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.

Best Practices to Help Billers Drive Consumer Adoption of Paperless E-Bills

Executive Summary

With rising costs that threaten to erode profit margins, billing organizations are constantly looking for ways to decrease expenditures without sacrificing customer satisfaction. Companies that incur significant expenses associated with the delivery of recurring bills are fully aware of the cost savings to be had by offering e-bills (electronic representations of bills) in lieu of the traditional paper bills. This white paper is intended to be thought-provoking and offer ideas and considerations for driving paperless adoption. It will discuss best practices, what to look for in an electronic billing and payment (EBP) provider, and suggestions for creating a business case for e-bills.

Every interaction with your customers is an opportunity to strengthen relationships and maximize business profitability. Billing and payment touch points are ideal interactions because they command consumers’ attention every month. The key is to meet consumers where they choose to view and pay your bill and strategically guide them to low-cost channels, beginning with online payments and ultimately paperless billing.

Many billing organizations have aggressive paper suppression goals as part of an overall cost-savings initiative. A well thought-out strategy with a strong understanding of consumer preferences is necessary to maximize consumer adoption of paperless billing. This white paper will help billing organizations reach their paperless goals by highlighting best practices such as implementing the best EBP user interface and customer experience, utilizing a multi-channel approach, deploying effective marketing tactics and other innovative tactics.

Best Practice #1: Choose the Right EBP Solution

It is important to understand customer preferences in order to meet their payment needs while also guiding them from online payment to paperless billing. You want a user-friendly EBP solution that allows you to optimize every customer interaction and supports your paperless billing initiative.

Here are several best practices for creating an effective EBP experience at your site:

Enrollment – It should be very easy for consumers to find where to enroll on your site and the process should be painless. Don’t make it an obstacle. The information needed to enroll should be readily available to the consumer and should be limited to only that which is needed to meet your company’s security standards for validating a consumer’s identity. Minimizing the number of required fields decreases the opportunity for data entry errors that lead to frustration and abandonment from your site. It’s also important to make e-bill enrollment available through offline channels as well. Have your customer service reps offer to enroll customers while on the phone. If you have a location that customers visit in person, enable enrollment in these locations as well. Better yet, consider moving the enrollment process to the time of activation with your company so all new customers will be paperless.

User Interface – Customer experience at your site is paramount. Your EBP application should be customizable to match the look, feel and branding of your website to avoid confusing users with a disjointed process. The user interface (UI), if designed correctly, can play a leading role in creating a positive customer experience and driving e-bill adoption. The most important best practice to help drive paperless adoption is to continually educate consumers on what an e-bill is and the many personal and environmental benefits. The UI should be designed in such a way that e-bill messaging is prominent and eye-catching. In addition to repeatedly defining an e-bill and explaining its benefits throughout your site, include a thumbnail picture of your e-bill to help users make a direct association between the paper bill and the e-bill.

There are other ways your user interface can help drive paperless billing at your website, so make sure your EBP solution is capable of the following:

  • Allows and encourages customers to turn paper bills off and on at their discretion from your website. With a highly visible paper bill status indicator on your website, consumers get the comfort, choice and control they are looking for. This will eliminate calls to your call center requesting to turn paper bills off and on.
  • Offers various ways to answer questions about bill payment and presentment with easy-to-find help text. Make sure the help text appears on the EBP pages so the user doesn’t have to leave the page or interrupt a task to search for help.

EBP Functionality – A rich customer experience can have a significant impact on driving more consumers online. You can facilitate customers’ use of your online channel and ultimately paperless billing by implementing a user-tested application that meets their needs. Based on consumer feedback, you should consider the following best practices:

  • Offer real-time information so users can view their bill summary immediately after enrollment
  • Develop functionality that seamlessly integrates into your current website so customers don’t have to log in separately to view and pay bills
  • Display bill presentment and payment within the website without pop-up windows
  • Provide customers the flexibility to choose their preferred payment method (scheduled, one-time, recurring, Auto Pay) and their preferred funding source (checking account, credit card, debit card)
  • Present e-bill as a mirror image of the paper bill to ensure a smooth transition to your electronic version
  • Enable billing-related notifications via multiple channels like e-mail or text messages
  • Store a sufficient amount of bill history with quick and easy retrieval capabilities

Best Practice #2: Consider a Multi-Channel Approach To Distribute Your e-Bills

New technologies have changed the way consumers choose to pay bills. While more than 51 percent of U.S. online bill payers use biller direct sites, 25 percent prefer the convenience of single bill pay sites1 and that segment is expected to continue growing. Forrester predicts that bank EBP growth rates will be close to twice that of biller sites through 20112 and TowerGroup estimates a bank EBP compounded annual growth rate of 24 percent through 2012.3 Therefore, in order to meet all your consumers at their preferred payment channels, you need to make your e-bills available at bank and financial websites in addition to your biller direct site.

Only 17 percent of U.S. billing organizations have not identified the bank channel as important to their online billing strategy, while the other 83 percent have already begun utilizing the consolidated channel and plan to continue doing so in the future.4 The days of viewing bank websites as your competition are long gone. Complementing your biller direct site with e-bill presentment in the bank channel is the way to meet all your online consumers at their payment point of preference.

You will not lose cross-sell and up-sell opportunities at your site because approximately two thirds of e-bill recipients visit their biller’s website for self-service or last-minute payment activities.1 Instead, you gain the opportunity to increase your paperless adoption rates.

The same study states that consumers who pay bills at bank sites have a higher propensity to go paperless. The data shows that in 2007, the percentage of consumers who opted for paperless bills at their bank site is double that of consumers choosing paperless at biller direct sites. When a large national insurance company began delivering its bills electronically to banks and financial institutions in January of 2008, they grew enrollments by 85,000 enrollments in the first three months alone. This is an example of the success to be achieved by distributing e-bills to banks and financial institutions.

With every paper bill turned off, you save on all the expenses of mailing bills: paper, printing, mailing envelopes, return envelopes, handling and postage, but the savings don’t stop there. Many of the large banks and financial institutions aggressively promote the availability of billers’ e-bills. You can benefit from all the e-bill marketing messages directed to your customers at no cost to you.

In addition to cost savings, distributing your e-bills to bank and financial institution websites will improve customer satisfaction and retention. According to CheckFree Consumer Insights data, 27 percent of consumers who receive a biller’s e-bills at their home banking site are more satisfied with that biller and 33 percent are more loyal.1 Unfortunately, the converse may also be true. Consumers who are already paying bills at their home banking site will be dissatisfied with your company if your e-bill is not available where they prefer to view and pay bills.

Distribution of your bills electronically to banks and financial institutions is the perfect complement to your own biller direct site. It is an essential part of any EBP strategy because it is the only way to give consumers the option of paperless billing from their home banking site. By delivering your e-bills to the bank channel, you can satisfy consumers’ needs at their payment point of preference while making headway on your paper adoption goals. It is a win-win for you and your customers.

Best Practice #3: Marketing and Promoting e-Bills

Once you have an easy, user-friendly e-bill program, the next step is to create a marketing campaign to drive awareness and guide customers from their current paper-based bill pay routine to online billing. Craft a clear, concise, actionable message and continually promote it through multiple consumer touch points. The message should include an explanation of what an e-bill is and the many advantages over the traditional paper bill. Emphasize specific consumer benefits (reduces risk of identity fraud, reduces clutter, simplifies bill management, saves time) and the environmental impact (reduces paper, saves trees and conserves energy).

Many companies have seen great success by educating consumers on the positive environmental impact of paperless billing as a way to drive e-bill adoption. According to a survey by CheckFree Consumer Insights, 48 percent of consumers cited, “It’s better for the environment,” as the top reason for choosing paperless billing. Consider a similar approach and direct proceeds to a local charitable organization to give customers an opportunity to make a difference within their own community.

Another marketing approach that has proven successful is offering sweepstakes incentives to enroll in e-bills. Con Edison of New York has used this approach by offering prizes such as MacBook®
computers and ENERGY STAR room air conditioners. Its most recent sweepstakes offered the chance to win an Apple®
iPhone™. The results were great; e-bill adoption increased 48 percent over the same period the prior year.

Whether your message focuses on the environment, convenience or both, use it to promote your e-bill service at every possible consumer touch point in an ongoing campaign. The following are steps you can take quickly and inexpensively:

  • Print a targeted message on consumer bills and return envelopes
  • Announce your campaign through a companysponsored press release
  • Display dynamic e-bill messaging prominently throughout your website
  • Include a thumbnail image of your e-bill to provide a visual reference for consumers
  • Incorporate an e-bill message in your on-hold recording
  • Have your customer service representatives promote e-bills over the phone and in person
  • Present the electronic bill as a mirror image of the paper bill to ensure a smooth transition to your electronic version
  • Dedicate a section to e-bills in your customer newsletter
  • Create a specific e-bill communication delivered via e-mail
  • Supplement your own consumer education efforts with tools such as PayItGreen.org and eBILLPLACE.com

Make every effort to find an internal executive champion for your marketing ideas and remember that the most successful campaigns are those that are comprehensive, ubiquitous and ongoing.

Best Practice #4: Utilize Innovative Tactics

In spite of all your communication efforts, some consumers may still not be comfortable with the idea of giving up their paper bill because it serves as a physical reminder of a due payment or for recordkeeping purposes. There are many who still don’t understand what an e-bill is or how it works. To combat the education and awareness barriers, take the opportunity to think and act outside the box. Here are three examples of successful innovative tactics:

1. Give Consumers Control of E-Bills at Bank Websites
In 2008, 45 percent of e-bill viewers said that the ability to turn on their paper bill at anytime would make them more willing to suppress their paper versions.1 The idea of going paperless becomes more attractive when the consumer is given choice and control. Earlier in this paper, it was recommended to choose an EBP solution that enables customers to turn their paper bills on and off from your biller direct site. Now, consider going one step further and create the same sense of control for your customers at consolidated sites by enabling an e-bill trial period. (This is only possible if you are already delivering your e-bills to bank and financial institution websites.) A trial period gives consumers two options: 1) Sign up for paperless e-bills or 2) Enter an e-bill trial period to become familiar with e-bills while the paper bill remains. Verizon Communications implemented this tactic and saw a 10 percent increase in e-bill activations, and almost 50 percent of customers presented with the trial
period opted to suppress their paper bill either immediately or at some point during the 90-day trial period.

2. Utilize Your Front Line to Help Drive E-Bill Adoption
Generally, a biller’s goal is to drive customers online for billing and payment activities rather than having them call customer service representatives (CSRs). However each phone call is extremely important because it is often the only human contact customers have with your company. Try a novel approach and include CSRs in your plan to drive e-bill adoption. Start by determining what motivates them – whether it’s an in-office party, a catered lunch or the chance to win a prize. Then communicate to your front line employees that you need their help educating consumers on the benefits of e-bills to drive paperless adoption. Set an e-bill activation goal and commit to a reward if the goal is reached.

Indianapolis Power & Light (IPL) created an e-bill adoption campaign for its customer service team and had positive results. An aggressive yet attainable e-bill activation goal was set and an in-office party was promised as the reward if the goal was met. The CSRs were given e-bill talking points and online enrollment instructions, and they were encouraged to promote e-bills as much as possible. They were not given a script. Instead, they were given the authority to use their own judgment when speaking with callers. After six weeks, IPL surpassed the goal and increased e-bill activations by 35 percent during the campaign. “Don’t underestimate your front line team,”
said Bill Bisson, Customer Service Manager at IPL when asked about his innovative approach to promoting e-bills.

The success of IPL’s campaign was driven by the fact that all employees, up through the top executives, understand the value of e-bills. IPL’s Executive Management Team was instrumental in driving awareness and support from the entire organization by reinforcing the importance of the e-bill adoption initiative. Bill Bisson says the success of his CSR campaign demonstrates that, “It’s important to have support from the top down.”

3. Consider Defaulting the Bill Setting to “Paperless”
During Enrollment

According to Forrester, there is a segment of consumers who have not adopted e-bills yet because they “just haven’t gotten around to it yet.”5 While this is a more aggressive tactic, consider this change to the account set-up process: When a consumer is asked to choose paper bills or e-bills, default the selection to e-bills. This does not restrict someone from selecting paper bills, but those who are more open to e-bills may be likely to accept the default. A large utility company in the Midwest reaped a 20 percent increase in the number of people going paperless with this approach.

Choose the Right EBP Provider to Meet Your Needs

When choosing an EBP provider, it is important to work with a company that will be a business partner rather than just a vendor. Besides finding a trusted, established organization with a proven track record and a strong history of reliability, here is a list of what to look for when you begin your evaluation:

  • Goal Alignment Yields Success: Choose a provider whose top priorities are aligned with yours – overcoming barriers to e-bills and driving paperless adoption.
  • Research is the Key: Make sure your EBP provider conducts and/or commissions ongoing research and usability testing to understand consumer behavior to make product and user interface improvements.
  • Innovation, Innovation, Innovation: You want a vendor who invests in the future of EBP, stays in the forefront of technology and can be quick to market with proven innovative solutions designed to drive paperless adoption.
  • One Size Does Not Fit All: You want a partner who will listen to you and provide a tailored solution to help you achieve your EBP goals while keeping the company’s goals in mind. The paper suppression strategy should be different for companies charged with cost reduction versus those focused on improving customer satisfaction or somewhere in between.
  • Largest, Widest Reach: Choose an EBP provider who has solutions for multiple channels so you can work with one company for all your EBP needs – a superior EBP solution at your biller direct site, the capability to deliver your e-bills to as many banks as possible, as well as the ability to support walk-in and phone payments.
  • It’s All About You: Work with a vendor who realizes that you have goals other than paper suppression and has solutions that can help. For example, if you have the desire to cross-sell and up-sell to consumers on your website, choose a vendor who can utilize billing information to create targeted, customized messaging within your EBP application.
  • Account Management: Having a dedicated account management team providing operational support will ensure a quality experience for your customers. They will also keep you informed on industry trends and new products.
  • Marketing Know-How: You want an EBP partner who offers marketing support and collaboration in developing campaigns designed to drive adoption. From experience, they should be able to tell you the best way to motivate your customers, what messages resonate best with different segments, and what incentives, if any, would be effective in changing consumer behaviors.

Tips for Building a Business Case for EBP

Once you have decided on the right EBP solution and provider for your business, the next step is to create a compelling business case to justify your recommendation and gain executive support. Achieving approval and funding for cost-saving initiatives can be more challenging than for revenue-generating projects, so here are some best practices to consider when developing your business case:

Include All Impacted Departments – According to TowerGroup, 100 percent of billers surveyed included a cost/benefit analysis from multiple departments.4 The benefits of including other departments in this process are two fold: not only will you receive additional data to support your business case, but you will gain internal cross-functional support early on. Both will help you when looking for executive approval of your project. This exercise will also help minimize implementation delays by keeping all impacted parties informed.

Develop a Comprehensive ROI Model – Make sure to capture all the possible savings from e-bills and paperless billing. Start with the due diligence of determining the costs associated with your current print and mail process to help accurately calculate the saving per activated e-bill. Next, forecast the e-bill adoption rate for your biller direct site. This can be challenging, so the best approach is to use industry averages. Your EBP provider should be able to supply these percentages.

If you plan to distribute your e-bills to banks and financial institutions, you need to forecast the e-bill adoption rate for this channel and include the savings into the ROI model. Your EBP provider should be able to help you predict the number of e-bill activations you can expect by determining the number of payments you currently receive from banks and applying an industry adoption average. Don’t forget to include the savings from fewer claims as a result of more accurate account information from e-bills.

Other items to be included in your ROI calculation are:

  • Increasing Postage Rates – Now that the USPS has the ability to raise postage rates every year, include an increase of at least one cent to your cost per bill each year.
  • Marketing Expenses – Include some reduced marketing expenses if your EBP provider offers marketing consultation and creative assets for your use.
  • Privacy and Security Expenses – With an outsourced EBP solution, you can reduce expenses associated with regulatory compliance.

Incorporate Soft Returns – While soft returns may not fit into the ROI model because they are difficult to quantify, they should not be omitted from the business case.

  • Research shows that consumers are more satisfied and loyal when they receive e-bills, regardless of the channel.1&7
  • You can be a leader in “green” environmental activities. Forty-three percent of consumers are more likely to do business with an environmentally friendly company.8
  • As you drive more consumers to your site for bill viewing, you will increase online marketing opportunities.
  • Research shows that 58 percent of customer calls are billing and payment related. With new self-service features from an EBP solution, you can anticipate a decrease in billing related calls. This can allow for repurposing of FTEs.9

Provide Examples – Support your business case with real life examples from other billers in your industry who have implemented an EBP strategy and describe their success. This will validate the numbers in your business case. Hopefully, your EBP provider can share case studies to exemplify the potential results.

What to Avoid – The savings per e-bill will be the bulk of your cost savings so it is important to be as accurate and realistic as possible. Be conservative and don’t over estimate adoption rates. Work with your provider to get an accurate project plan to tell you the number of IT resources and hours this project will require. You might be surprised at how minimal the requirements are. And lastly, don’t forget to include initial and on-going training costs for your front-line employees. Your customer service representatives can prove to be very valuable in helping to promote e-bills to your consumers if they are properly educated.

Conclusion

Is paper suppression a priority within your organization? Has your company already implemented some or all of the best practices mentioned in this paper? If not, begin thinking about what you can do in the short term with minimal expense (bill messaging, on-hold messaging, newsletter messaging, etc.). Then determine the company’s budget and IT resources available to pursue some of the higher-impact recommendations. If you are ready to begin researching options that are best for your organization, you can find more information at www.checkfree.com/billersolutions. Or, if you are interested in learning how other billing organizations in your industry have grown their e-bill adoption rates, you can find case studies at www.checkfree.com/resourceroom.

Footnotes

  1. CheckFree Consumer Insights, Consumer Billing and Payment Trends, February 2008
  2. Forrester, EBPP Forecast: 2006 To 2011, May 2007
  3. TowerGroup, Expedited Online Bill Payments: A New Revenue Stream for Financial Institutions, 2008
  4. TowerGroup, 2008 Biller Survey on EBPP, November 2008
  5. Forrester, Online Bill Pay 2007: Understanding The Mindset Of Holdouts, Fence-Sitters, And Quitters, December 2007
  6. Aite, Biller Direct Technology: A Vendor Overview, August 2008
  7. CheckFree Consumer Insights, Biller Direct Survey Findings, June 2008
  8. Javelin Strategy and Research, The Four E’s of Green Banking, June 2008
  9. PayStream Advisors, Consumer-To-Business Payments, Webinar, August 2006

Smart Meters on a Roll in Canada

Electricity supply challenges in Ontario, Canada, have led the provincial government there to take aggressive action on both the supply and demand sides to meet customer electricity needs. Between now and 2025, it’s estimated that Ontario must build an almost entirely new electricity system – including replacing approximately 80 percent of current generating facilities (as they’re retired over time) and expanding the system to meet future growth. However, just as building new supply is vital, so too is conservation. That’s why Ontario’s provincial government is introducing new tools like smart meters to encourage electricity consumers to think more about how and when they use electricity. By implementing a smart metering infrastructure by 2010, the province hopes to provide a foundation for achieving a more than five percent reduction in provincial demand through load shifting, energy savings and price awareness.

Hydro One owns and operates one of the 10 largest transmission and distribution systems in North America, serving a geographic area of about 640,000 square kilometers. As the leading electricity transmitter and distributor in Ontario, the company supports the province’s goal of creating a conservation culture in Ontario and having a smart meter in every Ontario home and small business. The company’s allocation of the province’s target was 240,000 smart meters by 2007 and the full 1.3 million by 2010.

The task for Hydro One and other local distribution companies (LDCs) in the province is to meet the government time line while at the same time building an enabling solution that provides the most upside for operations, demand management and customer satisfaction. Working with the industry regulator and the LDCs, phased goals were established and allocated among the major utilities in the province.

ADVANCED METERING INFRASTRUCTURE AND SOLUTION ARCHITECTURE

Advanced metering infrastructure (AMI) is the term used to describe all of the hardware, software and connectivity required for a fully functioning smart metering system. To view AMI as just a technology to remotely read meters and bill customers, however, would be to miss the full potential of smart metering.

The core of the solution resides with the requirement for a ubiquitous communications network and an integration approach that provides for the exploitation of data from many types of devices (automated meter reading, load control, in-home displays, distribution monitoring and control and so on) by making it available to numerous enterprise applications (for example, customer information, outage management, asset management, geographic information and work execution systems).

To meet this requirement, the Hydro One team architected an end-to-end solution that rigorously sought open standards and the use of IP at all communications levels to ensure that the network and integration would be available to and compatible with numerous applications.

Hydro One’s AMI solution is based on standards (ANSI and IEEE) and open protocols (Zigbee and IP) to ensure maximum flexibility into the future as the technology and underlying applications such as in-home energy conservation devices (two-way real-time monitors, pool pump timers and so on) and various utility applications evolve.

Smart Meters

The “smarts” in any smart meter can be housed in virtually any meter platform. Meter reads are communicated at a frequency of 2.4 GHz by a radio housed under the meter’s glass. In essence, the hourly meter reads are transmitted by hopping from one meter to the next, forming a self-organizing network that culminates at the advanced meter regional collector (AMRC). This type of local area network, or LAN, is known as a mesh network and is known for its self-healing characteristics: if communication between meters is interrupted for any reason, communication paths between meters are automatically rerouted to the regional collector to ensure that data is delivered reliably and on time. The installed smart meters also have a “super capacitor,” enabling the meter to send a last communication to the utility when there has been a power outage.

Repeaters

Repeaters provide a wireless range extender for the meters and are used in less densely populated areas in the province to allow data to be transmitted from one meter to the next. Typically, repeaters are needed if the hop between meters is greater than 1 to 2 kilometers (depending on a number of factors, including terrain and ground cover).

Advanced Metering Regional Collectors

Typically installed on poles at preselected locations within a local area network, advanced metering regional collectors (AMRCs) gather the meter readings in a defined area. Most importantly, the AMRCs provide access to the wide area network (WAN), where data is sent wirelessly back to Hydro One. The AMI solution is designed to accommodate either wireless cellular or broadband WAN to backhaul hourly meter reads to the advanced metering control computer.

Advanced Metering Control Computer

The advanced metering control computer (AMCC) is used to retrieve and temporarily store meter reads from the regional collectors before they’re transmitted to the meter data management repository (discussed below). The information stored in the AMCC is available to log maintenance and data transmission faults, and to issue reports on the overall health of the AMI system.

Meter Data Management Repository

MDM/R is the acronym for the province-wide meter data management repository. The MDM/R provides a common infrastructure for receiving meter reads from all LDCs in Ontario, processing the reads to produce billing quality consumption data, and storing and managing the data. The Ontario government has entered into an agreement with the Independent Electricity System Operator to coordinate and manage implementation activities associated with the MDM/R.

Billing

Time-of-use “bucketed” data is sent from the MDM/R to Hydro One for any exception handling that may be required and for customer billing. Hydro One prepares the bill and sends it to the customer for payment.

Web Presentment of Customer Usage Data

Customer electricity usage data will be available to customers by 9 a.m. the day after they use it via a secure website. This data will be clearly marked as preliminary data until the customer has been billed.

GOALS, OBJECTIVES AND KEY ACCOMPLISHMENTS

To successfully deploy the smart metering solution described above, the Hydro One team set out to accomplish the following goals and objectives (which are enshrined in project governance plans and daily project activities):

  • Balance investment with the regulatory process to ensure that smart meter investments don’t get ahead of changes in regulatory requirements.
  • Design, test, prototype and pilot prior to buying or building – a rule that applies to all aspects of the smart meter solution architecture, from the meters and communication network to the back-office systems.
  • Delay building solution components until line-of-business requirements are locked down. Solution components that are unlikely to change will be built before other components to minimize the risk of rework.
  • Test smart meter deployment business processes, technology and customer experience throughout the process.
  • Ensure positive customer experience and value, including providing customers with information and tools to leverage smart meters in an appropriate time frame.
  • Use commercial, off-the-shelf (COTS) products where possible (as opposed to custom solutions).
  • Include estimation of total cost of ownership (one-time and ongoing costs) in architectural decision making.
  • Enable commencement of time-of-use (TOU) billing in 2009.

Key project accomplishments to date have included:

  • Building an in-situ lab using WiMax and meters in rural areas to test and confirm open protocols, wireless broadband interoperability, and meter performance;
  • Conducting a community rollout of about 15,000 meters to develop and successfully test and optimize meter change automation tools and customer communication processes;
  • Mass deploying of just over a quarter of a million meters across the province;
  • Designing and beginning to build the communication network to support the collection of hourly reads from approximately 1.3 million customers.

METER AND NETWORK DEPLOYMENT

Meter installation teams surpassed a notable milestone of 250,000 installed smart meters as of December 2007. Network deployment began in 2007 with a planned ramp-up in 2008 of installing more than 2,000 AMRCs province-wide.

Meeting these targets has required well-coordinated activities across the project team while working in parallel with external entities such as MeasurementCanada and others to ensure compliance with regulatory requirements.

Throughout meter and network deployment activities, Hydro One has adhered closely to three primary guiding principles, namely:

Safety. The following initiatives were factored into the project to help maintain a safe environment for all employees and business partners:

  • Internal training was integrated into the project from the inception, establishing a thorough yet common-sense compliant safety attitude throughout the team.
  • No employee is permitted to work on the project without a full safety refresher.
  • Safety represented a key element of incentive compensation for management and executive personnel.

Customer service. Given the opportunity to visit literally every customer, the success of this project is being judged daily by the manner in which the project team interacts with customers.

  • Every customer is provided with an information package within 15 to 30 days of the meter change.
  • Billing windows are scrupulously avoided through automation tools and integration to CIS in order to eliminate any disruption to the size, look and feel of the customer bill.
  • All customers receive a personal knock at the door before meter change.
  • All life-safety customers are changed by appointment or have positive contact made prior to meter change if they cannot be reached for an appointment

Productivity. Despite Hydro One’s rural footprint – which includes some areas so remote they must be accessed by all-terrain vehicle, boat or snowmobile – the installation teams maintain an average of 39.6 meters per installer-day with a peak of 97 per installer-day. They have achieved this through automation and a phased ramp-up of installers, including training and joint fieldwork with Hydro One’s partners.

IN-HOME CONSERVATION AND DEMAND MANAGEMENT

Testing will soon be underway using third-party devices for residential demand response programs that operate on the mesh network, including two-way realtime monitors, automated thermostats and load control devices. Optimally for customers, meters will serve as the key head-end device, connectable to numerous other devices within the home as illustrated in Figure 2.

While much of this technology is still in its infancy, North America-wide AMI deployments will rapidly accelerate resulting in greatly enhanced customer service opportunities going forward.

LEVERAGING THE SMART NETWORK TO INCREASE UTILITY EFFICIENCY

Hydro One is also looking ahead to applications that will leverage the smart metering communication network to increase the efficiency of its operations. As illustrated in Figure 3, these applications include distribution station monitoring, enhancements to outage management, safety monitoring, mobile work dispatch and work accomplishment, and asset security. All of the above applications have been tested in a proof-of-concept environment, and individual projects are planned to proceed on a business case basis.

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.

Opportunity Ahead: The Aging Workforce

Conventional thinking has it that the utility industry’s aging workforce represents a critical problem demanding a call to arms. But is an aging workforce really just a human resources dilemma? Or can it be viewed more broadly as a window through which utilities can examine ways to foster positive change for the future of their organizations? When viewed in this light, the exit of a large cohort of skilled workers may represent the most significant opportunity a utility will ever confront – one that could fundamentally alter the way it does business and upgrades financial performance.

At most utilities, little or no opportunity exists for significant revenue growth (a situation that’s persisted for some time) at the same time that personnel-related expenses have continued to increase and squeeze profit margins. To achieve the annual earnings improvement targets of 10 to 15 percent that stakeholders have come to expect, utilities have had no alternative but to reduce ongoing operational expenses dramatically – and often that’s meant cutting staff.

But the days of dramatic expense cuts based on typical cost reduction strategies are all but over. With nearly a third of the industry eligible to retire today, further personnel cuts aren’t warranted. Utilities are now confronted with a unique opportunity to make business improvements to reduce future costs. One approach involves using innovative technology to:

  • Lessen headcount requirements and make better use of reduced staffs;
  • Capture the knowledge base of skilled workers before they depart the workforce;
  • Reduce the number of people required to carry out a task by improving data access and communications among operating units;
  • Emphasize availability and use of key skills (rather than number of personnel);
  • Create true “best practices” (rather than continue to rely on “status quo practices”); and
  • Develop a “digital organization” that excites and retains new hires.

The utilities that will be successful in the future – the high-performance utilities – won’t hire their way to success. After all, there will be fewer skilled workers available for hire; recruitment will remain costly; and ongoing personnel-related expenses will continue to escalate. Instead, the high-performance utility will institutionalize its key procedures and business processes (by capturing existing employee knowledge) and exploit documented best practices before employees fly out the door.

Forward-looking utilities must invest in strategic technology, using a variety of partner models to meet their requirements. Technology solutions that solve localized issues will not address the future. Solutions that are able to look at a utility horizontally – as an organization with many parts that need to perform as a single entity – will serve as an important means of dealing with the disappearing workforce.

WHAT ARE UTILITIES LOSING … AND GAINING?

The imminent loss of critical skills and knowledge base caused by an aging workforce approaching retirement represents a demographic tsunami – a force unprecedented in business history. During the next five to 10 years, many utilities will lose as much as 50 percent of their current workforce to retirement. Clerical and administrative staff, as well as field technicians, managers and supervisors, engineers, IT personnel and business executives will all be part of the retirement wave.

The effect of utility workforce retirement is more profound than simple personnel turnover, because it represents a loss of critical knowledge. This knowledge base embodies the art of the organization – not just the information documented in manuals, maps, procedures and databases but also the organization’s culture and attitudes.

As younger workers replace an aging and departing workforce, utilities could witness the fracture of the motivational belief system that once bound the workforce. To meet the utility’s objectives, new workers need to have access to the expertise and knowledge of prior generations of workers. They can then build on this knowledge with their own experiences, helping the utility achieve a new and positive culture for success.

CONVENTIONAL SOLUTIONS

Industry literature suggests a number of solutions to the aging utility workforce problem:

  • Long-term staffing plans;
  • Partnerships with universities and community colleges;
  • Continuing education and training programs;
  • Active involvement in industry organizations; and
  • Internal knowledge sharing programs.

Each of these approaches plays a role in the solution, but collectively they still fall short of truly lessening the impact of the loss of half (or more) of a utility’s workforce. To wit: the number of students enrolled in college math and science programs (with the exception of computer and information science) continues to decline. And in the last 15 years, colleges and universities have seen a 50 percent decline in the number of graduating engineers (one of many skill sets a utility requires). All of which means that as utilities lose their skilled workers, they will not be able to replace those skills by drawing from the current labor pool. Solutions other than hiring programs will be needed to bridge the gap between skills lost and skills needed.

THE ROLE OF TECHNOLOGY

Much of the technology utilities have implemented over the past five to 10 years has taken the form of “point” software solutions. By solving specific and limited problems, this software has tended to reinforce status quo business practices rather than enable innovation or better problem solving.

In many utilities, status quo means a vertical organization – a group of departmental silos that define the utility’s corporate structure. In a vertical structure, each group or department operates as a somewhat isolated entity, and each group “owns” the work to which it is assigned. But the manner in which utilities conduct business is comprised of horizontal processes spanning the office and the field – processes that are driven by the customer, whether commercial, industrial or residential.

Thus, vertical organizations often inhibit the type of change that can reduce headcount requirements and ensure better communication between remaining personnel. But changes that help flatten an organization horizontally – so that operations and procedures are viewed from end to end – can streamline business processes to improve handoffs between job roles and eliminate time-consuming and labor-intensive administration steps.

In the future, high-performance utilities will of necessity implement horizontal business process solutions that involve multiple systems spanning former organizational silos such as customer service and distribution operations. Horizontal solutions represent a quantum change in project complexity that will stretch many utilities’ internal organizations and define the systems integration market in the future.

The major opportunity offered by an integrated, horizontal solution lies in the creation of a strategic technology platform that offers the benefits of positive change and value creation. Such changes will be critical in supporting a utility as it undergoes workforce attrition and cultural evolution due to workforce retirements. The following represent some of the opportunities for change that high-performance utilities should be reviewing.

Business Process Change Opportunities

The term best practices has sometimes been defined as a generic methodology or a detailed scripting of events rather than an organized, documented view of the preferred and streamlined way to carry out a particular procedure. Many major technology initiatives and systems implementations have failed to deliver value to the utility because the true “best” practice is never defined, and therefore the transformation of the business process never occurs. The pressure to reduce costs and the rush to adopt scripts of existing procedures are the primary reasons for this disappointment.

The high-performance utility of the future, then, must commit to accurately defined best practices and a program of continuous process improvement. Such programs reduce costs by simplifying and standardizing business processes, eliminating paperwork and redundant data, reducing personnel interface points and viewing a utility’s operations from office to field as a single continuum. A strong strategic technology platform can support the capture and reinforcement of these standards.

Design Engineering Opportunities

The average investor-owned utility in North America has more than 50 design engineers architecting construction work undertaken by the utility. The design of such work involves significant systems support, including a geographic information system (GIS) and a graphical work design interface that links the GIS to a work management system.

Much of the construction work and underlying design work undertaken by utilities is repetitive. This type of repetitive work – particularly for light or medium construction activities – lends itself to design templates. In fact, design templates could accommodate as much as 80 percent of the design engineering workload. The development of a best practice based on standard designs for discrete types of work (and institutionalizing a standard design as a replicable template for the engineering department) can reduce a utility’s dependence on an increasingly limited supply of talented engineering labor.

Scheduling and Dispatching Opportunities

The average investor-owned utility (IOU) in North America has more than 700 field crews serving trouble response, customer service, maintenance and construction activities. Although job function definitions and responsibilities vary among utilities, the roles that manage the deployment of field crews may be defined as 1) schedulers; 2) dispatchers; 3) administrative personnel; and 4) field supervisors. All of these individuals may actively schedule or dispatch the field workforce, even within the same utility.

The same average IOU also has as many as 60 full-time employees (approximately one for every 12 field crews) involved in scheduling, dispatching, monitoring and providing administrative support to the field workforce. The staff handling these tasks is often functionally, organizationally and geographically dispersed – thanks largely to the point software mobile applications that mirror the organizational silos that acquired the applications. Typically, each piece of software addresses one job type: emergencies, customer service, maintenance or construction. Accordingly, each department employs multiple staff to schedule and/or dispatch each type of job.

This kind of environment spells opportunity for utilities facing shrinking workforces, since a single scheduling and dispatching technology can have immense cost-reduction implications (including reducing redundant job roles.)

The scheduling of field personnel can also be worked into a single dispatch strategy. Utilities need a unified method of work allocation – a kind of utility command and control center for scheduling and dispatching all work. The right strategic technology platform incorporates significant business intelligence, understands job dependencies, employs least-cost routing and continually provides the user with an optimized schedule throughout the workday. As the scheduling software assumes more of the scheduling responsibility, the 60 full-time employees formerly required by an average utility become unnecessary, thereby eliminating a major staffing concern.

Wireless Opportunities

For the last two years in North America, utilities have issued more RFPs for mobile workforce management than any other application domain. All of the top 100 North American IOUs employ some form of mobile deployment. However, these applications are point software solutions that address one job type, such as trouble reporting; they do not currently support a horizontal dispatching and scheduling function. Furthermore, many utilities lack an overarching, dedicated wireless strategy to fully mobilize the workforce.

Utilities require a plug-and-play wireless communications architecture that 1) manages the fl ow of data between office and field; 2) maximizes the bandwidth and throughput of existing utility RF radio, wire line and wireless networks; 3) assigns priorities to time-sensitive data; and 4) provides least-cost routing (network choice). This represents a complex undertaking – and one that no utility has yet mastered. There is no generic plug-and-play platform that manages field workforces in this way. Indeed, a universal communications platform (dispatch) that manages all types of work has been the holy grail of the network connectivity business. No utility has this capability today.

Once it is achieved, however, a universal architecture will allow the utility to plug-and-play back-office and mobile applications to broaden the footprint of work conducted wirelessly in the field. A universal mobile application controller that manages all types of work will power the future of mobile computing for the industry – but no utility has this capability today. In addition to application and network independence, the utility’s wireless enterprise strategy must accommodate the management of multiple field devices, and the supporting server and communications hardware/middleware environment.

An integrated universal communications platform must be viewed as the next technology that will enable utilities to lessen their dependence on headcount. The technologies that support such a platform are being created now; in order to blunt the impact of a disappearing workforce, high-performance utilities need to begin partnering with systems integrators that can bring these technologies to the table.

THE FUTURE OF TECHNOLOGY: SOLUTION OPTIMIZATION

The next significant strategic technologies implemented by utilities will be those that optimize solutions and processes. These systems will help the utility institutionalize the knowledge of seasoned employees and incorporate that knowledge into documented, sustainable best practices. In addition, new strategic technologies will help the utility evolve best practices over time through a program of continuous process improvement. Furthermore, these new technologies will provide the utility with ways to most effectively use both new and existing applications to perform work across the entire horizontal utility organization.

Instead of tactically buying enabling technology such as software, utilities will strategically partner with organizations that can deliver technology that creates value within the utility. Utilities will increasingly seek partners who own the business result, not simply the process or the IT infrastructure. Such partners will share utility risk and reward in a program of continuous process improvement, as they and the utility constantly refine and optimize solutions.

CONCLUSION

What will the high-performance utility look like in 10 years? For starters, it will have fewer employees and more new faces. It will have lost much of the culture it relied on to drive its business forward. But if it makes the right plans today, it will ultimately gain a new culture that takes advantage of the best of the old knowledge combined with the advantages of a new strategic technology platform. The new platform will unite all segments of utility operations within a single set of business goals. A workforce that is disappearing due to retirement doesn’t need to spell disaster if a utility takes steps now. These steps include applying conventional hiring approaches, embracing new technology and seeking out vendor partnerships to help unite and optimize the utility’s work processes.

Con Edison

Consolidated Edison Co. of New York (Con Edison) is a regulated utility serving 3.2 million electric customers in New York City and Westchester County. The company recognized that it could realize significant cost savings if more customers would adopt electronic billing, where bills are delivered electronically without a paper version. Eliminating the printing, postage, labor and equipment costs associated with paper billing can result in significant cost savings.

In addition to operational cost savings, further positive results could be gained from driving e-bill adoption, including improved customer relationships and fewer billing-related service calls. According to a Harris Interactive study conducted for CheckFree Research Services, customers who receive e-bills at a biller organization’s website show higher satisfaction levels, with 25 percent of them reporting an improved relationship with their biller as a result of receiving e-bills.

The challenge was how to attract more customers to the low-cost, high-impact online channel for billing activities and shut off their paper bills. To convince customers to change their behavior, Con Edison had to find a way to cost-effectively generate widespread awareness of electronic billing and explain how benefits, such as saving time, reducing clutter and helping the environment, outweigh concerns customers may have about giving up their paper bills.

THE ADVANTAGES OF ELECTRONIC BILLING

Together, Con Edison and CheckFree developed a comprehensive marketing campaign designed to communicate the advantages of electronic billing to as many customers as possible. As a critical first step, Con Edison gained cross-organizational alignment regarding the campaign strategy. Drawing from a longstanding commitment to the environment, the company made a strategic decision to implement an ongoing campaign that conveyed a “Go green with e-bills” message across numerous channels in order to maximize reach within its customer base. Research has shown that when attempting to change consumer behavior, a comprehensive, consistent and widespread marketing campaign is far more effective than “one-off” campaigns utilizing minimal tactics.

In May 2007, Con Edison launched the integrated marketing campaign capitalizing on the wave of consumer awareness on environmental issues. Con Edison promoted paperless billing and electronic payment through a variety of methods and channels, including:

  • Customer Emails;
  • Direct-mail postcards;
  • On-hold messaging;
  • Radio advertising;
  • Invoice messaging;
  • Press releases;
  • Con Edison website messaging;
  • My CheckFree website messaging;
  • Customer newsletters; and
  • Internal employee newsletters.

Each communication featured the company’s environmental incentive – for every customer choosing the paper-saving option of viewing and paying their bills online, Con Edison would donate $1 to a local, nonprofit tree-planting fund to help the environment in New York.

To aid in driving awareness, Con Edison made a deliberate decision to create an extended campaign designed to consistently reinforce the safety, security, simplicity and environmental benefits of electronic billing. Based on the success of the marketing activities seen thus far, Con Edison plans to include the “Go green with e-bills” theme in every consumer communication going forward.

THE RESULTS

Con Edison showed persistence and enthusiasm in pursuing a multichannel marketing campaign, and it was well worth the effort. In the first seven months after the campaign was launched, Con Edison generated impressive results, including the following:

  • More than 42,000 e-bills activated;
  • A 57 percent increase in e-bill activations over the same time period in 2006; and
  • A 19 percent increase in online e-bill payments over the same time period in 2006.

Con Edison also has benefited from the positive press and goodwill it’s created in the community. By providing its customers with a better, more environmentally friendly choice for paying and receiving their utility bills, Con Edison is minimizing costs, maintaining operational control, optimizing growth for its business and turning customer interactions into profitable relationships.

SmartGridNet Architecture for Utilities

With the accelerating movement toward distributed generation and the rapid shift in energy consumption patterns, today’s power utilities are facing growing requirements for improved management, capacity planning, control, security and administration of their infrastructure and services.

UTILITY NETWORK BUSINESS DRIVERS

These requirements are driving a need for greater automation and control throughout the power infrastructure, from generation through the customer site. In addition, utilities are interested in providing end-customers with new applications, such as advanced metering infrastructure (AMI), online usage reports and outage status. In addition to meeting these requirements, utilities are under pressure to reduce costs and automate operations, as well as protect their infrastructures from service disruption in compliance with homeland security requirements.

To succeed, utilities must seamlessly support these demands with an embedded infrastructure of traditional devices and technologies. This will allow them to provide a smooth evolution to next-generation capabilities, manage life cycle issues for aging equipment and devices, maintain service continuity, minimize capital investment, and ensure scalability and future-proofing for new applications, such as smart metering.

By adopting an evolutionary approach to an intelligent communications network (SmartGridNet), utilities can maximize their ability to leverage the existing asset base and minimize capital and operations expenses.

THE NEED FOR AN INTELLIGENT UTILITY NETWORK

As a first step toward implementing a SmartGridNet, utilities must implement intelligent electronic devices (IEDs) throughout the infrastructure – from generation and transmission through distribution directly to customer premises – if they are to effectively monitor and manage facilities, load and usage. A sophisticated operational communications network then interconnects such devices through control centers, providing support for supervisory control and data acquisition (SCADA), teleprotection, remote meter reading, and operational voice and video. This network also enables new applications such as field personnel management and dispatch, safety and localization. In addition, the utility’s corporate communications network increases employee productivity and improves customer service by providing multimedia; voice, video, and data communications; worker mobility; and contact center capabilities.

These two network types – operational and corporate – and the applications they support may leverage common network facilities; however, they have very different requirements for availability, service assurance, bandwidth, security and performance.

SMARTGRIDNET REQUIREMENTS

Network technology is critical to the evolution of the next-generation utility. The SmartGridNet must support the following key requirements:

  • Virtualization. Enables operation of multiple virtual networks over common infrastructure and facilities while maintaining mutual isolation and distinct levels of service.
  • Quality of service (QoS). Allows priority treatment of critical traffic on a “per-network, per-service, per-user basis.”
  • High availability. Ensures constant availability of critical communications, transparent restoration and “always on” service – even when the public switched telephony network (PSTN) or local power supply suffers outages.
  • Multipoint-to-multipoint communications. Provides integrated control and data collection across multiple sensors and regulators via synchronized, redundant control centers for disaster recovery.
  • Two-way communications. Supports increasingly sophisticated interactions between control centers and end-customers or field forces to enable new capabilities, such as customer sellback, return or credit allocation for locally stored power; improved field service dispatch; information sharing; and reporting.
  • Mobile services. Improves employee efficiency, both within company facilities and in the field.
  • Security. Protects the infrastructure from malicious and inadvertent compromise from both internal and external sources, ensures service reliability and continuity, and complies with critical security regulations such as North American Electric Reliability Corp. (NERC).
  • Legacy service integration. Accommodates the continued presence of legacy remote terminal units (RTUs), meters, sensors and regulators, supporting circuit, X.25, frame relay (FR), and asynchronous transfer mode (ATM) interfaces and communications.
  • Future-proofing. Capability and scalability to meet not just today’s applications, but tomorrow’s, as driven by regulatory requirements (such as smart metering) and new revenue opportunities, such as utility delivery of business and residential telecommunications (U-Telco) services.

SMARTGRIDNET EVOLUTION

A number of network technologies – both wire-line and wireless – work together to achieve these requirements in a SmartGridNet. Utilities must leverage a range of network integration disciplines to engineer a smooth transformation of their existing infrastructure to a SmartGridNet.

The remainder of this paper describes an evolutionary scenario, in which:

  • Next-generation synchronous optical network (SONET)-based multiservice provisioning platforms (MSPPs), with native QoS-enabled Ethernet capabilities are seamlessly introduced at the transport layer to switch traffic from both embedded sensors and next-generation IEDs.
  • Cost-effective wave division multiplexing (WDM) is used to increase communications network capacity for new traffic while leveraging embedded fiber assets.
  • Multiprotocol label switching (MPLS)/ IP routing infrastructure is introduced as an overlay on the transport layer only for traffic requiring higher-layer services that cannot be addressed more efficiently by the transport layer MSPPs.
  • Circuit emulation over IP virtual private networks (VPNs) is supported as a means for carrying sensor traffic over shared or leased network facilities.
  • A variety of communications applications are delivered over this integrated infrastructure to enhance operational efficiency, reliability, employee productivity and customer satisfaction.
  • A toolbox of access technologies is appropriately applied, per specific area characteristics and requirements, to extend power service monitoring and management all the way to the end-customer’s premises.
  • A smart home network offers new capabilities to the end-customer, such as Advanced Metering Infrastructure (AMI), appliance control and flexible billing models.
  • Managed and assured availability, security, performance and regulatory compliance of the communications network.

THE SMARTGRIDNET ARCHITECTURE

Figure 1 provides an architectural framework that we may use to illustrate and map the relevant communications technologies and protocols.

The backbone network in Figure 1 interconnects corporate sites and data centers, control centers, generation facilities, transmission and distribution substations, and other core facilities. It can isolate the distinct operational and corporate communications networks and subnetworks while enforcing the critical network requirements outlined in the section above.

The underlying transport network for this intelligent backbone is made up of both fiber and wireless (for example, microwave) technologies. The backbone also employs ring and mesh architectures to provide high availability and rapid restoration.

INTELLIGENT CORE TRANSPORT

As alluring as pure packet networks may be, synchronous SONET remains a key technology for operational backbones. Only SONET can support the range of new and legacy traffic types while meeting the stringent absolute delay, differential delay and 50-millisecond restoration requirements of real-time traffic.

SONET transport for legacy traffic may be provided in MSPPs, which interoperate with embedded SONET elements to implement ring and mesh protection over fiber facilities and time division multiplexing (TDM)-based microwave. Full-featured Ethernet switch modules in these MSPPs enable next-generation traffic via Ethernet over SONET (EOS) and/or packet over SONET (POS). Appropriate, cost-effective wave division multiplexing (WDM) solutions – for example, coarse, passive and dense WDM – may also be applied to guarantee sufficient capacity while leveraging existing fiber assets.

BACKBONE SWITCHING/ROUTING

From a switching and routing perspective, a significant amount of traffic in the backbone may be managed at the transport layer – for example, via QoS-enabled Ethernet switching capabilities embedded in the SONET-based MSPPs. This is a key capability for supporting expedited delivery of critical traffic types, enabling utilities to migrate to more generic object-oriented substation event (GOOSE)-based inter-substation communications for SCADA and teleprotection in the future in accordance with standards such as IEC 61850.

Where higher-layer services – for example, IP VPN, multicast, ATM and FR – are required, however, utilities can introduce a multi-service switching/routing infrastructure incrementally on top of the transport infrastructure. The switching infrastructure is based on multi-protocol label switching (MPLS), implementing Layer 2 transport encapsulation and/or IP VPNs, per the relevant Internet engineering task force (IETF) requests for comments (RFCs).

This type of unified infrastructure reduces operations costs by sharing switching and restoration capabilities across multiple services. Current IP/MPLS switching technology is consistent with the network requirements summarized above for service traffic requiring higher-layer services, and may be combined with additional advanced services such as Layer 3 VPNs and unified threat management (UTM) devices/firewalls for further protection and isolation of traffic.

CORE COMMUNICATIONS APPLICATIONS

Operational services such as tele-protection and SCADA represent key categories of applications driving the requirements for a robust, secure, cost-effective network as described. Beyond these, there are a number of communications applications enabling improved operational efficiency for the utility, as well as mechanisms to enhance employee productivity and customer service. These include, but are not limited to:

  • Active network controls. Improves capacity and utilization of the electricity network.
  • Voice over IP (VoIP). Leverages common network infrastructure to reduce the cost of operational and corporate voice communications – for example, eliminating costly channel banks for individual lines required at remote substations.
  • Closed circuit TV (CCTV)/Video Over IP. Improves surveillance of remote assets and secure automated facilities.
  • Multimedia collaboration. Combines voice, video and data traffic in a rich application suite to enhance communication and worker productivity, giving employees direct access to centralized expertise and online resources (for example, standards and diagrams).
  • IED interconnection. Better measures and manages the electricity networks.
  • Mobility. Leverages in-plant and field worker mobility – via cellular, land mobile radio (LMR) and WiFi – to improve efficiency of key work processes.
  • Contact center. Employs next-generation communications and best-in-class customer service business processes to improve customer satisfaction.

DISTRIBUTION AND ACCESS NETWORKS

The intelligent utility distribution and access networks are subtending networks from the backbone, accommodating traffic between backbone switches/applications and devices in the distribution infrastructure all the way to the customer premises. IEDs on customer premises include automated meters and device regulators to detect and manage customer power usage.

These new devices are primarily packet-based. They may, therefore, be best supported by packet-based access network technologies. However, for select rings, TDM may also be chosen, as warranted. The packet-based access network technology chosen depends on the specifics of the sites to be connected and the economics associated with that area (for example, right of way, customer densities and embedded infrastructure).

Regardless of the access and last-mile network designs, traffic ultimately arrives at the network via an IP/MPLS edge switch/router with connectivity to the backbone IP/MPLS infrastructure. This switching/routing infrastructure ensures connectivity among the intelligent edge devices, core capabilities and control applications.

THE SMART HOME NETWORK

A futuristic home can support many remotely controlled and managed appliances centered on lifestyle improvements of security, entertainment, health and comfort (see Figure 2). In such a home, applications like smart meters and appliance control could be provided by application service providers (ASPs) (such as smart meter operators or utilities), using a home service manager and appropriate service gateways. This architecture differentiates between the access provider – that is, the utility/U-Telco or other public carrier – and the multiple ASPs who may provide applications to a home via the access provider.

FLEXIBLE CHARGING

By employing smart meters and developing the ability to retrieve electricity usage data at regular intervals – potentially several readings per hour – retailers could make billing a significant competitive differentiator. detailed usage information has already enabled value-added billing in the telecommunications world, and AMI can do likewise for billing electricity services. In time, electricity users will come to expect the same degree of flexible charging with their electricity bill that they already experience with their telephone bills, including, for example, prepaid and post-paid options, tariff in function of time, automated billing for house rental (vacation), family or group tariffs, budget tariffs and messaging.

MANAGING THE COMMUNICATIONS NETWORK

For utilities to leverage the communications network described above to meet business key requirements, they must intelligently manage that network’s facilities and services. This includes:

  • Configuration management. Provisioning services to ensure that underlying switching/routing and transport requirements are met.
  • Fault and performance management. Monitoring, correlating and isolating fault and performance data so that proactive, preventative and reactive corrective actions can be initiated.
  • Maintenance management. Planning of maintenance activities, including material management and logistics, and geographic information management.
  • Restoration management. Creating trouble tickets, dispatching and managing the workforce, and carrying out associated tracking and reporting.
  • Security management. Assuring the security of the infrastructure, managing access to authorized users, responding to security events, and identifying and remediating vulnerabilities per key security requirements such as NERC.

Utilities can integrate these capabilities into their existing network management infrastructures, or they can fully or partially outsource them to managed network service providers.

Figure 3 shows how key technologies are mapped to the architectural framework described previously. Being able to evolve into an intelligent utilities network in a cost-effective manner requires trusted support throughout planning, design, deployment, operations and maintenance.

CONCLUSION

Utilities can evolve their existing infrastructures to meet key SmartGridnet requirements by effectively leveraging a range of technologies and approaches. Through careful planning, designing, engineering and application of this technology, such firms may achieve the business objectives of SmartGridnet while protecting their current investments in infrastructure. Ultimately, by taking an evolutionary approach to SmartGridnet, utilities can maximize their ability to leverage the existing asset base as well as minimize capital and operations expenses.

Pepco Holdings, Inc.

The United States and the world are facing two preeminent energy challenges: the rising cost of energy and the impact of increasing energy use on the environment. As a regulated public utility and one of the largest energy delivery companies in the Mid-Atlantic region, Pepco Holdings Inc. (PHI) recognized that it was uniquely positioned to play a leadership role in helping meet both of these challenges.

PHI calls the plan it developed to meet these challenges the Blueprint for the Future (Blueprint). The plan builds on work already begun through PHI’s Utility of the Future initiative, as well as other programs. The Blueprint focuses on implementing advanced technologies and energy efficiency programs to improve service to its customers and enable them to manage their energy use and costs. By providing tools for nearly 2 million customers across three states and the district of Columbia to better control their electricity use, PHI believes it can make a major contribution to meeting the nation’s energy and environmental challenges, and at the same time help customers keep their electric and natural gas bills as low as possible.

The PHI Blueprint is designed to give customers what they want: reasonable and stable energy costs, responsive customer service, power reliability and environmental stewardship.

PHI is deploying a number of innovative technologies. Some, such as its automated distribution system, help to improve reliability and workforce productivity. Other systems, including an advanced metering infrastructure (AMI), will enable customers to monitor and control their electricity use, reduce their energy costs and gain access to innovative rate options.

PHI’s Blueprint is both ambitious and complex. Over the next five years PHI will be deploying new technologies, modifying and/or creating numerous information systems, redefining customer and operating work processes, restructuring organizations, and managing relationships with customers and regulators in four jurisdictions. PHI intends to do all of this while continuing to provide safe and reliable energy service to its customers.

To assist in developing and executing this plan, PHI reached out to peer utilities and vendors. One significant “partner” group is the Global Intelligent Utility network Coalition (GIUNC), established by IBM, which currently includes CenterPoint Energy (Texas), Country Energy (new South Wales, Australia) and PHI.

Leveraging these resources and others, PHI managers spent much of 2007 compiling detailed plans for realizing the Blueprint. Several aspects of these planning efforts are described below.

VISION AND DESIGN

In 2007, multiple initiatives were launched to flesh out the many aspects of the Blueprint. As Figure 1 illustrates, all of the initiatives were related and designed to generate a deployment plan based on a comprehensive review of the business and technical aspects of the project.

At this early stage, PHI does not yet have all the answers. Indeed, prematurely committing to specific technologies or designs for work that will not be completed for five years can raise the risk of obsolescence and lost investment. The deployment plan and system map, discussed in more detail below, are intended to serve as a guide. They will be updated and modified as decision points are reached and new information becomes available.

BUSINESS CASE VALIDATION

One of the first tasks was to review and define in detail the business case analyses for the project components. Both benefit assumptions and implementation costs were tested. Reference information (benchmarks) for this review came from a variety of sources: IBM experience in projects of similar scope and type; PHI materials and analysis; experiences reported by other GIUNC members; and other utilities and other publicly available sources. This information was compiled, and a present value analysis was conducted on discounted cash flow and rate of return, as shown in Figure 2.

In addition to an “operational benefits” analysis, PHI and the Brattle Group developed value assessments associated with demand response offerings such as critical peak pricing. With demand response, peak consumption can be reduced and capacity cost avoided. This means lower total energy prices for customers and less new capacity additions in the market. As Figure 2 shows, in even the worst-case scenario for demand response savings, operational and customer benefits will offset the cost of PHI’s AMI investment.

The information from these various cases has since been integrated into a single program management tool. Additional capabilities for optimizing results based on value, cost and schedule were developed. Finally, dynamic relationships between variables were modeled and added to the tool, recognizing that assumptions don’t always remain constant as plans are changed. One example of this would be the likely increase in call center cost per meter when deployment accelerates and customer inquiries increase.

HIGH-LEVEL COMMUNICATIONS ARCHITECTURE DESIGN

To define and develop the communications architecture, PHI deployed a structured approach built around IBM’s proprietary optimal comparative communications architecture methodology (OCCAM). This methodology established the communications requirements for AMI, data architecture and other technologies considered in the Blueprint. Next, an evaluation of existing communications infrastructure and capabilities was conducted, which could be leveraged in support of the new technologies. Then, alternative solutions to “close the gap” were reviewed. Finally, all of this information was incorporated in an analytical tool that matched the most appropriate communication technology within a specified geographic area and business need.

SYSTEM MAP AND INFORMATION MODEL

Defining the data framework and the approach to overall data integration elements across the program areas is essential if companies are to effectively and efficiently implement AMI systems and realize their identified benefits.

To help PHI understand what changes are needed to get from their current state to a shared vision of the future, the project team reviewed and documented the “current state” of the systems impacted by their plans. Then, subject matter experts with expertise in meters, billing, outage, system design, work and workforce management, and business data analysis were engaged to expand on the data architecture information, including information on systems, functions and the process flows that tie them all together. Finally, the information gathered was used to develop a shared vision of how PHI processes, functions, systems and data will fit together in the future.

By comparing the design of as-is systems with the to-be architecture of information management and information flows, PHI identified information gaps and developed a set of next steps. One key step establishes an “enterprise architecture” model for development. The first objective would be to establish and enforce governance policies. With these in place, PHI will define, draft and ratify detailed enterprise architecture and enforce priorities, standards, procedures and processes.

PHASE 2 DEPLOYMENT PLAN

Based on the planning conducted over the last half of the year, a high-level project plan for Phase 2 deployment was compiled. The focus was mainly on Blueprint initiatives, while considering dependencies and constraints reported in other transformation initiatives. PHI subject matter experts, project team leads and experience gathered from other utilities were all leveraged to develop the Blueprint deployment plan.

The deployment plan includes multiple types of tasks; processes; and organization, technical and project management office-related activities, and covers a period of five to six years. Initiatives will be deployed in multiple releases, phased across jurisdictions (Delaware, District of Columbia, Maryland, New Jersey) and coordinated between meter installation and communications infrastructure buildout schedules.

The plan incorporates several initiatives, including process design, system development, communications infrastructure and AMI, and various customer initiatives. Because these initiatives are interrelated and complex, some programmatic initiatives are also called for, including change management, benefits realization and program management. From this deployment plan, more detailed project plans and dependencies are being developed to provide PHI with an end-to-end view of implementation.

As part of the planning effort, key risk areas for the Blueprint program were also defined, as shown in Figure 3. Input from interviews and knowledge leveraged from similar projects were included to ensure a comprehensive understanding of program risks and to begin developing mitigation strategies.

CONCLUSION

As PHI moves forward with implementation of its AMI systems, new issues and challenges are certain to arise, and programmatic elements are being established to respond. A program management office has been established and continues to drive more detail into plans while tracking and reporting progress against active elements. AMI process development is providing the details for business requirements, and system architecture discussions are resolving interface issues.

Deployment is still in its early stages, and much work lies ahead. However, with the effort grounded in a clear vision, the journey ahead looks promising.

Utility Mergers and Acquisitions: Beating the Odds

Merger and acquisition activity in the U.S. electric utility industry has increased following the 2005 repeal of the Public Utility Holding Company Act (PUHCA). A key question for the industry is not whether M&A will continue, but whether utility executives are prepared to manage effectively the complex regulatory challenges that have evolved.

M&A activity is (and always has been) the most potent, visible and (often) irreversible option available to utility CEOs who wish to reshape their portfolios and meet their shareholders’ expectations for returns. However, M&A has too often been applied reflexively – much like the hammer that sees everything as a nail.

The American utility industry is likely to undergo significant consolidation over the next five years. There are several compelling rationales for consolidation. First, M&A has the potential to offer real economic value. Second, capital-market and competitive pressures favor larger companies. Third, the changing regulatory landscape favors larger entities with the balance sheet depth to weather the uncertainties on the horizon.

LEARNING FROM THE PAST

Historically, however, acquirers have found it difficult to derive value from merged utilities. With the exception of some vertically integrated deals, most M&A deals have been value-neutral or value-diluting. This track record can be explained by a combination of factors: steep acquisition premiums, harsh regulatory givebacks, anemic cost reduction targets and (in more than half of the deals) a failure to achieve targets quickly enough to make a difference. In fact, over an eight-year period, less than half the utility mergers actually met or exceeded the announced cost reduction levels resulting from the synergies of the merged utilities (Figure 1).

The lessons learned from these transactions can be summarized as follows: Don’t overpay; negotiate a good regulatory deal; aim high on synergies; and deliver on them.

In trying to deliver value-creating deals, CEOs often bump up against the following realities:

  • The need to win approval from the target’s shareholders drives up acquisition premiums.
  • The need to receive regulatory approval for the deal and to alleviate organizational uncertainty leads to compromises.
  • Conservative estimates of the cost reductions resulting from synergies are made to reduce the risk of giving away too much in regulatory negotiations.
  • Delivering on synergies proves tougher than anticipated because of restrictions agreed to in regulatory deals or because of the organizational inertia that builds up during the 12- to 18-month approval process.

LOOKING AT PERFORMANCE

Total shareholder return (TSR) is significantly affected by two external deal negotiation levers – acquisition premiums and regulatory givebacks – and two internal levers – synergies estimated and synergies delivered. Between 1997 and 2004, mergers in all U.S. industries created an average TSR of 2 to 3 percent relative to the market index two years after closing. In contrast, utilities mergers typically underperformed the utility index by about 2 to 3 percent three years after the transaction announcement. T&D mergers underperformed the index by about 4 percent, whereas mergers of vertically integrated utilities beat the index by about 1 percent three years after the announcement (Figure 2).

For 10 recent mergers, the lower the share of the merger savings retained by the utilities and the higher the premium paid for the acquisition, the greater the likelihood that the deal destroyed shareholder value, resulting in negative TSR.

Although these appear to be obvious pitfalls that a seasoned management team should be able to recognize and overcome, translating this knowledge into tangible actions and results has been difficult.

So how can utility boards and executives avoid being trapped in a cycle of doing the same thing again and again while expecting different results (Einstein’s definition of insanity)? We suggest that a disciplined end-to-end M&A approach will (if well-executed) tilt the balance in the acquirer’s favor and generate long-term shareholder value. That approach should include the four following broad objectives:

  • Establishment of compelling strategic logic and rationale for the deal;
  • A carefully managed regulatory approval process;
  • Integration that takes place early and aggressively; and
  • A top-down approach for designing realistic but ambitious economic targets.

GETTING IT RIGHT: FOUR BROAD OBJECTIVES THAT ENHANCE M&A VALUE CREATION

To complete successful M&As, utilities must develop a more disciplined approach that incorporates the lessons learned from both utilities and other industrial sectors. At the highest level, adopting a framework with four broad objectives will enhance value creation before the announcement of the deal and through post-merger integration. To do this, utilities must:

  1. Establish a compelling strategic logic and rationale for the deal. A critical first step is asking the question, why do the merger? To answer this question, deal participants must:
    • Determine the strategic logic for long-term value creation with and without M&A. Too often, executives are optimistic about the opportunity to improve other utilities, but they overlook the performance potential in their current portfolio. For example, without M&A, a utility might be able to invest and grow its rate base, reduce the cost of operations and maintenance, optimize power generation and assets, explore more aggressive rate increases and changes to the regulatory framework, and develop the potential for growth in an unregulated environment. Regardless of whether a utility is an acquirer or a target, a quick (yet comprehensive) assessment will provide a clear perspective on potential shareholder returns (and risks) with and without M&A.
    • Conduct a value-oriented assessment of the target. Utility executives typically have an intuitive feel for the status of potential M&A targets adjacent to their service territories and in the broader subregion. However, when considering M&A, they should go beyond the obvious criteria (size and geography) and candidates (contiguous regional players) to consider specific elements that expose the target’s value potential for the acquirer. Such value drivers could include an enhanced power generation and asset mix, improvements in plant availability and performance, better cost structures, an ability to respond to the regulatory environment, and a positive organizational and cultural fit. Also critical to the assessment are the noneconomic aspects of the deal, such as headquarters sharing, potential loss of key personnel and potential paralysis of the company (for example, when a merger or acquisition freezes a company’s ability to pursue M&A and other large initiatives for two years).
    • Assess internal appetites and capabilities for M&A. Successful M&A requires a broad commitment from the executive team, enough capable people for diligence and integration, and an appetite for making the tough decisions essential to achieving aggressive targets. Acquirers should hold pragmatic executive-level discussions with potential targets to investigate such aspects as cultural fit and congruence of vision. Utility executives should conduct an honest assessment of their own management teams’ M&A capabilities and depth of talent and commitment. Among historic M&A deals, those that involved fewer than three states and those in which the acquirer was twice as big as the target were easier to complete and realized more value.
  2. Carefully manage the regulatory approval process. State regulatory approvals present the largest uncertainty and risk in utility M&A, clearly affecting the economics of any deal. However, too often, these discussions start and end with rate reductions so that the utility can secure approvals. The regulatory approval process should be similar to the rigorous due diligence that’s performed before the deal’s announcement. This means that when considering M&A, utilities should:
    • Consider regulatory benefits beyond the typical rate reductions. The regulatory approval process can be used to create many benefits that share rewards and risks, and to provide advantages tailored to the specific merger’s conditions. Such benefits include a stronger combined balance sheet and a potential equity infusion into the target’s subsidiaries; an ability to better manage and hedge a larger combined fuel portfolio; the capacity to improve customer satisfaction; a commitment to specific rate-based investment levels; and a dedication to relieving customer liability on pending litigation. For example, to respond to regulatory policies that mandate reduced emissions, merged companies can benefit not only from larger balance sheets but also from equity infusions to invest in new technology or proven technologies. Merged entities are also afforded the opportunity to leverage combined emissions reduction portfolios.
    • Systematically price out a full range of regulatory benefits. The range should include the timing of “gives” (that is, the sharing of synergy gains with customers in the form of lower rates) as a key value lever; dedicated valuations of potential plans and sensitivities from all stakeholders’ perspectives; and a determination of the features most valued by regulators so that they can be included in a strategy for getting M&A approvals. Executives should be wary of settlements tied to performance metrics that are vaguely defined or inadequately tracked. They should also avoid deals that require new state-level legislation, because too much time will be required to negotiate and close these complex deals. Finally, executives should be wary of plans that put shareholder benefits at the end of the process, because current PUC decisions may not bind future ones.
    • Be prepared to walk away if the settlement conditions imposed by the regulators dilute the economics of the deal. This contingency plan requires that participating executives agree on the economic and timing triggers that could lead to an unattractive deal.
  3. Integrate early and aggressively. Historically, utility transactions have taken an average of 15 months from announcement to closing, given the required regulatory approvals. With such a lengthy time lag, it’s been easy for executives to fall into the trap of putting off important decisions related to the integration and post-merger organization. This delay often leads to organizational inertia as employees in the companies dig in their heels on key issues and decisions rather than begin to work together. To avoid such inertia, early momentum in the integration effort, embodied in the steps outlined below, is critical.
    • Announce the executive team’s organization early on. Optimally, announcements should be made within the first 90 days, and three or four well-structured senior-management workshops with the two CEOs and key executives should occur within the first two months. The decisions announced should be based on such considerations as the specific business unit and organizational options, available leadership talent and alignment with synergy targets by area.
    • Make top-down decisions about integration approach according to business and function. Many utility mergers appear to adopt a “template” approach to integration that leads to a false sense of comfort regarding the process. Instead, managers should segment decision making for each business unit and function. For example, when the acquirer has a best-practice model for fossil operations, the target’s plants and organization should simply be absorbed into the acquirer’s model. When both companies have strong practices, a more careful integration will be required. And when both companies need to transform a particular function, the integration approach should be tailored to achieve a change in collective performance.
    • Set clear guidelines and expectations for the integration. A critical part of jump-starting the integration process is appointing an integration officer with true decision-making authority, and articulating the guidelines that will serve as a road map for the integration teams. These guidelines should clearly describe the roles of the corporation and individual operating teams, as well as provide specific directions about control and organizational layers and review and approval mechanisms for major decisions.
    • >Systematically address legal and organizational bottlenecks. The integration’s progress can be impeded by legal or organizational constraints on the sharing of sensitive information. In such situations, significant progress can be achieved by using clean teams – neutral people who haven’t worked in the area before – to ensure data is exchanged and sanitized analytical results are shared. Improved information sharing can aid executive-level decision making when it comes to commercially sensitive areas such as commercial marketing-and-trading portfolios, performance improvements, and other unregulated business-planning and organizational decisions.
  4. Use a top-down approach to design realistic but ambitious economic targets. Synergies from utility mergers have short shelf lives. With limits on a post-merger rate freeze or rate-case filing, the time to achieve the targets is short. To achieve their economic targets, merged utilities should:
    • Construct the top five to 10 synergy initiatives to capture value and translate them into road maps with milestones and accountabilities. Identifying and promoting clear targets early in the integration effort lead to a focus on the merger’s synergy goals.
    • Identify the links between synergy outcomes and organizational decisions early on, and manage those decisions from the top. Such top-down decisions should specify which business units or functional areas are to be consolidated. Integration teams often become gridlocked over such decisions because of conflicts of interest and a lack of objectivity.
    • Control the human resources policies related to the merger. Important top-down decisions include retention and severance packages and the appointment process. Alternative severance, retirement and retention plans should be priced explicitly to ensure a tight yet fair balance between the plans’ costs and benefits.
    • Exploit the merger to create opportunities for significant reductions in the acquirer’s cost base. Typical merger processes tend to focus on reductions in the target’s cost base. However, in many cases the acquirer’s cost base can also be reduced. Such reductions can be a significant source of value, making the difference between success and failure. They also communicate to the target’s employees that the playing field is level.
    • Avoid the tendency to declare victory too soon. Most synergies are related to standardization and rationalization of practices, consolidation of line functions and optimization of processes and systems. These initiatives require discipline in tracking progress against key milestones and cost targets. They also require a tough-minded assessment of red flags and cost increases over a sustained time frame – often two to three years after the closing.

RECOMMENDATIONS: A DISCIPLINED PROCESS IS KEY

Despite the inherent difficulties, M&A should remain a strategic option for most utilities. If they can avoid the pitfalls of previous rounds of mergers, executives have an opportunity to create shareholder value, but a disciplined and comprehensive approach to both the M&A process and the subsequent integration is essential.

Such an approach begins with executives who insist on a clear rationale for value creation with and without M&A. Their teams must make pragmatic assessments of a deal’s economics relative to its potential for improving base business. If they determine the deal has a strong rationale, they must then orchestrate a regulatory process that considers broad options beyond rate reductions. Having the discipline to walk away if the settlement conditions dilute the deal’s economics is a key part of this process. A disciplined approach also requires that an aggressive integration effort begin as soon as the deal has been announced – an effort that entails a modular approach with clear, fast, top-down decisions on critical issues. Finally, a disciplined process requires relentless follow-through by executives if the deal is to achieve ambitious yet realistic synergy targets.

The Technology Demonstration Center

When a utility undergoes a major transformation – such as adopting new technologies like advanced metering – the costs and time involved require that the changes are accepted and adopted by each of the three major stakeholder groups: regulators, customers and the utility’s own employees. A technology demonstration center serves as an important tool for promoting acceptance and adoption of new technologies by displaying tangible examples and demonstrating the future customer experience. IBM has developed the technology center development framework as a methodology to efficiently define the strategy and tactics required to develop a technology center that will elicit the desired responses from those key stakeholders.

KEY STAKEHOLDER BUY-IN

To successfully implement major technology change, utilities need to consider the needs of the three major stakeholders: regulators, customers and employees.

Regulators. Utility regulators are naturally wary of any transformation that affects their constituents on a grand scale, and thus their concerns must be addressed to encourage regulatory approval. The technology center serves two purposes in this regard: educating the regulators and showing them that the utility is committed to educating its customers on how to receive the maximum benefits from these technologies.

Given the size of a transformation project, it’s critical that regulators support the increased spending required and any consequent increase in rates. Many regulators, even those who favor new technologies, believe that the utility will benefit the most and should thus cover the cost. If utilities expect cost recovery, the regulators need to understand the complexity of new technologies and the costs of the interrelated systems required to manage these technologies. An exhibit in the technology center can go “behind the curtain,” giving regulators a clearer view of these systems, their complexity and the overall cost of delivering them.

Finally, each stage in the deployment of new technologies requires a new approval process and provides opportunities for resistance from regulators. For the utility, staying engaged with regulators throughout the process is imperative, and the technology center provides an ideal way to continue the conversation.

Customers. Once regulators give their approval, the utility must still make its case to the public. The success of a new technology project rests on customers’ adoption of the technology. For example, if customers continue using appliances as they always did, at a regular pace throughout the day and not adjusting for off-peak pricing, the utility will fail to achieve the major planned cost advantage: a reduction in production facilities. Wide-scale customer adoption is therefore key. Indeed, general estimates indicate that customer adoption rates of roughly 20 percent are needed to break even in a critical peak-pricing model. [1]

Given the complexity of these technologies, it’s quite possible that customers will fail to see the value of the program – particularly in the context of the changes in energy use they will need to undertake. A well-designed campaign that demonstrates the benefits of tiered pricing will go a long way toward encouraging adoption. By showcasing the future customer experience, the technology center can provide a tangible example that serves to create buzz, get customers excited and educate them about benefits.

Employees. Obtaining employee buy-in on new programs is as important as winning over the other two stakeholder groups. For transformation to be successful, an understanding of the process must be moved out of the boardroom and communicated to the entire company. Employees whose responsibilities will change need to know how they will change, how their interactions with the customer will change and what benefits are in it for them. At the same time, utility employees are also customers. They talk to friends and spread the message. They can be the utility’s best advocates or its greatest detractors. Proper internal communication is essential for a smooth transition from the old ways to the new, and the technology center can and should be used to educate employees on the transformation.

OTHER GOALS FOR THE TECHNOLOGY DEMONSTRATION CENTER

The objectives discussed above represent one possible set of goals for a technology center. Utilities may well have other reasons for erecting the technology center, and these should be addressed as well. As an example, the utility may want to present a tangible display of its plans for the future to its investors, letting them know what’s in store for the company. Likewise, the utility may want to be a leader in its industry or region, and the technology center provides a way to demonstrate that to its peer companies. The utility may also want to be recognized as a trendsetter in environmental progress, and a technology center can help people understand the changes the company is making.

The technology center needs to be designed with the utility’s particular environment in mind. The technology center development framework is, in essence, a road map created to aid the utility in prioritizing the technology center’s key strategic priorities and components to maximize its impact on the intended audience.

DEVELOPING THE TECHNOLOGY CENTER

Unlike other aspects of a traditional utility, the technology center needs to appeal to customers visually, as well as explain the significance and impact of new technologies. The technology center development framework presented here was developed by leveraging trends and experiences in retail, including “experiential” retail environments such as the Apple Stores in malls across the United States. These new retail environments offer a much richer and more interactive experience than traditional retail outlets, which may employ some basic merchandising and simply offer products for sale.

Experiential environments have arisen partly as a response to competition from online retailers and the increased complexity of products. The Technology Center Development Framework uses the same state-of-the-art design strategies that we see adopted by high-end retailers, inspiring the executives and leadership of the utility to create a compelling experience that will enable the utility to elicit the desired response and buy-in from the stakeholders described above.

Phase 1: Technology Center Strategy

During this phase, a utility typically spends four to eight weeks developing an optimal strategy for the technology center. To accomplish this, planners identify and delineate in detail three major elements:

  • The technology center’s goals;
  • Its target audience; and
  • Content required to achieve those goals.

As shown in Figure 1, these pieces are not mutually exclusive; in fact, they’re more likely to be iterative: The technology center’s goals set the stage for determining the audience and content, and those two elements influence each other. The outcome of this phase is a complete strategy road map that defines the direction the technology center will take.

To understand the Phase 1 objectives properly, it’s necessary to examine the logic behind them. The methodology focuses on the three elements mentioned previously – goals, audience and content – because these are easily overlooked and misaligned by organizations.

Utility companies inevitably face multiple and competing goals. Thus, it’s critical to identify the goals specifically associated with the technology center and to distinguish them from other corporate goals or goals associated with implementing a new technology. Taking this step forces the organization to define which goals can be met by the technology center with the greatest efficiency, and establishes a clear plan that can be used as a guide in resolving the inevitable future conflicts.

Similarly, the stakeholders served by the utility represent distinct audiences. Based on the goals of the center and the organization, as well as the internal expectations set by managers, the target audience needs to be well defined. Many important facets of the technology center, such as content and location, will be partly determined by the target audience. Finally, the right content is critical to success. A regulator may want to see different information than customers.

In addition, the audience’s specific needs dictate different content options. Do the utility’s customers care about the environment? Do they care more about advances in technology? Are they concerned about how their lives will change in the future? These questions need to be answered early in the process.

The key to successfully completing Phase 1 is constant engagement with the utility’s decision makers, since their expectations for the technology center will vary greatly depending on their responsibilities. Throughout this phase, the technology center’s planners need to meet with these decision makers on a regular basis, gather and respect their opinions, and come to the optimal mix for the utility on the whole. This can be done through interviews or a series of workshops, whichever is better suited for the utility. We have found that by employing this process, an organization can develop a framework of goals, audience and content mix that everyone will agree on – despite differing expectations.

Phase 2: Design Characteristics

The second phase of the development framework focuses on the high-level physical layout of the technology center. These “design characteristics” will affect the overall layout and presentation of the technology center.

We have identified six key characteristics that need to be determined. Each is developed as a trade-off between two extremes; this helps utilities understand the issues involved and debate the solutions. Again, there are no right answers to these issues – the optimal solution depends on the utility’s environment and expectations:

  • Small versus large. The technology center can be small, like a cell phone store, or large, like a Best Buy.
  • Guided versus self-guided. The center can be designed to allow visitors to guide themselves, or staff can be retained to guide visitors through the facility.
  • Single versus multiple. There may be a single site, or multiple sites. As with the first issue (small versus large), one site may be a large flagship facility, while the others represent smaller satellite sites.
  • Independent versus linked. Depending on the nature of the exhibits, technology center sites may operate independently of each other or include exhibits that are remotely linked in order to display certain advanced technologies.
  • Fixed versus mobile. The technology center can be in a fixed physical location, but it can also be mounted on a truck bed to bring the center to audiences around the region.
  • Static versus dynamic. The exhibits in the technology center may become outdated. How easy will it be to change or swap them out?

Figure 2 illustrates a sample set of design characteristics for one technology center, using a sample design characteristic map. This map shows each of the characteristics laid out around the hexagon, with the preference ranges represented at each vertex. By mapping out the utility’s options with regard to the design characteristics, it’s possible to visualize the trade-offs inherent in these decisions, and thus identify the optimal design for a given environment. In addition, this type of map facilitates reporting on the project to higher-level executives, who may benefit from a visual executive summary of the technology center’s plan.

The tasks in Phase 2 require the utility’s staff to be just as engaged as in the strategy phase. A workshop or interviews with staff members who understand the various needs of the utility’s region and customer base should be conducted to work out an optimal plan.

Phase 3: Execution Variables

Phases 1 and 2 provide a strategy and design for the technology center, and allow the utility’s leadership to formulate a clear vision of the project and come to agreement on the ultimate purpose of the technology center. Phase 3 involves engaging the technology developers to identify which aspects of the new technology – for example, smart appliances, demand-side management, outage management and advanced metering – will be displayed at the technology center.

During this phase, utilities should create a complete catalog of the technologies that will be demonstrated, and match them up against the strategic content mix developed in Phase 1. A ranking is then assigned to each potential new technology based on several considerations, such as how well it matches the strategy, how feasible it is to demonstrate the given technology at the center, and what costs and resources would be required. Only the most efficient and well-matched technologies and exhibits will be displayed.

During Phase 3, outside vendors are also engaged, including architects, designers, mobile operators (if necessary) and real estate agents, among others. With the first two phases providing a guide, the utility can now open discussions with these vendors and present a clear picture of what it wants. The technical requirements for each exhibit will be cataloged and recorded to ensure that any design will take all requirements into account. Finally, the budget and work plan are written and finalized.

CONCLUSION

With the planning framework completed, the team can now build the center. The framework serves as the blueprint for the center, and all relevant benchmarks must be transparent and open for everyone to see. Disagreements during the buildout phase can be referred back to the framework, and issues that don’t fit the framework are discarded. In this way, the utility can ensure that the technology center will meet its goals and serve as a valuable tool in the process of transformation.

Thank you to Ian Simpson, IBM Global Business Services, for his contributions to this paper.

ENDNOTE

  1. Critical peak pricing refers to the model whereby utilities use peak pricing only on days when demand for electricity is at its peak, such as extremely hot days in the summer.