customer’s importance; to redefine roles and responsibilities so that managers oversee processes instead of activities and develop people rather then supervise them; and to realign information system so that they help cross-functional processes work smoothly rather than simply support individual functional areas.

BUSINESS PROCESS DESIGN FRAMEWORK

IBM’s enterprise-wide business process design framework provides a structured approach to the development of the future state processes that support operational transformations and the complexities of AMI initiatives. This framework empowers utilities to apply business process design as the cornerstone of a broader effort to transition to a customer-centric organization capable of engaging external stakeholders. In addition, this framework also supports corporate decision making and continuous improvement by emphasizing real-time metrics and measurement of operational procedures. The framework is made up of the following five phases (Figure 1):

Phase 1 – As-is functional assessment. During this phase, utilities assess their current state processes and supporting organizations and systems. The goal of this phase is to identify gaps, overlaps and conflicts with existing processes and to identify opportunities to leverage the AMI technology. This assessment requires utility stakeholders to dissect existing process throughout the organization and identify instances where the utility is unable to fully meet customer, environmental and regulatory demands. The final step in this phase is to define a set of “future state” goals to guide process development. These goals must address all of the relevant opportunities to both improve existing processes and perform new functions and services.

Phase 2 – Future state process analysis. During this phase, utilities design end-to-end processes that meet the future state goals defined in Phase 1. To complete this effort, utilities must synthesize components from multiple functional areas and think outside the current organizational hierarchy. This phase requires engagement from participants throughout the utility organization, and participants should be encouraged to envision all relevant opportunities for using AMI to improve the utility’s relationship with customers, regulators and the environment. At the conclusion of this phase, all processes should be assessed in terms of their ability to alleviate the current state issues and to meet the future state goals defined in Phase 1.

Phase 3 – Impact identification. During this phase, utilities identify the organizational structure and corporate initiatives necessary to “operationalize” the future state processes. Key questions answered during this phase include how will utilities transition from current to future state? How will each functional area absorb the necessary changes? And what are the new organizations, roles and skills needed? This phase requires the utility to think outside of the current organizational structure to identify the optimal way to support the processes designed in Phase 2. During the impact identification phase of business, it’s crucial that process be positioned as the dominant organizational axis. Because process-organized utilities are not bound to a conventional hierarchy or fixed organizational structure, they can be customer-centric, make flexible use of their resources and respond rapidly to new business situations.

Phase 4 – Socialization. During this phase, utilities focus on obtaining ownership and buy-in from the impacted organizations and broader group of internal and external stakeholders. This phase often involves piloting the new processes and technology in a test environment and reaching out to a small set of customers to solicit feedback. This phase is also marked by the transition of the products from the first three phases of the business process design effort to the teams affected by the new processes – namely the impacted business areas as well as the organizational change management and information technology teams.

Phase 5 – Implementation and measurement. During the final phase of the business process design framework, the utility transitions from planning and design to implementation. The first step of this phase is to define the metrics and key performance indicators (KPIs) that will be used to measure the success of the new processes – necessary if organizations and managers are to be held responsible for the new processes, and for guiding continuous refinement and improvement. After these metrics have been established, the new organizational structure is put in place and the new processes are introduced to this structure.

BENEFITS AND CHALLENGES OF BUSINESS PROCESS DESIGN

The business process design framework outlined above facilitates the permeation of the utility goals and objectives throughout the entire organization. This effort does not succeed, though, without significant participation from internal stakeholders and strong sponsorship from key executives.

The benefits of this approach include the following:

  • It facilitates ownership. Because the management team is engaged at the beginning of the AMI transformation, managers are encouraged to own future state processes from initial design through implementation.
  • It identifies key issues. A comprehensive business design effort allows for earlier visibility into key integration issues and provides ample time to resolve them prior to rolling out the technologies to the field.
  • It promotes additional capabilities. The business process framework enables the utility to develop innovative ways to apply the AMI technology and ensures that future state processes are aligned to business outcomes.
  • It puts the focus on customers. A thorough business process effort ensures that the necessary processes and functional groups are put in place to empower and inform the utility customer.

The challenges of this approach include the following:

  • It entails a complex transition. The utility must manage the complexities and ambiguities of shifting from functional-based operations to process-based management and decision making.
  • It can lead to high expectations. The utility must also manage stakeholder expectations and be clear that change will be slow and painful. Revolutionary change is made through evolutionary steps – meaning that utilities cannot expect to take very large steps at any point in the process.
  • There may be technological limitations. Throughout the business process design effort, utilities will identify new ways to improve customer satisfaction through the use of AMI technology. The standard technology, however, may not always support these visions; thus, utilities must be prepared to work with vendors to support the new processes.

Although execution of future state business process design undoubtedly requires a high degree of effort, a successful operational transformation is necessary to truly leverage the features of AMI technology. If utilities expect to achieve broad-reaching benefits, they must put in place the operational and organization structures to support the transformational initiatives. Utilities cannot afford to think of AMI as a standard technology implementation or to jump immediately to the definition of system and technology requirements. This approach will inevitably limit the impact of AMI solutions and leave utilities implementing cutting-edge technology with fragmented processes and inflexible, functionally based organizational structures.

The Utility of the Future

The utility industry is in transition. Changing customer needs and expectations are redefining how utilities understand, plan and execute superior customer experiences. In addition, new technologies are enabling new ways to interact with customers.

What will the utility of the future look like? How will customers view their increasing dependency on energy in light of rising energy bills and a sense of urgency to conserve? Do utilities need to start thinking about customers differently? Given the shift in consumer attitudes, along with the rapid advancement of new technologies, what will the industry look like in three, five or even 10 years? While we don’t have a crystal ball to provide all of the answers, IBM has invested in research teams and conducted global surveys to shed light on what the future may hold.

MAJOR CHANGES UNDERWAY

Through interviews with more than 1,000 business and public sector leaders worldwide, the IBM Global CEO Study 200 provides new and compelling perspectives on the strategic issues that are facing organizations of all sizes. Our study finds that 3 percent of CEOs see substantial change coming in the next three years. For utilities, the most dramatic change will be a greater level of customer involvement. Across all industries, CEOs will be increasing their investment in today’s more informed and collaboration-focused customers. As younger consumers begin their relationships with utilities, they bring with them expectations of a digital, mobile and collaborative customer service experience. Most age segments – even boomers – will begin demanding these new multichannel experiences at times that are convenient for them. The utility of the future will have a deep collaborative relationship with the customer and offer innovations that make both its customers and its business more successful.

THE UTILITY BUSINESS MODEL OF THE FUTURE

In the past, utility companies had very limited interaction with customers beyond opening new accounts and billing for services. Consumers took a passive view of all utility activity, only raising their voices when their lights went out. The future shows a much more intense level of customer involvement. Successful companies will continuously differentiate themselves by delivering value with revenue-generating services. The utility of the future will understand the types of capabilities and services that customers will want and can identify and carefully define the gaps in current processes and systems that must be filled to meet these needs.

THE CUSTOMER-FOCUSED UTILITY

Getting perspectives from CEOs and other executives represents only one step toward understanding the utility of the future. IBM also wanted to know what utility customers were thinking. IBM surveyed 1,900 consumers from six countries and included residential households along with small commercial customers. Based on the insights from this survey, we anticipate a steady progression toward a Participatory Network, a technology ecosystem comprising a wide variety of intelligent network-connected devices, distributed generation and consumer energy management tools.

Although the precise time frame for reaching this end state is unknown, our research suggests a few major milestones. Within five years, the percentage of the world’s electric utilities that will be generating at least 10 percent of their power from renewable sources will double. In that same time frame, we believe sufficient supplier choice will allow meaningful consumer switching to emerge in most major competitive markets. We also expect utility demand management initiatives to expand dramatically and electric power generation by consumers to make tremendous inroads within 10 years.

The utility industry is fast approaching a tipping point beyond which consumers can, and increasingly will, demand equal footing with their providers. As consumer passivity gives way to active participation, utilities will have significant opportunities to differentiate themselves and help redefine the industry. Those utilities that are fully prepared to share responsibility with their customers and help them meet their specific energy goals will have a significant competitive advantage and lead the way toward the utility of the future.

INNOVATING FOR THE FUTURE

The utility industry’s future lies in a more participatory structure, where consumers can choose to be actively engaged, and information is abundant and free-fl owing. To thrive in this environment, utilities must be prepared to harness real-time usage information, use it to gain insights into a much more complex consumer base and match products and services to each customer group. Advances in sensor, switching and communications technologies are enabling the next-generation utility. The resulting Intelligent Utility Network will provide a new world of grid monitoring and control and increased options for utility customers.

IBM has proven results in delivering Intelligent Utility Network infrastructures that provide superior reliability and end-to-end network data in near real time. We bring to the table the integration skills, leading-edge technology and partner ecosystem required to support every stage of an Intelligent Utility Network initiative.

As a result of extensive engagements around the world, we have gained deep experience and understand the business processes and technical architecture required for an effective Intelligent Utility Network implementation. We bring together the relevant tools, methodologies, resources and people experienced in the Energy and Utilities industry.

WHY IBM?

IBM delivers innovation that matters for our clients. As a global enterprise, we value innovation that matters for our company and for the world. IBM’s corporate citizenship reflects both our brand and our values by addressing some of society’s most complex problems with game-changing business and technology innovation.

WHY WE ARE UNIQUELY QUALIFIED

The following represent just some of the reasons IBM is uniquely qualified to serve the utility industry:

We Know the Energy and Utilities Business

We help clients define their core competitive advantages. And we do this better than anyone else because we bring deep industry and functional expertise, global experience, high-powered research and a unique understanding of how utilities succeed when they fully leverage technology to their advantage. We bring the following unmatched assets:

  • 70,000 business and industry consultants;
  • On-demand innovation services;
  • Component business modeling;
  • Business Transformation Outsourcing
  • Center for Business Optimization; and
  • Institute for Business Value.

We Know Integration and Transformation

IBM can help energy and utility clients realize the full value of innovation by integrating technology into the fabric of their business, creating the competitive advantage that’s right for them. We offer:

  • Business Performance Transformation Services;
  • Engineering and Technology Services;
  • Application Innovation Services;
  • Custom Logic Capability; and
  • Leadership in Open Standards.

We Know Technology

We are the technology leader. Even more importantly, we know how to deploy all of our technology products and services to deliver the flexible IT infrastructure required to transform businesses and take advantage of every dimension of innovation. We can deploy:

  • 170,000 technology experts;
  • On-demand portfolio/capabilities;
  • Service-oriented architectures and Web services;
  • Modular, scalable and secure computing environments based on open standards;
  • Linux solutions;
  • Middle-ware industry solutions; and
  • Infrastructure management

IBM and the environment

IBM is committed to environmental leadership in all of its business activities, from its operations to the design of its products and use of its technology.

Smart Metering Options for Electric and Gas Utilities

Should utilities replace current consumption meters with “smart metering” systems that provide more information to both utilities and customers? Increasingly, the answer is yes. Today, utilities and customers are beginning to see the advantages of metering systems that provide:

  • Two-way communication between the utility and the meter; and
  • Measurement that goes beyond a single consolidated quarterly or monthly consumption total to include time-of-use and interval measurement.

For many, “smart metering” is synonymous with an advanced metering infrastructure (AMI) that collects, processes and distributes metered data effectively across the entire utility as well as to the customer base (Figure 1).

SMART METERING REVOLUTIONIZES UTILITY REVENUE AND SERVICE POTENTIAL

When strategically evaluated and deployed, smart metering can deliver a wide variety of benefits to utilities.

Financial Benefits

  • Significantly speeds cash flow and associated earnings on revenue. Smart metering permits utilities to read meters and send the data directly to the billing application. Bills go out immediately, cutting days off the meter-to-cash cycle.
  • Improves return on investment via faster processing of final bills. Customers can request disconnects as the moving van pulls away. Smart metering polls the meter and gives the customer the amount of the final bill. Online or credit card payments effectively transform final bill collection cycles from a matter of weeks to a matter of seconds.
  • Reduces bad debt. Smart metering helps prevent bad debt by facilitating the use of prepayment meters. It also reduces the size of overdue bills by enabling remote disconnects, which do not depend on crew availability.

Operational Cost Reductions

  • Slashes the cost to connect and disconnect customers. Smart metering can virtually eliminate the costs of field crews and vehicles previously required to change service from the old to the new residents of a metered property.
  • Lowers insurance and legal costs. Field crew insurance costs are high – and they’re even higher for employees subject to stress and injury while disconnecting customers with past-due bills. Remote disconnects through smart metering lower these costs. They also reduce medical leave, disability pay and compensation claims. Remote disconnects also significantly cut the number of days that employees and lawyers spend on perpetrator prosecutions and attempts to recoup damages.
  • Cuts the costs of managing vegetation. Smart metering can pinpoint blinkouts, reducing the cost of unnecessary tree trimming.
  • Reduces grid-related capital expenses. With smart metering, network managers can analyze and improve block-by-block power flows. Distribution planners can better size transformers. Engineers can identify and resolve bottlenecks and other inefficiencies. The benefits include increased throughput and reductions in grid overbuilding.
  • Shaves supply costs. Supply managers use interval data to fine-tune supply portfolios. Because smart metering enables more efficient procurement and delivery, supply costs decline.
  • Cuts fuel costs. Many utility service calls are “false alarms.” Checking meter status before dispatching crews prevents many unnecessary truck rolls. Reduces theft. Smart metering can identify illegal attempts to reconnect meters, or to use energy and water in supposedly vacant premises. It can also detect theft by comparing flows through a valve or transformer with billed consumption.

Compliance Monitoring

  • Ensures contract compliance. Gas utilities can use one-hour interval meters to monitor compliance from interruptible, or “non-core,” customers and to levy fines against contract violators.
  • Ensures regulatory compliance. Utilities can monitor the compliance of customers with significant outdoor lighting by comparing similar intervals before and during a restricted time period. For example, a jurisdiction near a wildlife area might order customers to turn off outdoor lighting so as to promote breeding and species survival.
  • Reduces outage duration by identifying outages more quickly and pinpointing outage and nested outage locations. Smart metering also permits utilities to ensure outage resolution at every meter location.
  • Sizes outages more accurately. Utilities can ensure that they dispatch crews with the skills needed – and adequate numbers of personnel – to handle a specific job.
  • Provides updates on outage location and expected duration. Smart metering helps call centers inform customers about the timing of service restoration. It also facilitates display of outage maps for customer and public service use.
  • Detect voltage fluctuations. Smart metering can gather and report voltage data. Customer satisfaction rises with rapid resolution of voltage issues.

New Services

For utilities that offer services besides commodity delivery, smart metering provides an entry to such new business opportunities as:

  • Monitoring properties. Landlords reduce costs of vacant properties when utilities notify them of unexpected energy or water consumption. Utilities can perform similar services for owners of vacation properties or the adult children of aging parents.
  • Monitoring equipment. Power-use patterns can reveal a need for equipment maintenance. Smart metering enables utilities to alert owners or managers to a need for maintenance or replacement.
  • Facilitating home and small-business networks. Smart metering can provide a gateway to equipment networks that automate control or permit owners to access equipment remotely. Smart metering also facilitates net metering, offering some utilities a path toward involvement in small-scale solar or wind generation.

Environmental Improvements

Many of the smart metering benefits listed above include obvious environmental benefits. When smart metering lowers a utility’s fuel consumption or slows grid expansion, cleaner air and a better preserved landscape result. Smart metering also facilitates conservation through:

  • Leak detection. When interval reads identify premises where water or gas consumption never drops to zero, leaks are an obvious suspect.
  • Demand response and critical peak pricing. Demand response encourages more complete use of existing base power. Employed in conjunction with critical peak pricing, it also reduces peak usage, lowering needs for new generators and transmission corridors.
  • Load control. With the consent of the owner, smart metering permits utilities or other third parties to reduce energy use inside a home or office under defined circumstances.

CHALLENGES IN SMART METERING

Utilities preparing to deploy smart metering systems need to consider these important factors:

System Intelligence. There’s a continuing debate in the utility industry as to whether smart metering intelligence should be distributed or centralized. Initial discussions of advanced metering tended to assume intelligence embedded in meters. Distributed intelligence seemed part of a trend, comparable to “smart cards,” “smart locks” and scores of other everyday devices with embedded computing power.

Today, industry consensus favors centralized intelligence. Why? Because while data processing for purposes of interval billing can take place in either distributed or central locations, other applications for interval data and related communications systems cannot. In fact, utilities that opt for processing data at the meter frequently make it impossible to realize a number of the benefits listed above.

Data Volume. Smart metering inevitably increases the amount of meter data that utilities must handle. In the residential arena, for instance, using hour-long measurement intervals rather than monthly consumption totals replaces 12 annual reads per customer with 8,760 reads – a 730-fold increase.

In most utilities today, billing departments “own” metering data. Interval meter reads, however, are useful to many departments. These readings can provide information on load size and shape – data that can then be analyzed to help reduce generation and supply portfolio costs. Interval reads are even more valuable when combined with metering features like two-way communication between meter and utility, voltage monitoring and “last gasp” messages that signal outages.

This new data provides departments outside billing with an information treasure trove. But when billing departments control the data, others frequently must wait for access lest they risk slowing down billing to a point that damages revenue flow.

Meter Data Management. An alternative way to handle data volume and multiple data requests is to offload it into a stand-alone meter data management (MDM) application.

MDM applications gather and store meter data. They can also perform the preliminary processing required for different departments and programs. Most important, MDM gives all units equal access to commonly held meter data resources (Figure 2).

MDM provides an easy pathway between data and the multiple applications and departments that need it. Utilities can more easily consolidate and integrate data from multiple meter types, and reduce the cost of building and maintaining application interfaces. Finally, MDM provides a place to store and use data, whose flow into the system cannot be regulated – for example, in situations such as the flood of almost simultaneous messages from tens of thousands of meters sending a “last gasp” during a major outage.

WEIGHING THE COSTS AND BENEFITS OF SMART METERING

Smart metering on a mass scale is relatively new. No utility can answer all questions in advance. There are ways, however, to mitigate the risks:

Consider all potential benefits. Smart metering may be a difficult cost to justify if it rests solely on customer acceptance of demand response. Smart metering is easier to cost-justify when its deployment includes, for instance, the value of the many benefits listed above.

Evaluate pilots. Technology publications are full of stories about successful pilots followed by unsuccessful products. That’s because pilots frequently protect participants from harsh financial consequences. And it’s difficult for utility personnel to avoid spending time and attention on participants in ways that encourage them to buy into the program. Real-life program rollouts lack these elements.

Complicating the problem are likely differences between long-term and short-term behavior. The history of gasoline conservation programs suggests that while consumers initially embrace incentives to car pool or use public transportation, few make such changes on a permanent basis.

Examining the experiences of utilities in the smart metering forefront – in Italy, for example, or in California and Idaho – may provide more information than a pilot.

Develop a complete business case. Determining the cost-benefit ratio of smart metering is challenging. Some costs – for example, meter prices and installation charges – may be relatively easy to determine. Others require careful calculations. As an example, when interval meters replace time-of-use meters, how does the higher cost of interval meters weigh against the fact that they don’t require time-of-use manual reprogramming?

As in any business case, some costs must be estimated:

  • Will customer sign-up equal the number needed to break even?
  • How long will the new meters last?
  • Do current meter readers need to be retrained, and if so, what will that cost?
  • Will smart metering help retain customers that might otherwise be lost?
  • Can new services such as equipment efficiency analyses be offered, and if so, how much should the utility charge for them?

Since some utilities are already rolling out smart metering programs, it’s becoming easier to obtain real-life numbers (rather than estimates) to plug into your business case.

CONSIDER ALTERNATIVES

Technology is “smart” only when it reduces the cost of obtaining specified objectives. Utilities may find it valuable to try lower-cost routes to some results, including:

  • Customer charges to prevent unnecessary truck rolls. Such fees are common among telephone service providers and have worked well for some gas utilities responding to repeated false alarms from householder-installed carbon monoxide detectors.
  • Time-of-use billing with time/rate relationships that remain constant for a year or more. This gives consumers opportunities to make time-shifting a habit.
  • Customer education to encourage consumers to use the time-shifting features on their appliances as a contribution to the environment. Most consumers have no idea that electricity goes to waste at night. Keeping emissions out of the air and transmission towers out of the landscape could be far more compelling to many consumers than a relatively small saving resulting from an on- and off-peak pricing differential.
  • Month-to-month rate variability. One study found that approximately a third of the efficiency gains from real-time interval pricing could be captured by simply varying the flat retail rates monthly – and at no additional cost for metering. [1] While a third of the efficiency gains might not be enough to attain long-term goals, they might be enough to fill in a shorter-term deficit, permitting technology costs and regulatory climates to stabilize before decisions must be made.
  • Multitier pricing based on consumption. Today, two-tier pricing – that is, a lower rate for the first few-hundred kilowatt-hours per month and a higher rate for additional hours – is common. However, three or four tiers might better capture the attention of those whose consumption is particularly high – owners of large homes and pool heaters, for instance – without burdening those at the lower end of the economic ladder. Tiers plus exception handling for hardships like high-consuming medical equipment would almost certainly be less difficult and expensive than universal interval metering.

A thorough evaluation of the benefits and challenges of advanced metering systems, along with an understanding of alternative means to achieving those benefits, is essential to utilities considering deployment of advanced metering systems.

Note: The preceding was excerpted from the Oracle white paper “Smart Metering for Electric and Gas Utilities.” To receive the complete paper, Email oracleutilities_ww@oracle.com.

ENDNOTE

  1. Holland and Mansur, “The Distributional and Environmental Effects of Time-varying Prices in Competitive Electricity Markets.” Results published in “If RTP Is So Great, Why Don’t We See More of It?” Center for the Study of Energy Markets Research Review, University of California Energy Institute, Spring 2006. Available at www.ucei.berkeley.edu/