Deregulation and Billing

While customers in deregulated utility markets face a barrage of marketing
materials from new entrants into the marketplace and comprehensive educational
programs sponsored by utility commissions, industry trade groups, and
incumbent companies, their most significant source of information on deregulation
is likely to be their monthly bill.

When the direct mail and advertising programs end, customers will look
to their bills to determine if a switch to a new supplier translated into
any significant savings. Customers make that evaluation – and future choices
– based on a comparison of what they’ve paid for utility services in the
past and what they are paying under deregulation.

For that reason, monthly billing statements will take on a whole new
role from a simple statement of usage, cost per unit, and amount due to
a tool that can be used to manage business and personal financial decisions
that could include a choice of supplier or options that could reduce utility
costs.

Additionally, deregulation will increase the complexity of the bill itself.
A bill that had a single cost and single amount due in a monopoly market
will now add additional categories to reflect the products and services
available competitively. For local distribution companies, billing and
payment may also mean billing for a wholesale supplier, as well as collecting
and forwarding payments to that supplier.

Above all, even in markets saturated with advertising, direct marketing,
and public information campaigns, deregulation has brought uncertainty
and questions from customers. The monthly billing statement is often either
the place where customers look for information and communication or the
document that sparks questions and requests for information from customers.

The traditional paper bill and enclosures have an extremely limited ability
to address the issues raised by deregulation, but new technologies are
giving utilities the ability to revolutionize their bill presentment and
payment processes while building stronger customer relationships and customer
loyalty.

EBPP – What Is It?

Simply stated, EBPP – Electronic Bill Presentment and Payment – is the
presentment of bills to consumers and the processing of bill payments
over the Internet. Today, EBPP describes a broad array of technologies
and services that range from the simple scanning and electronic transmission
of a paper bill image to more sophisticated electronic billing services
that permit customers to sort and analyze data and offer online, telephone,
or autodebit payment options.

The key to the growing popularity of EBPP is the ability to transform
the information available in the traditional paper bill into a management
tool that can equip businesses and individuals with the ability to analyze
costs and operations and make decisions that can significantly reduce
expenditures.

For example, an EBPP solution developed by Princeton eCom for Verizon
Wireless, provides Verizon customers with a cellular bill that can be
sorted according to several formats, including the time of day calls are
made, calls to a single location, etc. Usage analysis is another tool
available to Verizon customers, where they can analyze their usage by
several criteria. Now a static bill becomes an analysis tool. A business
manager or an individual consumer using the Verizon electronic bill could
make educated decisions on their calling plan or their long distance carrier
based on how they or their company’s employees were using their cellular
phone.

For utility companies, the potential for analysis in deregulated markets
may be limitless as customers could make comparisons over usage times,
times of day, and supplier costs in order to determine if they had made
the correct plan choices.

EBPP and Deregulation

The first and most significant impact of EBPP in a deregulated market
is enjoyed by the incumbent utility because electronic billing services
mean more effective, more efficient, and less costly billing processes.

Industry estimates place the cost of producing and sending a paper bill
at approximately $1.25 per bill. The cost of an electronic bill is estimated
at about 40 cents per bill. Companies that adopt electronic billing could
cut the costs of their billing operation by as much as half or two-thirds.
According to a study by Killen & Associates, the U.S. utility industry
can save $1.2 billion per year by implementing electronic bill presentment
and payment.

In addition to the savings that result from lower costs of producing
and sending the bills themselves, companies will also reduce costs by
translating the enclosures that accompany bills today into electronic
marketing tools and eliminating the high costs of printing and increased
postage required to send printed material.

For regulatory commissioners, who relied on the small print on the back
of the bill and bill enclosures to communicate regulations with the public,
and for companies required to communicate regulatory information, the
translation of printed material into online communications has some additional
advantages. Customers could be required to acknowledge their receipt of
regulatory conditions or information with a click of the mouse in much
the same way as they indicate acceptance of the terms and conditions of
the software they download or install in their computers.

At the same time, the customers who pay bills online also receive the
benefit of convenience and time savings, not to mention the costs of postage
for sending payment.

EBPP also offers companies more efficient and effective operations on
the accounts receivable side of the business.

By their very nature, electronic payments are more efficient and faster
than paper bills. The traditional billing process involves creating and
sending a bill in the mail, having the customer receive it, read it, write
a check, and then mail the check back to the company. At any stage of
the process, a delay on the part of an individual or the postal service,
means delayed payment.

In electronic bill presentment and payment, the bill arrives electronically,
the individual selects a payment option, and the payment is processed.
No mail delays, no lost paper bills somewhere on the kitchen counter.

Two other services offered by some EBPP providers also speed payment
and increase cash flow.

The electronic lockbox increases the accuracy of bill processing and
posting by eliminating the most common exception items.

An electronic collection service streamlines the traditional collection
agency process by automatically debiting a customer’s checking account
or drawing from a credit card.

EBPP and Competition

The competitive stakes in utility deregulation are high. More than one-third
of the respondents in a recent survey said they would absolutely switch
providers for a 10% price discount.

That’s not good news for traditional utilities, whose cost structure
often reflects the high expense of large operations like billing, that
come face-to-face with non-traditional entrants who don’t have large overhead
and are looking for new and innovative ways to break into the marketplace
and attract customers.

Adoption of electronic billing by the incumbent utility not only helps
to reduce costs and improve operational efficiency, it also helps to put
a more up-to-date face on the traditional company and to meet its competitors
toe-to-toe on the competitive battlefield. Moreover, it eliminates the
competitive advantage that a competitor could claim by introducing EBPP
and provides another reason for customers to “stay home” with the company
they’ve known for years.

Adopting an EBPP Strategy

Utilities need to adopt an EBPP strategy now. While overall adoption
rates for electronic billing are currently low – an estimated 5 percent
of all utility commerce was conducted online in 1999 – it’s anticipated
that 30% of utility customers will either use the Internet to pay bills
or make customer service contacts over the next few years. Experience
tells us that adoption grows more significantly when companies implement
a billing system that provides value in terms of content and the ability
to sort and analyze data, and easily and quickly initiate payment.

In today’s competitive marketplace, an initial EBPP strategy should take
several factors into consideration.

Cost. The cost of investing in an EBPP solution is likely to drive
a number of related decisions. These include deciding on whether to build
a proprietary system at a cost of more than a million, outsourcing the
total EBPP process for as little as $30,000, or licensing an EBPP solution
and paying ongoing maintenance costs, which can cost several hundreds
of thousands of dollars.

Branding. The EBPP implementation should support and reinforce
the company’s brand image, in terms of the obvious prominence of the biller’s
logo on the bill to offerings that reflect the company’s core competencies.

Systems Integration. An EBPP solution should help solve financial
challenges – not create new ones. A system that does not integrate with
existing billing and financial systems is likely to be cost prohibitive.

CRM Interface. Viewing EBPP as only a means to send bills and
collect money limits its power and overlooks its most important value
– its ability to build a strong Customer Relationship Management platform
into and on top of the electronic billing process.

Ushering in a New Era in CRM

While streamlining the billing and payments process and increasing the
accuracy and speed of payments are powerful reasons to implement an electronic
billing and payment solution, the real promise of EBPP lies in its ability
to revolutionize utility CRM operations.

By marrying billing and information technologies, EBPP has the potential
to turn a monthly billing statement – often the only point of contact
between utility companies and their customers – into a powerful tool to
increase customer satisfaction and build all-important customer loyalty.

By using the information imbedded in a customer’s bill as the basis of
an analysis, the company produces targeted, personalized messages that
position it as a concerned partner interested in helping and empowering
individual customers to make smart business decisions.

As an example, if the analysis of a customer’s energy bill shows a sudden
and significant increase in energy usage that occurs at the start of a
winter season, that information could generate a message offering a free
energy audit or information about the utility’s equipment maintenance
and repair service. In this case, the offers are not merely seasonal marketing
promotions received by every customer, but messages targeted to and reflecting
the individual customer’s energy usage and bill.

Or, if an analysis of a business’s electricity bill shows most usage
occurring in the high-cost prime time hours, it might generate a suggestion
to cut costs by switching at least some operations to the less expensive
night hours and provide a cost-analysis of savings.

Beyond information and analysis resulting from an indivdual customer’s
usage, the utility bill of the future is likely to provide more significant
and valid comparisons and to draw more informed conclusions. For example,
a future natural gas bill might contain comparisons with other natural
gas users in a neighborhood, housing development, or zip code. This would
enable customers to determine if their gas usage is out of line with neighbors
or just the result of abnormally high or low temperatures.

By providing more detailed information and comparisons in billing statements
as well as related links, it’s likely that companies can eventually reduce
more expensive call center operations.

Redefining Customer Service

Online billing is also expected to redefine the way in which customers
interact with utility companies on routine requests for service or service
changes. It stands to reason that fewer and fewer customers will accept
waiting on the telephone for a customer service representative when they
can conduct routine business and make routine purchases as fast as a mouse
click.

For that reason, it’s very likely that successful utilities will incorporate
routine service and billing change requests into their EBPP solution.
Rather than holding on the line waiting for the next available operator,
customers will have an online ability to change addresses and arrange
for service, and schedule routine maintenance visits online.

As an added advantage, incorporating routine service requests into the
EBPP solution also places that information into the company’s billing
system.

Experience-Based Marketing

In deregulated markets, incumbent often find themselves attempting to
build their competitive position by marketing new and higher margin products
and services under their familiar brand name.

Electronic billing makes it possible for the companies to cross-sell
and up-sell products and services more efficiently and effectively by
targeting offers to customers based on their current billing experience
as well as the demographic and financial information.

Differentiation – Content is a Competitive Advantage

When the World Wide Web experienced its explosive growth in the mid-1990s,
companies differentiated themselves from competitors merely by having
a presence on the Web. Eventually, however, customers began to differentiate
competitors and give their loyalty to companies whose websites offered
them the utility and interaction they expected.

Today, companies can distinguish themselves from competitors by merely
offering electronic bill presentment and payment services. But not for
long.

As more and more companies find that EBPP is no longer an option, but
a requirement, customers will make decisions about them based on what
their EBPP solution contains and whether it offers the content or options
they expect.

The companies whose EBPP solutions offer the most content, the most features,
and the most targeted messages will find themselves holding a significant
competitive advantage.

Background

Recent dramatic changes in the electric utility industry have systematically
motivated traditionally integrated utilities to functionally or legally
unbundle their business segments. While many utilities are actively separating
their business units into a myriad of organizational structures, nearly
all utilities are separating their generation business from their wires
businesses (distribution and transmission) at a minimum. As these structural
changes occur, the formation of multi-tiered holding companies to legally
recognize operational reorganizations has become prevalent. Although most
of the reorganized entities qualify for exception from the provisions
of Public Utility Holding Company Act of 1935 (’35 Act), they have frequently
established “service” companies similar to mutual service companies as
defined in the ’35 Act. In is important to understand that the formation
of a service company is not, in any way, analogous to the adoption of
a SSO.

Unfortunately, because of the regulatory precedent including the ’35
Act, a pattern observed across most utilities is the attention focused
on the legal and regulatory aspects of the SSO. This attention is not
surprising or misplaced. Virtually every utility today must comply with
state commission regulations, as well as SEC requirements. These regulations
often require the utility to organize a separate legal entity for its
SSO and follow specific guidelines regarding pricing services and invoicing
customers.

However, utilities often neglect to address many other organizational
and management changes that are necessary to distinguish the SSO from
its predecessor entity, the corporate overhead function. As a result,
many utilities’ SSOs are not driving out costs or improving service as
expected, and many are not providing the suite of cost-effective services
that were promised to the business units.

Watershed Events

The launching (or re-launching) of a shared service function should include
five critical events, including:

Achieving organizational understanding

• Developing a new operating model

• Rationalizing the suite of services

• Improving the cost assignment methods

• Providing technology to support cost assignment and reporting

Achieving Organizational Understanding

Establishing a shared service organization should really represent a
different way of providing improved support services to the utility and
its affiliates. This message cannot be effectively conveyed with an email
message – it must be hand-delivered by the right messenger. The first
watershed event involves selecting a rising star in the utility as a sponsor,
who will be responsible for getting the organization to understand the
SSO concept and embrace this direction.

The oft-repeated admonition to select a star to champion the initiative
is particularly important because the utility is essentially launching
a private enterprise within the organization. The SSO initiative should
have a respected, visible and involved executive sponsor who has a stake
in the success of the SSO. This sponsor must devote enough time “selling”
the SSO to his or her peer group in one-on-one settings, as well as championing
the SSO to the entire utility.

Once the SSO sponsor “gets religion,” the managers of the SSO support
groups must also be “converted.” Key to this conversion process is the
recognition that the SSO exists to serve the customer and that a “provider/customer”
relationship will be established.

The second wave of understanding and buy-in must take place between the
managers of the SSO support groups and the leaders of the business units.
Although BU leaders usually do not request services directly from the
SSO, they need to understand what services are being offered and how their
business units will be charged. More important, these BU leaders must
perceive that they are receiving value from the SSO.

To accomplish this leap of faith, the newly-converted leaders of the
SSO support groups should develop the habit of meeting regularly with
the BU leaders to identify new services required, discuss progress meeting
cost and service levels, and solicit feedback on the SSO’s performance.
This type of behavior is foreign to most corporate support czars and requires
SSO managers in many utilities to develop new skills.

It is typically difficult to measure a utility’s success in getting these
types of messages across. However, an indication that the SSO message
has been understood by the organization is when BU leaders begin to look
forward to the annual planning process and the promised ability to negotiate
support service costs with the SSO.

Developing a New Operating Model

The second watershed event is the recognition that the utility is departing
from the historical corporate overhead model and adopting a new operating
model that is based on a “provider/customer” relationship. At the heart
of many of these failed attempts is the lack of a formal operating model
and a lot of misconceptions about shared services. Shared services must
be viewed as more than a centralization of business practices currently
existing in different business units.

Progressive utilities take the time to formally document the new operating
model in the form of guiding principles. These “rules of engagement” should
be developed jointly by the CEO, the SSO executive sponsor, and key stakeholders.

The guiding principles should address the following issues:

• The objectives of the SSO (i.e., reduce cost, improve service levels,
  leverage technology, standardize processes, allow the BUs to focus
  on their core business or meet regulatory requirements)

• The scope of services that the SSO will offer (e.g., human resources,
  etc.)

• The organizational units within the utility which represent the SSO’s
  customer base (the SSO’s market territory)

• The rules governing the ability (or inability) of business units
  to “shop around” for services which the SSO offers – today and long-term

• The rules governing the ability of the utility’s non-regulated subsidiaries
  to “shop around” to obtain services – today and long-term

• The accounting charge-back methods which will be used to assign costs
  to customers for services provided

• The basis for charging customers

• The SSO’s responsibility for managing the cost and quality of services
  provided

The last item in the guiding principle is perhaps the most important
one for the SSO to live with. In the SSO environment, the support group
is accountable to the customer for delivering the agreed-upon services
within cost and quality constraints. This mindset represents a radical
departure from the traditional corporate overhead mentality.

The SSO framework should also speak to an organizational issue that many
utilities fail to address, namely, an examination of where each support
process will be performed. Determining the optimum split of responsibilities
among the corporate support group, the SSO, and the BU should be addressed
by the following questions:

• Which portions of the support process should performed at the corporate
  level in order to achieve appropriate levels of oversight and governance?

• Which portions of the support process should be performed by the
  SSO in order to achieve cost savings, improve service levels, standardize
  processes, or leverage technology?

• Which portions of the support process should be performed by the
  BU for control or decision-making purposes?

The resolution of these issues depends on the organizational model that
the utility selects when the SSO is formed. One model frequently seen
includes three tiers: a small corporate support function that houses selected
strategic or governance services; the SSO that houses the transaction-oriented
services; and the BU that performs other activities. Many utilities using
this model refer to their corporate support area as the “Corporate Center”
which typically houses legal, treasury, internal audit, investor relations,
tax, strategic planning, HR policy, and supply chain policy. Figure 1
depicts this three-tier model for the procurement process.

Figure 1
Distribution of procurement activities in a three-tier model
See
larger image

Another model eliminates the corporate support function entirely and
places all support services in the SSO. In both models, certain pieces
of each support process remain the responsibility of the BU.

Utilities that have elected to locate the governance activities in their
SSOs may force more scrutiny on the cost and value of these services.
This model also implies that the SSO and the BUs will negotiate the charges
for these services. Leaving these strategic/governance services in a corporate
support group may send a “hands off” message and allow obsolete overhead
allocation methods to be continued in the future.

The typical types of responsibilities assigned to each of these areas
are:

• Corporate Support: Establish policies; provide strategic direction;
  manage risk; resolve issues; provide oversight; allocate capital;
  and monitor investments

• Shared Service Organization: Process transactions; provide
  services

• Business Unit: Operate the business; develop and implement
  strategy

Developing the new operating model requires time to negotiate these guidelines
and design new organization structures. More importantly, it requires
the utility leaders to be receptive to the theory and reality of this
new way of delivering support services. Finally, management must recognize
that regulatory structural constraints (i.e., ’35 Act) should not inhibit
the establishment of the appropriate management (as opposed to legal)
structure. The management structure does not need to mirror the legal
structure required for regulatory purposes. For instance, both the Corporate
Support and Shared Services personnel may be employed by a Mutual Service
Company, but for management purposes can be housed in different units
with different goals and leadership.

Rationalizing the Suite of Services

The third watershed event in the evolution to a SSO is the evaluation
of the existing products and services from the customer’s perspective.
This exercise recognizes the fact that in this new model, the people who
pay the invoices for services must be satisfied with the content, quality
and cost of the services they receive.

The trap that most utilities fall into when organizing a SSO is the failure
to rationalize the suite of services. The services provided by the previous
corporate support function are often just re-labeled as “shared service
offerings.” When this route is chosen, the SSO leader can’t understand
why internal customers are not thrilled with the new support organization.

The progressive SSO leader recognizes that now is the time to consider
the following opportunities:

• Eliminating services (and costs) that do not add value to the customer
  or the utility

• Adding services that the customer needs and the SSO is capable of
  delivering at the right price

• Unbundling or consolidating services so they better meet the customer’s
  needs and “buying patterns”

• Matching the quality and the level of service to the customer’s needs

• Outsourcing certain services to improve the cost and/or the quality
  of services

• Moving activities previously performed by the SSO to a BU

An objective party is helpful for this exercise because it involves meeting
with the people in the BUs who actually request and/or “consume” the SSO
services and asking some hard questions. This exercise should also involve
selected corporate oversight people to assure that regulatory, safety,
and strategic issues are addressed as each service is evaluated.

At the heart of the SSO model is the concept of standard processes. During
this examination of the SSO offerings, individual customers often demonstrate
the need for different levels of service and quality. The progressive
SSO organization should strive for a “one-size-fits-all” approach to packaging
its services to achieve standardization of processes and costs. Certain
services that are unique to certain groups (e.g., nuclear safety inspection
services) are probably best left with the BU and not relocated to the
SSO.

Up to now, the SSO journey has been relatively painless; the SSO has
been announced, the organizational design has been developed, and the
SSO has determined that the suite of services needs to be rationalized.
Following through with the rationalization of services implies that the
utility will deploy the right number of people who have the right skills
to the appropriate location in the organization (i.e., the corporate support
function, the SSO, or the BU.) Unfortunately, this is another trap that
many utilities fall into: The services are rationalized (but the work
force isn’t), and costs do not decline as anticipated or the quality of
services does not increase as promised.

The rationalization of the services should also include examining each
SSO leader as a potential marketer, because the new SSO model requires
this mindset. To mitigate the lack of marketing skills by the SSO management
team, some utilities have established internal marketing managers to solicit
business from internal customers and act as a single point of contact.

A final caution on the suite of services relates to understanding. Most
utilities overestimate the ability of the SSO employees and the BUs to
fully understand the newly published suite of services. A conscious effort
must be made to ensure that both the “seller” and the “buyer” understand
the “new and improved” suite of services, including what is included in
each service and how the customer is charged.

Improving the Cost Assignment Methods

The next watershed event that distinguishes the SSO from its predecessor
organization is improving how services are charged to customers. Most
corporate support groups have historically used one or two simple methods
to allocate the cost of services to internal customers (percentage allocation
being the most popular). The charge-back issue receives the most attention
by the customer and represents an easy way to improve the emerging “provider/customer”
relationship.

This event must take place in connection with the rationalization of
services described above. Once the proposed suite of services has been
finalized, improved types of cost assignment methods should be developed.

Experience has shown that three basic types of cost assignment and cost
allocation are typically used, including:

• Percentage allocation

• Project-based allocation

• Transaction-based allocation

For each of these methods, an inverse relationship exists between the
ease of application and the accuracy of the cost assignment. For example,
most utilities find it relatively easy to develop a percentage formula
that is based on some BU measure (e.g., revenue) and allocate certain
support costs according to these percentages. However, this method is
typically the least precise with respect to matching the costs allocated
and the benefits received.

The last method (transaction-based) is the most accurate, but it requires
the utility to measure the quantity of service used and requires the SSO
support group to develop a unit price. Most utilities develop a standard
rate at the beginning of the year for these types of charge-backs. When
standard rates are used, the SSO must determine how to handle the inevitable
residual (actual versus standard variance) from an accounting perspective.

The next task is to select the most appropriate cost assignment method
for each service. This decision should consider the following factors:

• Which BUs use the service?

• What are the cost drivers for each service?

• What information is available to support the cost assignment calculation?

Once the cost assignment method has been defined for each service, a
worthwhile exercise is to develop a pro forma cost assignment for all
BUs and all services. This exercise is labor intensive, but is a good
test of the fairness and accuracy of the proposed cost assignment model.
Most utilities skip this exercise unless the CFO mandates it.

This may be the appropriate time for the SSO to benchmark the utility’s
cost of providing services. Benchmarking is a two-edged sword: If done
properly, benchmarking takes a lot of time and effort in order to determine
the cost of comparable services. If reliable data indicate the utility’s
costs are out of line with the outside world, the progressive utility
will either bring costs in line or allow BUs to buy these services elsewhere.

Some utilities have gone as far as funding a SSO benchmarking activity
to formalize this effort. Experience has shown that the relationship between
the SSO and its customers improves when the customers know that the SSO
is making a good faith effort at benchmarking and using the results.

The last task in the cost assignment arena is the development of Service
Level Agreements. Most utilities limit this exercise to transaction-based
services. Progressive utilities tailor service level agreements for each
category of service (percentage allocation, project and transaction-based)
and require the SSO to negotiate all of these charge-backs with their
customers.

Many utilities fail to significantly improve the fairness and accuracy
of cost assignments because insufficient resources are assigned to this
task. The development of “new and improved” cost assignment methods should
involve the finance and accounting, information technology, selected internal
customers, as well as the support group itself. This exercise must be
performed concurrently with the evaluation of enabling technology. Many
utilities have designed elaborate charge-back methodologies only to discover
that their enterprise systems cannot handle the newly designed cost assignment
methods.

Providing Technology to Support Cost Assignment and Reporting

The next watershed event is typically the most complex and the most costly.
Few of the benefits associated with charging services on a more equitable
and accurate basis will be realized if the utility’s information systems
cannot handle these new requirements. A desired outcome of the SSO initiative
should be to improve the visibility of support charges to the BU. If the
timing of the SSO initiative is not aligned with the timing of the configuration
of the enterprise system, problems usually result.

Handling the new ways of assigning costs for services used is the first
issue. These calculations are usually handled by the financial and/or
project modules in enterprise accounting systems. Virtually every enterprise
system can handle percentage allocations, transaction-based cost assignments,
and transfer of project-based costs. However, almost every system must
be configured to handle transaction-based cost assignments and project-based
cost assignments in the precise manner that has been designed for the
SSO. Hence, configuration options are usually required to handle these
calculations in the right manner.

Reporting cost assignments at detailed and summary levels to internal
customers often presents another dilemma. The reporting requirements for
the SSO environment are typically different than the standard report formats
provided by most enterprise systems.

The next potential snag is time reporting. In order to support the build-up
of costs for project-based services, SSO employees providing these services
will need to maintain time records. This timekeeping requirement has both
policy and technology implications. Many utilities do not require corporate
support employees to maintain time records. Moreover, the timekeeping
systems in place for field maintenance personnel usually do not have the
flexibility to track time by customer, project, and service. In the ideal
world, timekeeping requirements should be jointly developed by the SSO,
the human resources function, and the information technology function
to assure that a realistic framework is being designed and can be deployed.

Many utilities have launched their SSO initiatives despite the obvious
gap between the SSO system requirements and current system functionality.
Here is the resulting scenario at the end of each month: SSO support staff
or accounting personnel are relegated to handling the cost assignments
and generating reports off-line using Excel spreadsheets and other point
solutions. This effort usually generates another report that differs from
the information that the BU received from the enterprise system. The existence
of multiple reports with different cost information gives rise to the
refrain frequently used by many utility BU managers: “Those aren’t my
numbers.” The resulting chaos may have increased the visibility of the
SSO charges, but the level of understanding has taken a step backward.

A final word of caution regarding information systems deals with the
utility’s budgeting system and its planning process. A good rule of thumb
is “We budget the way we report actual costs.” Hence, the budgeting process
should incorporate the “new and improved” cost assignment methods. Many
utilities fail to recognize the effort associated with reconfiguring the
budgeting tool when they launch their SSO and resort to handling the budgeted
cost assignments off-line.

Information systems represent a potential showstopper for the SSO. Unless
the utility is prepared to make the investment to support new cost assignment
and reporting requirements, the organization will be disappointed with
the results and the image of the SSO will suffer.

Summary

Shared Service Organizations provide utilities significant opportunities
to reduce cost and allow business units to focus on their core business
practices. These opportunities have eluded many utilities because their
approach has been limited to setting up the legal framework and selecting
a new name for the shared service function. Getting the return on the
shared service function requires focusing on organizational buy-in, the
suite of services, cost assignment methods, and information systems.

Energy Service Providers (ESPs) seeking market entry in the United States
face an often-underestimated series of market barriers. Strong product
differentiation and favorable long-term wholesale energy supply contracts
represent important steps, but they are just the beginning for ESPs seeking
a substantial market presence. From the hurdles of gaining regulatory
approval in each state to the challenges of consumer education, ESPs must
navigate a time-consuming, resource-draining sea of business complexities
before ever powering a single light bulb or firing a single water heater.
Once operational, the obstacles continue – some say increase – with customer
service quality concerns, sales quotas, billing challenges, and trading
partner management.

Due to these high costs and the typically low commodity margins of a
competitive business, ESPs strive for cost savings in nearly every aspect
of their operation to achieve profitability. With cost cutting often comes
sacrifice, and in an increasingly competitive marketplace, under-allocating
funds to key operations such as sales, customer service, supply, and infrastructure
can ultimately prevent ESPs from achieving the customer-base scale required
for a sustainable business.

So how have successful ESPs achieved the scale they require while effectively
managing costs during the ramp-up period?

Success Means Fragmentation

Success has been found in specialization. From a greater market perspective,
it is referred to as fragmentation. Where once was found a single entity
managing its own operations from end-to-end – from trading and supply
to customer acquisition, from regulatory consult to IT Infrastructure
– now arise functional specialists, focusing on one key area and providing
that proficiency to complementary providers.

Dot-com storefronts and telesales masters have lowered customer acquisition
costs for every supplier with which they work. Online auctions have shortened
the sales cycle for large commercial and industrial (C&I) accounts from
weeks and months to a few short minutes. Wholesale suppliers have reduced
energy procurement overhead with long-term contracts and outsourced trading
and supply functions. Energy exchanges are creating fluid markets, reducing
overall commodity cost by increasing the economic utility of each Kilowatt
and Therm. Even customer service and billing costs have been lowered by
outsourced and managed services, Web-based billing, and automated Customer
Relationship Management.

In this fragmented market, each provider promotes itself not as a competitor,
but rather as a specialist – an organization dedicated to providing the
marketplace with the best capabilities available at a manageable cost
and with near-zero risk. By spreading fixed-cost infrastructure investments
over service to many partners, these providers effectively eliminate the
financial market barriers and many of the operational market barriers
facing ESPs in an inherently risky market.

Many ESPs continue to worry about competitive advantage in the context
of sharing a critical strategic resource such as a customer acquisition
solution or a trading and supply operation with other suppliers, asking
themselves “if I found the best provider in a given area, why would I
want my competitor to benefit from it as much as I do?” The answer is
simple: the provider in question is the best specifically because it is
a shared resource among many competitors. The ability to spread fixed
costs over many partners only scratches the surface of the benefits of
a shared specialist. Add to the cost savings the immeasurable benefits
embodied in the specialists’ expertise, their need to exceed partner expectations,
their need to continually improve their offerings, their need to continually
expand and deepen their mastery of their particular specialty, their ability
to reduce risk, and quite simply, their ability to completely remove one
more market barrier.

The specialist will benefit a number of suppliers, regardless of competitive
concerns; the only dilemma is whether the ESP in question is on or off
the list of those that gain.

Competitive advantage is not to be found in overburdening an operation
with a do-it-all-yourself strategy, any more than competitive advantage
is to be found by using a mattress for cash management instead of a bank.
Rather, competitive advantage in the restructuring retail energy market
of the United States can be found in assembling the most complete, cost-effective,
market-driven strategy for acquiring and serving energy consumers. Competitive
advantage can be found in identifying those few key differentiators that
are both demonstrable and defensible and establishing a business focus
geared solely toward exploiting those advantages.

An Example Serves the Point

ESP X develops an idea for billing that is identified as a demonstrable
and defensible competitive advantage and is called SuperBill. The question
now revolves around how to capitalize on SuperBill. Is the greatest advantage
to be exploited by developing the IT infrastructure that can support SuperBill
– technology advantage – or is the true advantage to be found in developing
an effective strategy for compelling consumers to choose SuperBill as
their billing option – marketing advantage?

Whether the ESP in question is the next great start-up or a well-established
unregulated subsidiary of an investor-owned utility, the answer can be
found in the same, proven adage that has been emblazoned in the history
books of failed companies everywhere: the best technology/idea in the
world is entirely useless without the sales and marketing infrastructure
to capitalize on it. The advocacy in this example is not one of necessarily
mastering marketing over technology, rather the point is that the issues
can be separated and tackled by the most capable organization, not simply
the internal organization.

The numbers back it up. Assume it costs $10 million to develop the technology
for SuperBill. Assume that of that $10 million, $9 million is spent on
those supporting systems, which, while necessary, are not directly responsible
for the provision of SuperBill. Now assume that Vendor Y offers a billing
solution that cost $10 million to develop and would require another $1
million to customize in support of SuperBill. Should Vendor Y have two
other clients using its product, even at a reasonable profit, Vendor Y
would be able to offer its billing solution, complete with the customization
required for SuperBill, to ESP X for a mere $5 million, half the cost
of developing SuperBill internally. This would free the other $5 million
for allocation to sales and marketing support for the promotion and widespread
adoption of SuperBill in the marketplace.

Figure 1

Vendor Y has eliminated 90% of the risk associated with deploying and
managing a new billing solution and should be expected to deploy SuperBill
in 10% of the time that would be required to develop it internally.

Additionally, because of prior experience with its other clients, and
because its supporting systems have been proven to function properly,
Vendor Y has eliminated 90% of the risk associated with deploying and
managing a new billing solution and should be expected to deploy SuperBill
in 10% of the time that would be required to develop it internally.

Conclusion

The $300 million U.S. energy market is attracting a great deal of attention.
It should still be considered a tabula rasa in that no one has cornered
the market. Low switch rates, volatile energy prices, and regulatory hurdles
are only part of the reason that restructured growth rates remain relatively
flat. Just as demand for bandwidth failed to surface until the supply
was available from providers like Qwest and Williams, so too should demand
for deregulated energy be expected to remain subdued until a supplier
can develop a comprehensive offering. In the absence of the billions of
dollars in capital allocated to Qwest and Williams for their network build-outs,
ESPs in the U.S. must look for creative measures to achieve the same level
of scale. Specialization and the use of other specialists hold the key
to achieving such scale in short order, at low cost, and with minimal
risk.

The Business Internet is the realization of the vision of a Digital Nervous
System in which information flows quickly through an organization and
is delivered to the employees who need it, helping them to respond effectively,
take advantage of new opportunities quickly, and fix problems as soon
as they arise.

The Business Internet involves five key, interrelated areas:

• E-Commerce: Practical, fast-to-market, flexible channels connect
  customers and partners online. Enhance the fulfillment and replenishment
  cycle and improve supply logistics by engaging in Web-based purchasing
  while taking advantage of just-in-time delivery savings. Smart use
  of the Internet will help reduce overall procurement costs, which
  can make up 30 percent to 65 percent of most companies’ total expenses.

• Knowledge Management: Boost employee productivity and job
  satisfaction by connecting employees more closely to the overall business.
  Doing this removes barriers to information and ensures that personal
  knowledge becomes organizational knowledge.

• Collaborative Engineering-Based Services: Use the Web to collaborate
  with suppliers and technical consulting communities in areas such
  as plant maintenance, repair, and operations (MRO); asset optimization;
  supply chain logistics; and supervisory control and data acquisition
  system (SCADA) control. Place greater emphasis on the most profitable
  and strategic areas of your business by outsourcing non-core business
  functions to a new breed of Web-based service providers.

• E-services to the Retail Market: Consider adding new services
  to your customer base to enhance revenues. Expand your customer base
  with Web-based delivery channels to new customer communities.

• Infrastructure: A long-term, end-to-end standards-based platform
  manages and ensures the return on the next generation of information
  technology investments.

• Industry-Specific Solutions: A practical, open, and flexible
  way to get the broadest choice of the right applications, software
  services, and data services for running a business – no matter what
  kind of business it may grow to be.

E-Commerce

It is very hard in the physical world to bring large enterprises, small
businesses, and consumers together simultaneously. We simulate it with
distribution networks or affiliate networks, and in the utility business,
there are distributors, manufacturers, and consumers trying to come together.
The Internet not only provides a way to conduct traditional business-to-business
buying, but it also enables distributors, consumers, and businesses to
come together in new and different ways. This will wind up benefiting
the people who set up these relationships and are able to reduce most
of the transaction costs and administrative costs in a utility company.

Utility companies have entered a new era in which accessing and managing
information efficiently throughout the Extended Enterprise is the key
to competitive success, even survival (see Figure 1). The traditional
linear production process – a “flow line” from raw materials to supplier
to engineering to production to distributor to end customer – is fast
being replaced by an interactive, dynamic, customer-driven business model.

Figure 1

The Extended Energy Enterprise. Utility companies need to make information
transparent to the supply chain. Opening up the flow of information to
suppliers, partners, and customers by using the Internet will allow a
whole new level of transactional and operational efficiencies.

This model demands real-time access to all the information needed for
concurrent decision-making at every level in the virtual organization.
We call this the Business Internet-Enabled Utility Enterprise. It can
be achieved only through the use of information technology (IT) systems
that support the integration of applications, information flow, and communication
to the fullest possible extent.

Furthermore, communication must provide a view of the entire supply chain
process to customers and partners so they can interact with greater certainty.
This is known as “transparency,” where customers can get questions answered,
such as availability and price, without being slowed by human intervention.
A supply chain that offers this kind of transparency provides “forward
visibility.” With great forward visibility, the supply chain is fully
aligned to variations in demand by the end customer, and demand uncertainties
are managed in near real time.

Today, creating any kind of a linked view of the supply chain is difficult
because it’s unlikely that your suppliers’ Web sites will work with your
website, or your distributors’ or retailers’ websites. Extensible Markup
Language (XML) technology makes it possible for data to flow easily and
seamlessly across these sites. XML turns the Internet into something that
can be programmed or customized by businesses, end users, and software
companies on behalf of end users.

This is a fundamental change – whether we’re talking about business-to-business
or business-to-consumer transactions. In both cases, a new breed of self-serving
buyer is emerging, and companies that proactively look at the way that
the Internet can enrich the interaction with these customers for better
service and reliability stand to reap the greatest rewards.

Many smaller utility service companies and utility customers are looking
to Internet portals such as bCentral (http://www.bcentral.com) to establish
and maintain transparent, linked supply chains. At bCentral, companies
can use Microsoft’s Business Internet hosting services for a broad range
of services, such as establishing an Internet presence, promoting the
business, and managing the business more effectively.

Companies that have these kinds of rich trading relationships can also
better analyze buying trends. A well-integrated procurement environment
enables an energy company to quickly see where rogue purchasing needs
to be consolidated and where to find the best procurement opportunities
(see Figure 2). Furthermore, integrated trading strengthens relationships
between partners and allows for greater flexibility in supplier selection.
Tighter relationships also allow for vendor-managed inventory and for
enhancing the fulfillment and replenishment cycle, as well as overall
supply logistics.

Figure 2

Reduce Cost by Streamlining Procurement: Utility companies can consolidate
their procurement through the Internet to both reduce rogue purchasing
and to take advantage of the newly announced trading exchanges that will
deliver auction-based products and services.

Companies can also take advantage of the recently announced trading exchanges.
Companies such as Andersen Consulting, KPMG, and PricewaterhouseCoopers
are offering packaged offerings to get utility companies quickly up and
running to streamline their procurement. Estimates by many show that an
energy company can save somewhere between 5 percent to 15 percent on procurement
costs by getting connected to the trading exchange and by bringing Web-based
procurement discipline within its operations.

Knowledge Management

Information asset management is key to success in today’s business environment.
Typically, however, information is scattered throughout an organization
and beyond. Users must roam different applications to access the information
they need. The Digital Nervous System schema is a framework to interconnect
an organization’s different information islands into a single contiguous
environment. In such an environment, it becomes simple to access information
from several sources through a single application. Users are now able
to control their activities and share information among their peers using
common application frameworks.

In such an environment, knowledge workers need tools to help them navigate
corporate knowledge stores. The Digital Dashboard is just such a tool,
a portal to multiple information sources (see Figure 3). Rather than being
a simple collection of links pointing to different information stores
and applications, a Digital Dashboard empowers knowledge workers to make
assessments and prioritize their work based on factors derived from these
information sources.

Figure 3

The Digital Dashboard, built on Office 2000, allows utility industry
knowledge workers an easy way to prioritize the display of relevant information
from different information stores, applications, and from external sources
such as operations management companies. (Image courtesy of Honeywell)

See
larger image

A Digital Dashboard not only offers a quick glance at various information
sources; it also organizes information in powerful ways, highlighting
the topics that are relevant to each worker. Based on the information
that the Digital Dashboard presents, a worker can make judgments and take
appropriate action.

In the utility environment, there are a number of knowledge worker communities
that could benefit from the Digital Dashboard. Energy traders, plant and
facility managers, transmission and distribution maintenance managers,
and executives, for example, are too busy to learn proprietary toolsets.

The Digital Dashboard permits key performance indicators, decision criteria,
and aggregate process information to be presented alongside the user’s
calendar, task list, in-box, and news ticker. Information that was previously
only available in the end-of-month report is now available in real time
using familiar tools.

Collaborative Engineering-Based Services

Great utility operations rely on the near-real-time coordination of key
technical resources such as plant managers, call-center operators, energy
traders, and field maintenance managers. These disciplines often require
input from external consultants and suppliers to make better decisions.
A Web-enabled desktop environment allows for companies to use new collaborative
tools so that these specialized disciplines can share information and
act as a team on a global basis.

Best-in-class utility companies are using powerful new PCs to utilize
collaborative operations and trading services that enable their key technical
resources and specialized external service companies to instantly coordinate
and share expertise (see Figure 4). Examples of these collaborative engineering-based
services include land data management from Tobin.com, plant and facility
monitoring/management by Honeywell’s myplant.com, and numerous specialized
maintenance applications through MRO.com. Companies that proactively use
these new services will significantly reduce their in-house costs and
achieve greater operational efficiency.

Figure 4

The scalable Microsoft Windows operating systems environment unifies
the energy industry computing network across the entire range of hardware.

Services to the Retail Market

With the Web, utility companies are in a position to offer more services
to the retail customers. Many proactive utility companies are rethinking
the interaction that they have with customers. In a customer’s mind, there
are many services that could be provided to them that would be seen as
natural extensions to paying for the core utility itself: water, electricity,
gas, and waste management. Simple versions of these services can be the
consolidation of household bills and the offering of a spectrum of financing
options.

To a very aggressive utility, the opportunity to extend rich, information-based
services into the home is now possible (see Figure 5). Through an information
link into the home, a utility company can now go much further beyond the
basic billing and financial services. It can look at new services, such
as monitoring and managing heating/cooling systems, security systems,
and even providing Web-based community services.

Figure 5

With the rich new capabilities of the Web, utility companies can offer
many new Web-based services to their customers to enhance profitability
and customer satisfaction. It is now possible for utility companies to
offer services such as MSN megaservices, Web TV, and household management
services.

The Web-based community services could be Web TV and its vast spectrum
of services, bCentral for small businesses and home-based businesses,
and MSN megaservices. The MSN megaservices are a spectrum of Web-based
services that utility companies can license and extend to their user community.
These are many megaservices that utility companies can use, including
MSNBC news, weather, Hotmail, and Expedia.

Using these megaservices, a utility can then look at itself as an Information
Utility, and quickly deliver hundreds of value-added services to its customers.

Infrastructure

To have a Business Internet-enabled IT infrastructure in utility, it
is important to have the following components:

1) Standards for interoperability between and within transmission and
distribution, the plant, and the enterprise;

2) A complete spectrum of scalable and interoperable (and now Web-enabled)
hardware from the device level to the corporate enterprise; and

3) The ability to have internal and in many cases external Internet access
to any component of the IT infrastructure.

Complete energy solutions must support integration between the plant
systems, the transmission and distribution operations, energy trading,
customer call-center operations, and production planning. Clearly, it
cannot be achieved in one blow, but it is the target to shoot for and
the underlying IT infrastructure must be designed to support it. In other
words, IT must provide an efficient, cost-effective Web-enabled computer
and communications infrastructure for universal information access.

To solve the software interoperability requirement in the energy industry,
Microsoft and hundreds of software partners during the past three years
launched OLE for Process Control (OPC) and The Windows® Distributed interNet
Architecture for Manufacturing (DNA-M). The OPC Foundation’s goal is to
ensure that there is standard interoperability between instrumentation
and control devices such as utility SCADA systems, control applications,
and back-office applications. To tie the interoperability of the process
control area to the Business Internet, the OPC Foundation has committed
its support for XML through the BizTalk organization (www.biztalk.org).

Recently, the American Petroleum Institute, in particular The Gas Industry
Standards Board, has endorsed XML and BizTalk for E-Commerce in the utility
industry. As a Web-enabling infrastructure for utility companies, the
Windows® DNA2000 framework combines the ease of use of the browser-style
interface with the power of traditional client/server applications. It
creates a highly efficient development environment for application developers
and systems integrators. Implementing a digital nervous system is now
economically feasible for utility enterprises of all sizes. It also enables
mutual sharing of functions between applications, free exchange of information
between system components, and distributed implementation of applications
across local networks, intranets, and the Internet.

This framework allows utility companies to collaborate better internally
and externally with the service community. The DNA2000 framework also
allows utility companies an expandable IT base upon which they can grow
to offer hundreds of open standards-based services as they grow to become
information utilities.

Industry-Specific Solutions

With the Business Internet, companies will have greater choice in devices,
networks, services, and partners that can develop solutions that meet
the unique needs of each business. Microsoft’s goal in the utility industry
is to support the hundreds of software companies producing thousands of
applications so customers can have the greatest choice.

Products need to be both interoperable, so that they work with an organization’s
existing systems, and scalable, so solutions can evolve and adapt to meet
changing business conditions. This means companies don’t have to start
from scratch and throw away the significant investments they have already
made in hardware, software, and knowledge.

With Windows NT Services for UNIX and with the rich capability of XML
to provide data interchange between numerous different operating environments,
energy companies can look forward to adding the Business Internet capability
onto their existing IT infrastructure. This solution improves information
sharing, reduces computing costs, and capitalizes on past investments.

The Business Internet Strategy: Getting Started to Reduce Costs

Utility companies need to quickly achieve a tight integration of their
operations with suppliers, partners, and customers. This integration needs
to go deep within the utility organization so that knowledge workers and
production operations are integrated into the extended supply chain. Microsoft
and hundreds of industry-specific system integrators can help you map
out your current business processes and help propose ways to realign these
to focus on your core competency. Streamlining your processes and integrating
your core processes into the Web-enabled supply chain will help you drive
down costs.

Selecting the appropriate technology and managing a smooth implementation
is every energy company’s dream. Decisions regarding what products to
buy and build, to enable mobile workers, to enable support in multiple
geographies and languages, to reduce IT costs, and to meet future capacity
requirements can be a daunting exercise. Microsoft and its tens of thousands
of systems integrators and software partners provide you with a vast spectrum
of choices so you can find the solution that meets your unique environment.

Delivering information throughout the extended energy value chain must
be a key component of any utility business strategy. In most forward-looking
enterprises, a well-designed, integrated information management infrastructure
is considered essential for continuous business improvement and to win
in the Internet marketplace. By giving people participating in the extended
supply chain fast access to the Business Internet, the full capacity of
human capability and ingenuity is released and turned into an effective
asset.

Regardless of how the utility positions itself, restructuring is forcing
the utility to focus on:

• Reducing operating/maintenance costs

• Obtaining a return-on-investment for assets

• Increasing service reliability

Summarized, the utility must continue and strengthen their ability to
manage both their assets and customers. Customers, and the assets used
to deliver their energy needs, can not be addressed independently. Management
of either requires consideration of both. This is driving an investment
by the utilities in providing Enterprise Service Delivery (ESD). ESD is
a holistic approach in providing business solutions with a combined customer/asset-centric
focus through the integration of front-office, engineering & operations,
and back-office applications. In some cases, this is an investment by
the utility to integrate existing front-office, engineering & operations
(e.g., GIS, Outage Management, Work Management, and Mobile Dispatch),
and back-office applications to provide a complete business solution.
In other cases, it requires the utility to invest in additional engineering
and operations applications.

This white paper will explore in more detail one role that a utility
may choose to play – or scenario it may find itself in – that of a Local
Distribution Company (LDC, or pipes and wires providers) with multiple
Energy Service Providers (ESPs). Similar enterprise service delivery solutions
exist for other roles a utility may choose to play in the restructured
environment.

Utility Industry Drivers for Enterprise Service Delivery

A recent survey of 46 North American electric, gas, and water utilities
conducted by the META Group indicates that the need for an Enterprise
Service Delivery Solution is being driven by:

• Regulated Restructuring (i.e., deregulation)

• Mergers and Acquisitions (M&A)

• Development of multi-utilities (combinations of gas, electric, water,
  telecommunications)

• Emergence of a dedicated asset owner/manager role

Some of these may be cause and effect. For example, the regulated restructuring
in some cases drives resulting mergers and acquisitions. To be a more
full service provider, M&A activities often result in a multi-utility.

A restructured and re-regulated pipes and wires business (1999 through
2003) will be forced to focus on operating costs and service reliability.
As the restructuring efforts unfold, it’s likely that the pipes and wires
providers will be held to several performance standards, e.g., electrical
system reliability or service restoration time during a storm. These are
directly correlated to providing a high level of customer service. The
organization must be both customer and asset-centric. Data supporting
this must be managed in such a way that it is not fragmented and that
the appropriate channels have access – not just the field service personnel,
but also the call center, customer service, marketers, and system operators
as well. The survey results indicated that existing Information Systems
(IS) are underutilized and fragmented, leaving these Lines-of-Business
(LOBs) unprepared for a restructured business environment. This will drive
increased investment (2000 through 2004) in integrated engineering and
operations applications (GIS, Work/Asset Management, Outage/Distribution
Management, Mobile Data, etc.) with front and back-office solutions to
provide enterprise service delivery.

Mergers and acquisitions, including those that result in multi-utilities,
depend on achieving economies of scale and at least the same level of
productivity with fewer resources (i.e., the going-in position for M&A
activities is often a defined reduction in operating costs). Also, technology
solutions, like Mobile Dispatch, may be deployed across the new company,
which have typically resulted in 25 percent reductions in field service
personnel. These efforts contribute to reduced operating/maintenance costs.
Historically, utilities have typically understood the revenue side but
on the cost side, they haven’t aggregated information at the customer
level, and only to some extent, at the asset level. ESD is both the means
to identify what operating/maintenance costs really are, and the means
to become more efficient in service delivery. The utility becomes knowledgeable
in the real distribution costs by customer class and asset, which must
be recovered either directly from the end customer or ESP.

Utilities have long overlooked the value in managing assets, often because
the asset planning/purchase decisions, operation, maintenance, and retirement
are typically the responsibilities of many individuals, with no one person
being truly defined as the asset owner. Additionally, this activity strongly
depends on the availability of data and information upon which to make
decisions. Although much of this data exists, it is not readily available
because of IS being underutilized and fragmented. Enterprise Service Delivery
is seen as the vehicle to pull this data together, maintaining the time-sensitive
relationship of this information, necessary for the asset owner/manager
to be able to make informed decisions in managing the asset (e.g., achieving
a pre-determined ROI for the asset or expected useful life).

Current Utility Market Assessment

A recent survey conducted by the META Group focused on the degree to
which Engineering & Operations applications (specifically, GIS, Work Management,
Mobile, DMS, SCADA, and AMR (Automated Meter Reading) have been implemented,
the current degree of application integration, and planned investments
in integration.

Figure 1, Implementations, 1997 vs. 1999, summarizes the degree to which
these applications have been implemented, and provides some insight into
the maturity of specific applications. It shows that very high implementation
levels exist for Geographic Information Systems (GIS), Work Management
Systems (WMS), and Supervisory Control and Data Acquisition (SCADA) applications.
Between 1997 and 1999, the GIS implementations remained constant, indicating
that it may be reaching maturity in the utilities industry. This, however,
does not mean that significant, additional investments are not planned
for GIS, as will be seen later. WMS implementations increased significantly,
with moderate growth occurring in SCADA. SCADA, being very specialized
technology, also appears to be mature. Both Mobile and DMS (Outage) showed
substantial growth between 1997 and 1999, with significant room for growth
as currently, both are less than 50 percent implemented. AMR showed little
movement and only about 35 percent total implementation. This can be most
likely contributed to the rapid changes in meter reading technology, the
cost, and the uncertainty caused by restructuring as to whom will own
the meter.

Figure 1
The degree to which specific applications have been implemented

Figure 2, Current and Planned Applications Investments, summarizes the
additional investments the surveyed utilities plan to make in these applications
between 2000 and 2004. Planned investments are greater than 50 percent
for GIS, WMS, and Mobile, with DMS (Outage) only slightly less. Although
previously, the level of GIS implementations was shown to be high, there’s
still almost a 60 percent planned investment. This investment is not all
in implementations, but a shift in focus on GIS as a supporting technology
and source of data for other applications (e.g., WMS, DMS, and Asset Management).

Figure 2
Current and planned investments in Engineering and Operations applications

It’s worthwhile to briefly discuss the definition of GIS. In the broadest
possible terms, GIS are tools that allow the processing of spatial distribution
of data into information, generally information tied explicitly to, and
used to make decisions about, some portion of the earth (land base). For
utilities, the spatial data is focused on Facilities, Customers, and improvements
to the land base (e.g., roads, buildings, ROW, easements). GIS tools may
either be supported through a technology solution or a manual process.
Every day, the utility is making use of GIS to support work requirements.
For example, when a developer comes to the utility with plans for a new
residential subdivision, Engineering supports the design and placement
of facilities (e.g., poles, transformers) on the subdivision plat either
through physical plat markups or computer-assisted drafting. Another example
is joint-use and utility-owned pole locations, on maps with land base
and property information available through a state agency, maintained
by the local telecommunications company and made available to the utility.
This may be viewed through a GIS vendor “freeware” product. A third example
is the use of GIS software, by Real Estate, to provide utility easement,
property, pole/anchor agreements.

In each of the examples provided above, the utility is accessing/updating
a subset of the same data that resides in multiple sources. Data management
and integrity become at the least challenging if not questionable, and
very resource intensive. Additionally, the information gained from the
knowledge of the spatial distribution of the data has limited distribution,
often only within the user community that developed it. Within Enterprise
Service Delivery, GIS is the provision of a single technology solution
across the organization that supports the entire organization in its need
for spatial information. This is the GIS investment identified in Figure
2. This is not meant to imply an all-or-nothing approach to implementing
Enterprise GIS. Implemented through a series of projects, each of the
user communities’ spatial information needs can be met while providing
a tool for achieving data management and integrity.

Another focus of this META Group survey was to assess the current status
of application integration in the utilities industry, and to determine
the perceived degree to which integration must occur and investments made
based on the previously discussed drivers. Figure 3, Level of Application
Integration, provides a summary. Approximately 50 percent of the survey
respondents indicated current, minor levels of application integration
exist. This typically involved the use of batch file transfers. About
another 40 percent indicated moderate levels of application integration,
typically more applications interfaced through point-to-point interfaces.
Less than five percent indicated a high degree of application integration,
having most applications interfaced through the use of industry standard
middleware or Enterprise Application Integration (EAI).

Figure 3
The current status of application integration in the utilities industry

Planned Application Integration (2000 through 2004) shows substantial
projected increases. Forty-five percent of the respondents chose moderate
application integration and another 45 percent chose high integration.
This is consistent with the drivers indicating that LDCs need to move
toward an integrated environment supported by industry standard middleware.
It’s also consistent with GIS investment plans for making GIS a supporting
enterprise technology and source of data for other applications.

As several states are farther along the path of restructuring, it’s worthwhile
to examine two outcomes for consideration: (1) Who the customer is, and
(2) Timing of IS investments. These two items directly relate to the preparedness
of the utility to operate in a restructured environment.

Who is the Customer?

First, a misconception exists that in this new restructured industry
where the LDC and the ESP are no longer one and the same, that the LDC’s
customers are the ESPs with the ESP servicing the customer consuming the
energy. This has led LDCs to anticipate a reduction in call center volume
with a subsequent reduction in staff. In handling customer service requirements,
transactions must occur between the ESP and LDC. The LDC must recover
the energy distribution costs, either from the end customer or the ESP,
as well as costs for any additional services that may be provided to the
customer on behalf of the ESP. For the LDC, this may take the form of
a flat rate charged to the ESP per customer per year based on an anticipated
level of customer calls the LDC may expect to handle. In one instance,
the LDC’s call volume almost doubled, leaving the LDC short of Customer
Service Representatives, and significantly under-compensated by the ESPs
based on the flat rate charged for the transactions.

Although in this arrangement, the LDC may no longer be able to directly
serve the end customer, this customer’s level of satisfaction (and the
customer’s perception of how well the ESP is providing service) is strongly
tied to the LDC’s ability to maintain and operate the pipes and wires.
The customer still looks to the LDC, and in many cases, will call the
LDC first, over their chosen ESP, in matters concerning customer service.

Timing of IS Investments

Second is the timing of IS investments. A LDC must be prepared to enter
the restructured environment, capable of efficiently providing services
to the ESPs, or fully knowledgeable of the associated costs and transaction
levels to obtain/set a fair-market cost. If the LDC hasn’t made or anticipated
the technology investments up front for enterprise service delivery, the
LDC may not have the opportunity to have ESPs share in this investment.
As ESPs are strongly focused on customer service, and as identified previously,
in many cases the customer still looks to/or holds the LDC accountable
for service, there may be little impetus for the ESP to support LDC investments.
The ESP may deem their relationship with the customer and the level of
service received from/through the LDC, acceptable. This may leave the
LDC in the position of having to make significant investments. An example
of this is where a customer requesting service must be addressed through
a three-way telephone between the customer, the ESP, and the LDC. This
can be particularly true in geographical regions that represent little
or modest growth in new customers to the ESPs.

Enterprise Service Delivery Overview

Enterprise Service Delivery is a wholistic approach in providing business
solutions with a combined customer/asset-centric focus through the integration
of front-office, engineering & operations, and back-office applications.
It provides:

• Significant reduction in Operating & Maintenance Costs in the provision
  of Customer Service

• Substantial Improvements in Service Reliability, and Level of Customer
  Service

• Asset Management

Traditionally, front-office (e.g., CIS, Call Center applications) and
back-office (e.g., Financial, HR, Accounting, Materials) have been interfaced
independently with engineering & operations (e.g., GIS, Outage Management,
Mobile Data/Dispatch, Work Management), leading to “tight” vertical integration.
However, the importance of “tight” horizontal integration (i.e., front
office to engineering & operations to back office, and within engineering
& operations, such as, GIS to Outage Management to Mobile Data/Dispatch)
has been overlooked. As the need arises for a utility to consider the
implementation of additional engineering & operations applications, such
as Mobile Data/ Dispatch, it typically is strongly focused on the vertical
integration. It is not viewed as part of an integrated IS business plan
to provide complete solutions to the utility’s business problems, and
results in extracting less than maximum value from the new system. Figure
4 provides an example of an Enterprise Service Delivery solution for addressing
Service Interruptions/Restoration.

Figure 4
Service Interruption/Restoration
See
larger image

The Service Interruption/Restoration scenario and the Enterprise Service
Delivery solution presented in Figure 4 is as follows:

“An individual customer calls to report partial or complete loss of power
for an unknown reason. This call is logged through the Call Center/CIS
to create a permanent record. The call information is subsequently transmitted
to an Outage Management System (OMS) where the call is analyzed and is
determined to be a part of a larger, existing outage. The Probable Outage
Device (POD) is identified as a transformer feeding a residential subdivision.
The resultant Outage Order is assigned and dispatched to an available
crew using a Computer-Aided or Mobile Data Dispatch (MDD) System, and
the time to restore power is estimated. As part of the analysis, an inquiry
was made in the Geographic Information System (GIS) regarding this specific
transformer. It was determined that this transformer was scheduled to
be replaced with a larger unit to meet anticipated residential growth
in this area. The failed transformer is replaced with a larger unit, and
additionally, a normal open point in the primary feed is permanently changed.
The customers are re-energized. The field crew completes its activities
by logging time and materials used on a Mobile Data Terminal (MDT), sending
updated status and facilities information to OMS and the GIS, respectively.
Customers requesting call back are notified by the Interactive Voice Response
(IVR) System as advised by OMS. Customer records in CIS are updated with
completed outage information. Based on completion data from the field
MDT, facilities records are updated and posted in the GIS and Equipment
Master database. The original transformer is retired and the new transformer
is added to the Asset Management database. The OMS operating model is
updated from the connectivity model of the GIS”.

In this particular ESD solution, from the time the customer makes a request,
to the real-time status availability of work-in-progress and completion
of the work, the process is fully integrated and automated, achieving
exceptional levels of customer service. Also, maintenance associated with
the Asset (i.e., transformer) is captured in real time along with the
current physical configuration as documented through GIS, both key components
in Asset Management. Additionally, GIS provides the updated physical connectivity
model used as the basis for creating the operational model in DMS (Outage).
This provides both Customer and Asset-Centric Management.

Conclusion

Utilities are struggling with the number of investments they should make
given the strategic uncertainty of dealing with restructuring (deregulation).
Many utilities are still trying to figure out what role they want to play
in the new markets – whether they want to be an energy supplier, in retail,
etc., either regionally or nationally. However, utilities must continue
and improve in both their Customer and Asset-Centric Management. There
is a shift away from the utility’s traditional mega-application development
projects (e.g., single solution ERP provider) towards a more flexible
environment with packaged solutions. This compliments what many of the
utilities have today, allowing them to integrate new software as markets
change, technology improves, and the restructured lines of business evolve.
Additionally, recent advancements in Enterprise Application Integration
(EAI) software, allow applications to talk to each other in real-time
using middleware rather than custom, point-to-point interfaces which can
be two to three times more costly. This significantly improves the utility’s
capability to respond more quickly to restructuring changes.

Outcomes from several utilities that have experienced restructuring are
worth considering. First, in this newly restructured industry with LDCs
and ESPs as separate entities, the LDC may no longer be able to directly
serve the end customer. However, the customer still looks to the LDC,
and in many cases, will call the LDC first, over their chosen ESP, in
matters concerning customer service. Second, an LDC must be prepared to
enter the restructured environment, capable of efficiently providing services
to ESPs, or fully knowledgeable of the associated costs and transaction
levels to obtain/set a fair-market cost. If the LDC hasn’t made or anticipated
the technology investments up front for enterprise service delivery, the
opportunity may not exist to have ESPs share in this investment.

The blend of a combined Customer and Asset Management focus on providing
business solutions through Enterprise Service Delivery extends a balanced
value proposition to the Utility. It achieves:

• Reduction in and knowledge of operating and maintenance costs aggregated
  by customer and asset

• Improvement in physical energy system reliability

• Improvement in customer service and satisfaction

Fragmented data is turned into meaningful information, providing all
the appropriate Line-of-Businesses with access.

Additionally, ESD supports E-business initiatives through Web-enabled/hosted
applications that present customer-facing solutions, such as customer
appointment setting, with multiple marketers supplying the customer base
for a LDC. Another example is the Web-hosted Mobile Data Dispatch of work
to field service personnel, reducing the utility’s investment in IS infrastructure
across their service territory. Finally, utilities with non-contiguous
service territories resulting from M&A activities, may consider Web-based/
hosted solutions.

Figure 1
Typical infrastructure required for developing and deploying Business
Intelligence applications
See
larger image

Business intelligence makes the enterprise “smart.” Although not new
in and of itself, business intelligence can be seen as the process of
transforming data into information and ultimately into knowledge that
is valuable to the corporation. Applications such as data warehousing,
data mining, enterprise information portals (EIPs), and knowledge management
systems (which can all comprise a business intelligence solution) can
provide insight into customer retention, purchasing patterns, and even
future behavior. They can also consolidate the presentation of and access
to data stored throughout the company. These applications can not only
tell you what has happened but why and what may happen given certain business
conditions – allowing for exploration of “what if” scenarios.

Business intelligence touches on every aspect of IT, such as enterprise
resource planning, supply chain, and Customer Relationship Management.
By improving their ability tocollect, interpret, and act on their information
assets, companies realize more-efficient operations and decision-making,
fueling top-line growth and rewarding shareholders.

It is universally acknowledged that information is a valuable asset and
competitive advantage, especially in e-business. However, extracting potentially
valuable information from the massive volumes of data collected by operational
systems is the biggest challenge most companies face in developing business
intelligence systems. The priorities for business intelligence system
designers and applications developers are interoperability, scalability,
and adaptability, but traditional IT practices have focused on corporate
or departmental solutions with their own internal standards for data interchange,
system access, and security. In order to bridge this gap and allow for
the creation of trading exchanges and robust, semantically rich business
intelligence and data warehousing applications that capitalize on lucrative
new business models such as business-to-business e-commerce, participants
need to utilize standards-based development and computing models. These
models act as a blueprint for new applications and systems development
as well as a common set of standards and interfaces through which applications
can interact and explore and exchange information.

The Data Interoperability Challenge

Demands on corporate data warehouses have been steadily accelerating
for the past several years, as businesses generate and collect more and
more information over the Web. As a result of this information growth,
people at all levels inside the enterprise – as well as suppliers, customers,
and others in the value chain – are clamoring for subsets of the vast
stores of information – such as billing, shipping, and inventory information
– that can benefit them. Collecting and storing vast amounts of data is
one thing; utilizing and deploying that data throughout the organization
is another.

The technical challenges inherent in integrating disparate data formats,
platforms, and applications are significant. However, emerging standards
such as the application programming interfaces (APIs) that comprise the
Java platform, as well as XML technologies, can facilitate the interchange
of data and the development of next-generation data warehousing and business
intelligence applications. Java technology has been used extensively for
client-side access and in the presentation layer, and it is emerging as
a significant force for developing scalable, mission-critical server-side
programs. The Java 2 Platform, Enterprise Edition (J2EE) provides the
object, transaction, and security support for building robust, adaptable
enterprise-class systems.

Incompatible Metadata

One of the key problems limiting data interoperability that business
intelligence developers must solve is incompatible metadata formats. Metadata
can be defined as information about data or simply “data about data.”
In practice, metadata is what most tools, databases, applications, and
other information processes use to define, relate, and manipulate data
objects within their own environments. It defines the structure and meaning
of data objects managed by an application, so that the application knows
how to process requests or jobs involving those data objects. The problem
is that most applications define metadata differently, using different
programming structures, syntaxes, and semantics as well as storing metadata
in different data management systems with different file formats.

An example of metadata is the schema or model that database programmers
create that defines the tables, fields in a table, and table relationships
in a database. The database management system uses this metadata to determine
which tables and rows to access in response to an end user transaction
or query. Developers can use this schema to create views for users. Also,
users can browse the schema to better understand the structure and function
of the database tables before launching a query.

Data warehousing and business intelligence developers in particular are
familiar with the problems incompatible metadata formats cause. A typical
data warehousing application requires the integration of many different
types of tools for the extraction and transformation of data, often from
different operating systems and software applications. Data must then
be transported in stages to the data warehouse, where it is merged with
data collected from other sources – each with its own set of metadata.
Query, reporting, and analysis tools likewise need to maintain common
metadata to ensure that the data views maintained by the tools are synchronized
with the associated database schemas. Without a common model for creating
metadata, developers must hard-wire discrete interfaces between applications
to allow for the exchange and synchronization of data. The high cost of
developing such a system, in terms of development and maintenance, can
be prohibitive. Companies have been limited in developing solutions that
require the exchange of data from multiple, heterogeneous applications.

To address the metadata issue, a group of companies – including Hyperion,
IBM, Inline Software, Oracle, SAS Institute, Sun, and Unisys – have joined
forces to develop the Java Metadata Interface (JMI) API, which permits
the access and manipulation of metadata in Java with standard metadata
services. JMI is based on the Meta Object Facility (MOF) specification
from the Object Management Group (OMG). The MOF provides a model and a
set of interface definition language (IDL) interfaces for the creation,
storage, access, and interchange of metadata and metamodels (higher-level
abstractions of metadata). Metamodel and metadata interchange is done
via XML and uses the XML Metadata Interchange (XMI) specification, also
from the OMG. JMI defines a Java mapping of the MOF IDL interfaces as
well as the contracts necessary to connect to a metadata repository (see
“J2EE Connector Architecture,” later in this white paper). The goal is
to overcome the limitations caused by proprietary systems’ use of different
and incompatible semantics, structures, and syntax for metadata. The lack
of metadata interoperability prevents the sharing of data between applications
and has limited the development of robust BI systems.

JMI is part of a larger strategy of utilizing Java technology to create
an end-to-end data warehousing and business intelligence solutions framework.
Through the Java Community Process, industry experts are extending the
functionality of J2EE in new areas relevant to data warehousing and business
intelligence independent software vendors and users. Another specification
in the works is the Java OLAP (JOLAP) API, which will provide Java-based
access to OLAP servers and multidimensional databases.

Business Intelligence and J2EE

Metadata management is just one aspect of creating a successful business
intelligence solution. As applications become more Web-centric and integrated
with operational systems such as ERP and CRM, it is important that new
applications be developed and deployed with a scalable, robust, and secure
development and deployment framework. J2EE was specifically designed to
meet the rigorous needs of enterprise computing as well as those for data
interchange and interoperability.

Although the benefits of J2EE for building enterprise applications are
many, of specific interest to data warehousing and business intelligence
developers are scalability, multitier support, platform independence,
and security:

Scalability

Data warehousing and business intelligence applications typically involve
ad hoc combinations and transformations of large amounts of data, making
scalability of the underlying system critical. As the number of users
increases, J2EE can reliably manage millions of transactions during major
Web surges.

Multitier Support

Multitier architectures are composed of tiers of application logic separated
from the data tier and the client user interface. Multitier architectures
bring high levels of scalability and reliability to Web applications,
in that unpredictable demand levels and changes in application code will
not require rewriting of the entire application.

Platform Independence

Java Virtual Machines are available on a wide range of computing platforms,
from handheld PDAs to servers to mainframes. As users’ expectations for
information to facilitate decision making increase, there is a greater
need to distribute information on a variety of devices and platforms.

Security

Java has been designed from the ground up with security as a central
feature. The security architecture of J2EE defines simple, flexible relationships
between protected resources, the roles that have access to those resources,
components, and users.

A key technology of J2EE is Enterprise JavaBeans (EJB), an architecture
for the development of component-based distributed business applications.
Applications written with the EJB architecture are scalable, transactional,
secure, and multiuser-aware. These applications may be written once and
then deployed on any server platform that supports J2EE. The EJB architecture
makes writing components easy for developers, who do not need to understand
or deal with complex, system-level details such as thread management,
resource pooling, and transaction and security management. These issues
are all taken care of by the EJB server, allowing developers to focus
on writing business logic. Applications are then composed by combination
of EJB components, sometimes supplied by different vendors, into modules
that can be deployed, managed, and executed in any compliant J2EE implementation.
This allows for role-based development, in which component assemblers,
platform providers, and application assemblers can focus on their area
of responsibility, further simplifying application development.

J2EE Connector Architecture

Although accessing data stored in relational databases is a relatively
trivial matter with the JDBC API, most applications will require access
to larger amounts of data stored in back-office applications as well as
legacy computing environments. J2EE defines the Connector Architecture,
which allows access to data within the Java environment by defining a
set of contracts that need to be fulfilled between the back-end system
and the J2EE platform to support security, transactions, and resource
management. The connector acts as an interface between the J2EE platform
and the targeted data source, which allows for transparent connectivity
between these two systems. This simplifies the integration of operational
systems, data warehouses, and mainframe-based systems, because only one
connector needs to be provided for any single back-end data source. Connectors
can be built that access metadata repositories, either locally or remotely
on other platforms. Utilizing the connector architecture to access a metadata
repository and using JMI to manipulate the metamodels and metadata stored
in that repository enhance interoperability between applications, tools,
services, and disparate data sources.

Java Technology for Business Intelligence

As we have seen, the J2EE platform provides key benefits for building
data warehousing and business intelligence applications, tools, and services
by providing a solid architectural framework that simplifies complex development
and shortens product time to market. By leveraging the J2EE platform,
organizations can take advantage of the scalability, multitier architecture
support, and security of Java, which has become the de facto industry
standard for building transactional Web-based applications. The support
of industry-leading companies in developing extensions to J2EE for the
data warehousing and business intelligence marketplace makes J2EE a compelling
platform for deployment of such applications.

Birth of the GISB

The creation of this new, cooperative organization not only made good
business sense, but it also addressed concerns raised by the Federal Energy
Regulatory Commission (FERC), which regulates interstate pipelines. FERC
had made it clear that if the industry was unable to reach agreement on
voluntary electronic commerce standards on its own, the regulatory agency
was fully prepared to impose them on the industry.

The standards organization that resulted from these industry efforts,
the Gas Industry Standards Board (GISB), was viewed at first with skepticism
by some market participants who feared that standards would delay and
discourage innovation and hamper competition. They reasoned that standards
would lead to a cookie-cutter approach to business decisions, limiting
choice for both buyers and sellers. But GISB’s accomplishments since its
founding in 1994 demonstrate that standards, if created within the proper
framework, can actually enhance competition, spur creativity, and even
lead to the development of new markets.

Decisions about Governance

GISB’s success is not an accident but the direct result of a series of
decisions made when the organization’s governance was being determined.
Mindful of the industry’s history of internecine squabbling, a careful
set of rules was painstakingly crafted by GISB’s founders. Five membership
segments were established: the traditional four of producers, distributors,
pipelines, and end users, and a fifth – service providers – to include
such new industry participants as brokers, marketers, financial services
companies, consultants, law firms, computer firms, and other businesses.
Chosen to govern the new organization were two 25-member governing boards
with five members from each segment: the Board of Directors, with responsibility
for administrative and financial matters; and the Executive Committee,
which was given the responsibility of developing the standards themselves.
(Later, numerous working groups and task forces were formed to assist
the Executive Committee.)

GISB’s voting rules were devised to promote “inclusivity,” protect the
interests of even the smallest segments of the industry from the “tyranny
of the majority,” and ensure that all decisions were the result of a genuine
industry consensus. Prospective standards must get at least 17 affirmative
votes in the Executive Committee, and there must be at least two affirmative
votes from each segment. Standards must then be ratified by the GISB membership;
a 67 percent affirmative vote of those submitting ballots is required
for a standard to get final approval. On the Board of Directors, changes
in bylaws or articles of incorporation need at least 19 affirmative votes,
with at least two affirmative votes from each segment.

The new organization also made an early commitment to openness and the
broadest possible industry participation. All meetings are open to the
public, and while GISB’s dues have been intentionally kept at a reasonable
level to encourage companies to join, even non-members are welcome to
propose and comment on prospective standards and to vote on all but Board
of Directors, Executive Committee, and standards-ratification initiatives.
GISB maintains a small staff in Houston, but the organization’s work is
principally carried out by a large cadre of volunteers from member companies.

GISB’s governance made sense on paper to most members of the gas industry,
but there was real doubt during the first months after the organization’s
incorporation in 1994 as to whether its goal of achieving a voluntary,
industry-driven standards regime would ever be realized. There were fears
that the intricate voting mechanism wouldn’t work in practice or that
federal regulators would attempt to second-guess GISB or even take over
the standards-setting function altogether.

In 1995, FERC issued an advanced notice of proposed rulemaking setting
a March 15, 1996, deadline for comments “containing detailed proposals
for the standard set of information that the commission should require
all pipelines to use” in conducting business electronically, “as well
as for standard nomenclature and standards for any associated business
practices and procedures.” While the commission said it expected GISB
“may become a forum through which these industry efforts may be coordinated,”
FERC made it clear that it was ready to step in if the industry couldn’t
accomplish the task itself. As the result of a substantial effort involving
hundreds of volunteers, GISB managed to meet FERC’s deadline, and on March
15, 1996, the organization submitted 140 proposed standards to the commission.

The fears that GISB would die a premature death were largely laid to
rest on April 24, 1996, when FERC issued its notice of proposed rulemaking
(NOPR) on business practices standards for the natural gas industry. The
NOPR proposed that interstate pipelines adopt the 140 standards that GISB
had submitted to the commission and commended the gas industry and GISB
for the work they put into developing the standards “and the significant
progress they have made toward standardization.” The commission said GISB’s
standards “regularize the means by which the entire industry will conduct
business across the interstate pipeline grid.” Declaring that GISB’s standards
“represent a formidable step towards improved efficiency and competitiveness
in the gas industry,” FERC proposed that interstate pipelines comply with
the GISB definitions, standards, and data sets by January 1, 1997.

Since that time, the pace of work at GISB has not slowed. FERC and GISB
have maintained a collegial relationship that has enabled the two organizations
to create a unique public-private partnership. In a six-year period, GISB
for its part has created a body of over 400 standards. Most recently,
the organization has concentrated on standards designed to ease the inevitable
move of electronic commerce in natural gas to the Internet.

GISB has also been considering, at the request of another industry organization,
whether to change its governing documents to enable it to develop wholesale
and retail standards for the electric industry. The extensive discussions
that GISB has conducted with the electric industry have produced one near-consensus:
that whether GISB changes so that it develops electricity standards itself
or some other organization is entrusted with this task, the standards-setting
process would be well served by following the GISB model, which has proved
to be both fair and effective.

A Seamless Marketplace

What has been the effect on the natural gas industry of five years of
GISB standards? A former board chairman declared that GISB’s goal is to
create a “seamless natural gas marketplace,” and there is every indication
that this is becoming a reality. Standardization, coupled with the use
of electronic commerce, has improved communication between multiple trading
partners, made information necessary for business transactions less ambiguous,
allowed transactions to be completed more quickly, and provided more accountability.
It has also facilitated tighter coordination between trading partners
and automated the business process. As an example of the tangible benefits
of this process, the Commodity Futures Trading Commission has attributed
to GISB standards the reduction in the New York Mercantile Exchange trading
cycle for gas futures from five days to three days. This is Economics
101: more information in the marketplace leads to less uncertainty and
ambiguity, thus reducing arbitrage.

Besides enhancing efficiency, electronic commerce and standardization
are leading to increased competition. The more relevant information that
is made available to market participants in a timely manner, the better
the marketplace functions. And standards for electronic communication
make doing business in the gas marketplace considerably simpler. This
helps to level the playing field for smaller players, who previously did
not have the staff to devote to learning each pipeline’s way of doing
business, as well as to improve efficiency for larger firms. A recent
FERC order incorporating into the commission’s regulations the latest
version of GISB’s standards declared, “GISB’s ability to reach consensus
regarding contentious issues such as multi-tiered allocations and title
transfer tracking demonstrates that industry self-regulation can successfully
bridge gaps between industry members in order to implement policies that
improve the efficiency and competitiveness of the gas industry.”

The current movement toward the Internet is destined to continue these
trends. FERC has mandated that pipeline websites have a “common look and
feel,” further increasing their ease of use. State public utility commissions,
which have jurisdiction over retail natural gas and electricity restructuring
in their states, have increasingly been recognizing the need for standards
for electronic transactions. GISB standards are being specified in a growing
number of states, even for electricity-only open access programs.

Security concerns are being addressed at the same time the Internet standards
are being developed. The U.S. Department of Energy (DOE) was one of GISB’s
first members, and its close relationship with DOE has enabled GISB to
work with the Sandia and Lawrence Livermore National Laboratories to ensure
that the Internet remains a secure and reliable communications medium
for the gas industry.

The transformation of the gas market from its traditional way of doing
business – with its mounds of paper and faxes and countless phone calls
– to an almost instantaneous Web-based process has happened in a relatively
short period of time, and naturally it has not been an easy transition
for all market participants. Smaller companies in particular have had
difficulty finding sufficient in-house resources to prepare to buy and
sell gas on the Internet. But as so frequently happens when industries
undergo major changes, some companies’ problems become other companies’
opportunities. Dozens of firms, some of them start-ups and others veteran
players in the business of electronic commerce, have emerged to offer
products and services to help small – and large – gas companies meet GISB’s
standards and FERC’s deadlines. What has occurred is nothing less than
the birth of a new industry, an event that has made GISB’s services segment,
to which these new companies belong, the fastest-growing part of the organization.

An Industry Forum

It is possible that this gas market evolution would have taken place
if GISB had never been created, but the chances that this would actually
have happened seem very small. FERC would certainly have tried to write
electronic standards on its own, but the historical divisions in the gas
industry would in all likelihood have reasserted themselves. Without GISB’s
ability to function as a forum for working out differences before standards
are even proposed, the commission’s rulemakings would have been greeted
with objections, rehearing petitions, and lawsuits by companies and trade
associations that felt they had been disadvantaged by the proposed rules.

Eventually, some standards might have made it through the legal process
and achieved implementation. But they would likely have been too little
and too late for the gas industry to take advantage of an expanding economy
and a growing need for new electric generation capacity. Competing fuels
like coal, unconstrained by regulation, would undoubtedly have moved to
take away many promising markets. Because some of the FERC-imposed standards
would have been diluted because of the need for compromises either at
the regulatory or the judicial level, there are no assurances that the
standards would have functioned properly once they were imposed. And because
the prospects for future new electronic standards or changes in existing
standards would have been cloudy at best, many companies that had been
poised to serve the new natural gas market would have decided that the
risks were just too great. The industry would have been left with fewer
choices, and far less satisfactory ones.

Far from harming the natural gas industry by impeding competitiveness
and causing delays in the development of needed standards, GISB has led
the industry toward a highly competitive and highly efficient future.
It has, in fact, gone faster than some market participants would prefer,
but by setting a level of expectation that is reasonably congruent with
the state of available technology, it has shown companies what it takes
to compete successfully in the new natural gas industry. And by stressing
that its standards represent only minimum levels of performance, it has
allowed truly innovative companies to take full advantage of their creativity.

As for the argument that standards hurt creativity and innovation, GISB’s
experience demonstrates that quite the opposite is true. In the words
of the American National Standards Institute (ANSI), the nation’s most
prestigious standards organization, “Far from impeding business, standards
actually break down barriers to trade, provide industry stability, and
encourage commerce. Standards are the foundation for innovation, so they
hasten the rate of implementation of new technology.”

One way to approach this issue is to consider whether a novelist would
be likely to complain that his creativity is hampered by the existence
of standardized spelling in the form of a dictionary. Like words, GISB’s
technical standards are building blocks to be used by creators and innovators
to advance an industry that has been renewed and invigorated by technological
change.

Conclusion

GISB’s experience in creating electronic commerce standards for the natural
gas industry demonstrates that standards organizations, properly constituted,
can enhance industry competitiveness and encourage innovation. GISB’s
success is attributable to its carefully balanced structure, with its
complex but highly effective voting procedure, its two distinct governing
boards, and its other attempts to ensure that the interests of all market
participants are given the proper weight. With its ability to create and
maintain public-private partnerships and its success in achieving consensus
on often divisive and controversial industry issues, GISB is uniquely
positioned to help facilitate the transformation of the natural gas industry
through electronic commerce and the Internet.

The L-Hub model is positioned favorably in the e-procurement market space,
in large part because of the sheer size of regional economies and the
compelling nature of doing business on a local basis. Regional Hubs offer
unmatched opportunities for purchasing services (as distinct from goods),
sourcing items from minority and protected-class vendors, and reducing
logistics costs. The L-Hub model enjoys certain advantages over both universal
horizontal and vertical Internet marketplaces, though it may be used as
a powerful complement to one or both of them.

Emergence of B2B E-Procurement Business Models

The business-to-business (B2B) e-procurement marketplace represents the
convergence of two trends. One the one hand, it reflects conventions established
in the business-to-consumer (B2C) world, especially single seller/buyer
models. In B2C, most commerce for goods and services is organized around
a single seller (e.g., Land’s End, Amazon.com). Under this model, a consumer
may have to visit multiple marketplaces to compare prices or other terms
and conditions when more than one vendor sells the same product. The single-seller
model adapted easily to the B2B world, examples being Dell and Grainger.

The other trend was the growth of single-buyer electronic procurement
systems. Companies such as Ariba and Commerce One developed the software
that supports this model, whose primary feature is the use of a single,
simple, specialized interface that enables one buyer to compare offerings
and make purchases from multiple sellers.

These single-buyer software pioneers exploited a crucial technological
innovation, the extensible mark-up language data standard, or XML. XML
brings commerce-specific capabilities to the language of the World Wide
Web by allowing business-related information (such as prices, product
numbers, quantities, etc.) to be “tagged” as such using a common, standardized
set of codes. In its several varieties, XML makes it practical for systems
using diverse data formats to exchange transactional information. A buyer’s
e-procurement system can put a requisition out to a seller’s system, even
though the two systems use different data formats.1

These two streams converged into multi-buyer marketplaces, where a group
of unrelated companies use a common interface for buying from multiple
vendors. On the surface, extending the tools of single-buyer electronic
procurement to multiple buyers may not appear to be a great leap forward,
but it represents the difference between a mere business tool and a bona
fide marketplace. For example, with multiple buyers sharing an interface
and generating transaction data that can be aggregated and analyzed, the
market-maker can effectively combine the buying power of multiple small
buyers to give them the leverage of a single large buyer. Indeed, buyer
aggregation is a leading impetus for the development of B2B marketplaces.2
By contrast, in the B2C arena, grouping of buyers is almost unheard of.
Individual consumer demand is not readily aggregated, though Priceline
and others are trying to discover a viable, sustainable model for aggregation.

Different Marketplace Approaches

Just as marketplaces can differ in the number of participants (single
buyer, single seller, multiples of either or both), they can differ markedly
in the range and complexity of services offered. Marketplaces can be anything
from a straightforward online meeting place to an E-hub; they can offer
anything from the simple opportunity to purchase a product, to integration
with back-office supply and delivery functions.

The first Internet marketplaces were simply online meeting places: sites
where buyers could identify sellers and obtain contact information to
facilitate a transaction that would continue, and be completed, offline.
Then other marketplaces in the B2B space started to post online catalogs,
where people could browse through a list of items, add them to their shopping
cart, and eventually purchase online. Standardized goods such as office
supplies lent themselves most readily to this type of sale and procurement,
but as time passed, tools were developed to facilitate trading in less
standardized goods and services. As online marketplaces evolved, one could
begin to see a relationship between the value-added of each new breed
of marketplace and its increased level of complexity.3

Exchanges were the next logical progression to follow catalogs online,
as Web marketplaces evolved, but while this migration added value through
greater flexibility, it also added more complexity. An exchange allows
companies both to buy and sell goods online through three general methods:
forward auctions (seller aggregation, prices rise), reverse auctions (buyer
aggregation, prices fall), and real-time exchange pricing (spot market,
prices rise and fall).4

E-hubs create additional value by offering collaborative services that
build upon the underlying transaction and by allowing the buyer and seller
to interact on more levels than just price. Examples include the following:
interfacing the marketplace with manufacturing and delivery systems, which
can reduce both parties’ inventories; automation of specialized buying
patterns, which can cut transaction costs; and integration with back-office
procurement systems, which can increase overall process efficiency. While
they add complexity to the transaction, collaborative services and process
improvements bring additional value to E-hub market participants that
many believe could be greater than the price savings that are often assumed
to be the primary benefit of electronic exchanges.5

Differences Between the Exchange and the E-Hub

An exchange is analogous to a stock market, where ownership changes hands
with real-time pricing but no goods are actually delivered. Value is created
in the transaction itself, not through allied services. Unlike pure exchanges,
however, E-hubs offer multiple opportunities to “deliver the goods,” so
to speak, through a variety of increasingly sophisticated value-added
services.

Examples of potential value-added services include: order matching, one-to-one
marketing, content aggregation, fulfillment, and back-office collaboration.6
Order matching is simply being able to match the buyer and seller through
the desired pricing mechanism discussed above. One-to-one marketing can
be facilitated by the market-maker’s knowledge of orders matched, which
permits the building of new marketing relationships with previously unfamiliar
buyers or suppliers, or more targeted and helpful advertising. Similarly,
the market-maker’s access to transaction data (which, to protect the privacy
of customers, is not available to users) permits detailed information
on purchasing patterns to be collected, aggregated in a way that eliminates
customer-specific references, and used for the benefit of buyers in negotiating
prices and structuring contracts.

Order fulfillment includes a broad set of processes where the potential
for value-added services is significant. Examples of fulfillment services
include contract administration, financing, insurance, credit review and
provision, and shipping.7 For the E-hub, each additional value-added service
can represent a comparative advantage and an added source of revenue.

Demand and supply chain collaboration is another area in which E-hubs
can add value, particularly where integration involves core process redesign.
An example of such integration is Dell Computer. The business process
has been Web-enabled so the customer has the ability to adapt the product
being purchased to a precise set of needs in real-time, be quoted a price,
and know how long production and delivery will take.

E-Hub Business Models: Tailoring Procurement Advantages to Business
Needs

There are currently four major online marketplace business models, each
of which meets different needs in the market. The needs are driven primarily
by traditional procurement concerns, especially the difference between
manufacturing (direct) inputs and operating (indirect) goods. Direct inputs
are generally production goods, which are largely industry-specific and
are typically targeted by vertical Internet marketplaces. Indirect inputs,
on the other hand, cut across multiple industries and are a good fit for
horizontal marketplaces, which serve multiple (or all) industries.8

The first B2B multi-buyer marketplace form was the independent vertical,
an e-procurement interface for a relatively narrow range of industry-specific
goods, or a vertical slice of the economy. Still the most common form,
these marketplaces were developed independent of the buyers (and sellers).
Examples of independent verticals include Chemdex, PlasticsNet, and SciQuest.

These independent verticals face considerable liquidity challenges. Until
enough purchases are made through the market, its bargaining power to
get lower unit prices is limited. Yet it must demonstrate this power to
attract the necessary critical mass of buyers and sellers.

The second B2B marketplace form, currently in vogue, is the buyer vertical.
As with the independent vertical, the buyer vertical focuses on a relatively
narrow range of industry-specific manufacturing, or direct, inputs. Buyers,
such as automobile manufacturers and petroleum majors, typically develop
these marketplaces.

While the independent vertical must cope with the liquidity problem,
the buyer vertical must cope with two insidious issues. First, buyer verticals
require competitors in the same industry to coordinate and act at Internet
speed. Just how formidable this task is when competing entities are involved
has been underscored by the relatively slow start of buyer verticals in
the automobile and utility industries. As difficult as this neutrality
problem is,9 government antitrust authorities may create a second hurdle,
leading buyer verticals not to coordinate in a number of crucial ways.10

The third and fourth B2B marketplace forms are horizontal, encompassing
all vertical slices of the economy. The universal horizontal intends to
serve any business, whatever its industry, location, or size. AOL and
PurchasePro, in a joint venture, are developing a universal horizontal,
as are others. OnVia.com is another variation, offering to serve any small
business. Extreme breadth is as much a liability as a virtue for universal
horizontals.

The regional horizontal procurement hub, or L-Hub, created by energyLeader.com,
serves a particular geographic region’s businesses and non-profit institutions
of all kinds and sizes, capitalizing on local cohesiveness. A wide variety
of goods (both indirect and direct) and especially services can be procured
through an L-Hub. energyLeader.com is working in partnership with utilities
in several parts of the country to develop an L-Hub in each utility partner’s
region.

Every region has dozens of businesses, hospitals, universities, school
districts, and local governments with enormous unmet e-procurement needs.
Knowing a region’s businesses and institutions, and having the regional
standing to leverage procurement opportunities, are core competencies
required to build L-Hubs.

Significantly, because of the sheer size of regional markets, L-Hubs
can develop liquidity more quickly, continue to grow longer, and achieve
larger steady-state size than competing Internet market models. For example,
many individual states have a regional accessible market (a measure of
the total transaction volume that could go through a Net marketplace)
in the hundreds of billions of dollars – far larger than most vertical
industry groups. Because all Internet marketplaces must grow over time,
regional horizontals may have a sustainable competitive advantage.

Some important characteristics of the four different business models
can be summarized as illustrated in Figure 1.

Figure 1
Internet Marketplace Models

Vertical versus Regional – A Comparison

Whatever its form, a multi-buyer marketplace must aggregate a critical
mass of buyers to attain the necessary bargaining leverage to drive down
unit prices. The buyer vertical and regional horizontal (L-Hub) forms
have a decisive head start, since they launch with the commitment of buyers:
Buyer verticals have committed buyer-owners, whereas regional horizontals
start with “Charter Buyers,” a small group of committed users of the L-Hub,
including local businesses and institutions.

A major hospital, for example, can use one or more independent verticals
(Medibuy, Neoforma, Chemdex, SciQuest), join a buyer vertical, or join
an L-Hub. Each of these alternatives offers specific advantages and certain
drawbacks:

o ?Verticals market their interfaces to buyers by leveraging intra-industry
associations and relationships. L-Hubs create value by leveraging regional
associations and relationships.

o ?Verticals excel in driving down unit prices of specialized goods that
buyers in a narrow industry procure in large quantities no matter where
they are located. Regional horizontals excel in driving down unit prices
of a broad range of goods, and particularly services, that buyers within
a region procure in large quantities. The value proposition is compelling,
particularly for indirect inputs. The transactional cost savings are estimated
to be 3.5 to 5 times greater for indirect inputs than for direct inputs,
reflecting the higher volume and generally smaller value per order of
indirect transactions.11 This underscores the potency of the L-Hubmodel
compared with industry verticals.

Given these opportunities, the hospital might go exclusively with a vertical
or a regional horizontal, but it is increasingly likely that buyers will
use multiple procurement channels in ways that maximize value. For example,
buyers may loosely separate direct procurement from indirect, with the
industry vertical capturing a large portion of highly specialized direct
goods and the L-Hub capturing regional and indirect goods and most services.
The L-Hub will also be the solution of choice for goods and services procured
from minority and protected-class vendors, who tend to be local or regional,
and for items (such as bulky goods and frequently purchased products)
where logistics costs are significant but can be reduced through geographic
propinquity. Over time, various e-procurement interfaces will develop,
allowing the markets to interconnect seamlessly (as users “punch out”
or “round trip” from one to another).

Of course, these phenomena may vary by industry and region, and over
time. Nonetheless, evidence suggests a trend toward both specialization
and coexistence of multiple marketplace forms. Buyers will use both vertical
and regional horizontal markets on a complementary basis. Both kinds of
Internet marketplaces will succeed because each creates value.

An Imperative for Utilities

Utility companies, especially in the energy industry, are currently searching
for both e-procurement solutions and ways to create value through e-business
initiatives. L-Hubs provide a unique opportunity for utilities to accomplish
both ends in one initiative.

First, utility companies can both sponsor and use an L-Hub. As sponsor,
the utility can build its brand and strengthen customer relations. It
can capitalize on its long-standing role as a community and economic leader
– advantages shared by no other regional entity – to attract a sufficient
number of charter buyers. Charter buyers, in turn, allow the L-Hub to
aggregate a substantial amount of the regional buy as rapidly as possible,
building necessary liquidity.

As user of the L-Hub, the utility provides a large, locally oriented
procurement requirement, further building liquidity. They can help define
the goods and services available through the L-Hub, and the procurement
processes followed. The level of influence may not be as high as in a
single-buyer vertical, but in the highly fragmented utility industry,
local utilities will surely have more influence in L-Hubs than industry-specific
buyer verticals. This increases and deepens the utility’s opportunities
for supply chain integration with the L-Hub, enabling a higher level of
cost savings.

Second, as owner of an L-Hub, a utility company has an unparalleled opportunity
to create shareholder value. The utility is the majority, controlling,
and branding owner of a bona fide, profitable e-business enterprise. As
such, it reaps the majority of the financial benefits – including large
upside potential – that accrue to such ventures. Such benefits are significantly
greater than could be conferred by, for example, a small ownership share
in an industry vertical.

These unique and compelling advantages present a strong case for utility
companies to consider building L-Hubs. Those that do so will stand among
the winners.

Footnotes/References

1 XML also has dethroned the EDI data standard, which was used in a primitive
ancestor of e-procurement. EDI requires the buyer and seller to agree
strictly on format details, an impracticality in modern e-procurement.

2 Harvard Business Review, “E-Hubs: The New B2B Marketplaces,” by Steven
Kaplan and Mohanbir Sawhney, May-June 2000, “The Emergence of Reverse
Aggregators.”

3 Exhibit 23, “Evolving from Exchanges to E-Hubs,” graphically depicts
the relationship between increased value and increased complexity of the
marketplace in Morgan Stanley Dean Witter Equity Research, “The B2B Internet
Report: Collaborative Commerce,” Charles Phillips and Mary Meeker, April
2000.

4 www.netmarketmarker.com.

5 Numerous investment bank research reports have indicated a belief that
the short and intermediate-term cost savings are only the beginning and
that the longer-term process improvements can lead to significant additional
cost savings and potentially be revenue enhancing, according to CSFB eCommerce
Research, “The B2B eVolution,” by Christopher E. Vroom, et al., May 2000.

6 Exhibit 26, “E-Hub Layers of Value,” provides a good illustration of
this point. It can be found in Morgan Stanley Dean Witter Equity Research,
“The B2B Internet Report: Collaborative Commerce,” Charles Phillips and
Mary Meeker, April 2000.

7 For a more extensive list of potential value-added services for E-hubs,
see Exhibit 25, E-Hub: Collaborations and Value-Added Services, in Morgan
Stanley Dean Witter Equity Research, “The B2B Internet Report: Collaborative
Commerce,” Charles Phillips and Mary Meeker, April 2000.

8 For more on this distinction, see Harvard Business Review, “E-Hubs:
The New B2B Marketplaces,” by Steven Kaplan and Mohanbir Sawhney, May-June
2000.

9 e Company Now, “Corporations of the World Unite! You Have Nothing to
Lose but Your Supply Chains!” by Erick Schonfeld, June 2000, www.ecompany.com.

10 U.S. Federal Trade Commission and U.S. Department of Justice, “Antitrust
Guidelines for Collaborations Among Competitors,” April 2000, Section
3.31(a), Relevant Agreements that Limit Independent Decision Making or
Combine Control or Financial Interests, “Buying Collaborations.” See also
Business Week, “Commentary: E-Exchanges May Keep Trustbusters Busy,” by
Dan Carney, May 1, 2000.

11 CSFB eCommerce Research, “The B2B eVolution,” by Christopher E. Vroom,
et al., May 2000.