In Texas, everything’s big. The boots. The hats. The brag. It’s all done bigger in Texas.
TXU Electric Delivery is no exception. A subsidiary of TXU Corp., TXU Electric Delivery provides power to more than 3 million delivery points. With 14,000 miles of transmission lines and 100,000-plus miles of distribution lines, TXU Electric Delivery controls one of the largest energy infrastructures in the nation.
And they keep doing it big. In 2004, TXU Corp. and Capgemini entered a limited partnership to form a new company that would provide business process services and IT solutions to TXU Corp. It was the biggest outsourcing deal at the time, valued at $3.5 billion over 10 years. For TXU Electric Delivery the deal had a ripple effect: its IT services were covered, freeing the utility to focus on delivering power to its customers.
Not content to sit back and rock on its heels, TXU Electric Delivery inked a deal with CURRENT Communications Group LLC at the end of 2005 to transform its distribution network into the nation’s first broadband-enabled “smart grid.” The deal, worth $150 million, will create a broadband over power lines (BPL) network large enough to cover the majority of the utility’s service area, comprising more than 2 million homes and businesses in Texas.
Tom Baker, TXU Electric Delivery’s chairman and CEO, started his career in 1968 as a plant engineer with Dallas Power & Light and has been with TXU Corp. ever since. That’s 37 years. He’s been married to his wife, Nancy, for 40 years. (Loyalty must be big in Texas too.)
Baker spoke with EL&P about the importance of a strong CIS solution and the effects of outsourcing on his company’s CIS decision-making. In fact, he’s one of the keynote speakers at CIS Conference 30, scheduled for May in Dallas/Fort Worth. He also let us in on what TXU Electric Delivery has planned for the future and why what’s coming in the utility industry isn’t like your grandma’s Oldsmobile.
EL&P: TXU Corp.’s deal with Capgemini was big news in 2004. How does that impact TXU Electric Delivery?
Baker: The transaction was clearly big news in 2004, among some other things that TXU put in place that year. Basically the logic for it and the benefit for us as a company come from the fact that we are not experts in some of the functions we outsourced. What we really wanted to focus on, in the case of the larger delivery company, was the delivery of electricity and to do it better than most companies in the nation.
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We think we can be top decile, and one of the best in the country at that. We are top quartile by a number of measures currently and headed to top decile. We’re not necessarily experts in things like IT solutions. When building a large IT system, for instance, there are companies that typically would go out and bring in various consultants and contractors. Outsourcing really replaced some activities that we’re not in the business of doing. We wanted to get somebody that is in that business, an expert, and off load those kinds of projects-and that’s exactly what we did.
That freed us to really focus on our delivery system and how we can improve reliability and get our costs down. Obviously, the transaction was cost-effective. We did save some money. We invested some of that money back into our infrastructure and funded some of the new technology that we’re implementing to serve customers, improve service and quality. So it served a double role from our viewpoint, and I think it’s been helpful.
EL&P: You are a keynote speaker at the upcoming CIS Conference. How important is a good CIS solution to TXU Electric Delivery?
Baker: Well, it’s critical. Very important. We are a pure delivery company. We do not sell electricity. We do not purchase electricity. We do move electricity and deliver it. We also read 3 million meters. We have to take that information and provide it to the appropriate retail company that is providing service to that meter. We have, in Texas, full competition, so, in the case of customer switching, we have to have systems that know which meter belongs to which retailer on which day. And it has to operate very accurately and interface with a number of other computer systems. This data has to go through ERCOT (the Electric Reliability Council of Texas). It has to interface with all the different retailer computer systems. It’s got to be very accurate and has to work like a Swiss watch, if you will, very fast and efficient.
I think more broadly though, even beyond CIS, we’re essentially in a digital revolution. And I don’t know that anyone can even predict today what types of solutions we’re going to need even five and 10 years from now, as quickly as those technologies are changing. The industry is talking about the smart grid of the future. We need solutions in CIS and other IT applications that are flexible and can evolve into the coming needs from a business standpoint, even though we don’t know today what the specific application may be. It’s a really critical piece of the business.
EL&P: You’ve been with TXU for 37 years but your background is mostly on the engineering and management side of the business. With that background, how do you make the right decisions about IT products?
Baker: Gee, 37 years! Time flies when you’re having fun! That’s a heck of a way to start a question!
Well, when you get into something like that, you must have good people and support to make those decisions easier. We have experts from inside our company who work with systems and know what we need. We have experts who are familiar with our strategy. And then, thirdly, we have strategic partners. They are experts in system development and design who team with us to advise me on the positions we’ll take with regard to technology in the future.
What I really look for is something that can be flexible and adaptable for the future. That is because some of the technologies we’re interested in putting on our grid today haven’t been invented yet. The way markets change around the country, we must have a very flexible system. That’s key in making those decisions.
EL&P: Most of TXU Electric Delivery’s service area will be covered by CURRENT’s “smart grid” services. (See sidebar page 38). Has the public’s response to this plan been positive?
Baker: There’s been a lot of interest in the rollout of the broadband over power line technology. As you would expect, the media is centered on the aspect that provides access to the Internet through an electric plug in your house or in your business. That has an interesting ring to it.
I think the real piece of the story that’s intriguing from our standpoint in electric delivery is the impact it can have on our power grid in the future. For the first 100 years of this business, we took power from a power plant and pushed megawatts down the wire to the meter. That was fine back when you were in the industrial revolution, in the early part of the 1900s. Today, going into this century, we’re in the digital revolution. With the power demands on the system and the demands for information to come back, we find ourselves in a place where we’re pushing megawatts down the wire and getting megabytes back- megabytes of information.
So the electric grid can tell us, “I’m sick, my voltage is off, my meter is out,” or, “I don’t have power.” We can switch somebody remotely when a customer changes suppliers or moves in or out of a house. We can operate it more effectively because we can communicate with it.
The key thing that broadband is going to do for us is give us bandwidth. That bandwidth will allow us to put technologies on the grid that, literally, we’re in the process of working with manufacturers now to develop. We’re not there yet. When we are, the smart grid will provide the communication medium for many applications that are coming in the future, including video surveillance, innovations that require a lot of bandwidth.
EL&P: TXU Corp. is very innovative. What drives such innovation, and how does TXU Electric Delivery benefit?
Baker: That’s a great question. The innovation, I believe, is a cultural thing within a corporation. In fact, it’s one of our five values at TXU. To make it work, to foster it and grow it, you have to believe in it. You have to encourage it. You have to urge people to ask questions and challenge the way you do things. That can be uncomfortable, but it’s a must for innovation to find its way into the workplace.
It’s not new here. One of our predecessor companies was one of the first companies to build an outdoor power plant. A fellow named J.B. Thomas ran Texas Electric Service Company back in the late ’40s and he asked that key question, “Why?” In his case it was, “Why do we need to put power plants inside down here in the South where it’s hot, where things don’t freeze up that often?” He asked the “why” word. J.B. Thomas eventually built the first outdoor plant in the Southwest and saved a lot of money.
We have programs in our company to focus on innovation and to encourage employees to ask that question. We created something called “Innovation Station.” People submit ideas. We pick some of the best ideas and have some fun with them. We bring people together and give cash awards for ideas. We celebrate, have a party, and thank people for submitting an idea. You make it a part of your culture and a part of your business so employees are not afraid to think out loud.
EL&P: On the nuts and bolts side, what infrastructure projects does TXU Electric Delivery have planned for the future?
Baker: Well, we have a lot. We’re looking at a three-year plan that will spend in excess of $2 billion on infrastructure in the north Texas area alone. Some of that money will go to pure wires growth in the service territory. Some of the money will go to reduce congestion on the transmission grid. With a fully open competitive market, every time a power plant goes online it changes the electricity flows, and we’re constantly chasing potential congestion solutions.
We’re committed to go to 100 percent automatic meter reading by 2010 or 2011. That’s 3 million meters. The BPL system rollout will be included in that. We’re putting smart switches out on the grid that will automatically monitor load flows. When you have an outage, they sense where the flows are and automatically switch the load around. That keeps an employee from going to the field to do the switching. Customers are back on much quicker, and the system is more efficient.
All and all, it’s clearly new technology that is the path of the future for this industry. It’s going to be digital technology. I think we’re going to have a very different grid 20 years from now from what we’ve had in the past 50 years.
EL&P: Has deregulation worked in Texas? Analysis tends to support a view that it has been successful, but how do you view it from a CEO’s perspective?
Baker: I think Texas clearly got it right, and I hope that’s not just Texas brag! It may be, a little bit. The Texas Legislature took a careful look back in 1999. Leadership looked at other deregulated industries. They went to the United Kingdom to see that market. They investigated California and decided that model wasn’t for them. That was before California essentially blew up.
Texas did have the benefit, with all due respect to California and others, of not having to go first. So, clearly, they could learn from some of the experiences of others. I think they did get it right.
One of the things Texas did that I think was clearly right, relating to our transmission and distribution business, is that, unlike the other states in the country, TXU Electric Delivery is not a vertically integrated utility that provides electric service to default customers or customers that haven’t switched. From the day the market opened, every customer in those areas open to competition was, by definition, a competitive customer. For example, if TXU had a customer the day before competition, the day immediately following, that customer was a customer of TXU’s competitive energy supply company. The wires company has no retail customers. We don’t send bills to customers. We go out and get the power back on for them. We read the meters and send the bills to retailers.
It was a unique opportunity in my career, which as you pointed out is a long career in this business, to sit back and ask the question, “What is this T&D business?” For a stand-alone business, what do we do, why do we do it, how do you make money in it? Quite honestly, when you bundle generation and the customer business up, sometimes it gets covered up with other issues. It gave us an opportunity to take a look at this business, to determine exactly what our product is, how we make money, and what our needs are for the future.
From my perspective as the chief executive of a transmission and distribution business, I think the market is organized correctly. We’ve had a number of power plants built in Texas during the competitive era as stand-alone units. We’ve had a lot of people that are switching at all levels of consumption in different customer classes. The Public Utility Commission estimated that people have been saving between $200 and $400 a year as a result of competition, even though gas prices have gone up. Gas prices, people may have forgotten, used to go up in the regulated days, too.
EL&P: When you look at deregulation, the Energy Policy Act of 2005 and President Bush’s newly announced Advanced Energy Initiative, do you think there’s ever been a time of such profound change in the energy industry?
Baker: I think it depends on the person you ask. Beauty is in the eye of the beholder. I suspect that if you were interviewing a CEO back in 1935 when the Public Utility Holding Company Act was passed, that person would say that PUHCA was pretty substantial and what it did to the organization of the business was profound. When you talk to CEOs who tried to maintain an energy supply during War II while everyone was off to war, they would say that was pretty challenging. Or, if you talked to CEOs who worked here in the early 1970s when we had our first energy crisis, they would say that was a challenging time. Clearly it was a good thing to have energy policy direction.
Again, when you come back to the proliferation of computers that we have today in the digital age, people are demanding more reliability. The types of outages we used to have 10 or 15 years ago simply can’t be tolerated today. We see and hear everyday that customers want energy cheaper. We need to focus on that objective. The customer’s always right, and I think we’ve got to drive toward that. But it is an interesting and challenging time that we’re facing today. So, the Energy Policy Act was the right law at the right time.
EL&P: Texas has a Renewable Portfolio Standard on the books that mandates 2,000 MW of renewable generating capacity installed by 2009. Do you think a mandate like this is good policy?
Baker: At the time that the law was passed, I thought it was good idea because it would bring some wind generation investment into the mix. That goes back to my core belief that as a nation we must have a diverse fuel supply. There is no right answer. We’ve seen gas prices rise and fall back in the ’70s. We’ve seen them come up in the last four years again.
Some of the questions being asked in the industry today are what type of fuel source should I build? What about coal? They’ve been asking these questions for 20 years. The key to a fuel policy is a diverse fuel supply. There’s not a single silver bullet answer that will fix the nation’s needs. Renewables are clearly one piece to that puzzle and we should use them, but they’re not the only answer. Sometimes I think folks want to just do one thing. We’ve got to have some gas, some coal, some nuclear, some renewables, we need to have clean technology and we need to have energy conservation in the country. They all go together. Any one of them by themselves is not a good policy. Put together you have a good policy both when you look at availability, cost, supply and also energy security for the country.
EL&P: Utility companies used to put a lot of time, effort and money into community and economic development projects. As an individual you’ve stayed active in serving your local community but can utilities continue to function in that capacity?
Baker: I think so. It depends on how you define what a utility is. In Texas, we have competition. We have wires companies, power companies, and competitive retailers. As a wires company, TXU Electric Delivery is in a defined service territory. Over the last hundred years, we have grown right along with Texas. Our grid helped industrialize the state. TXU Electric Delivery continues to contribute to the economic wellbeing of the state in many ways. Our employees and contractors live and work in communities throughout our service area. We will continue participating with our communities, whether it is through chambers of commerce or economic development corporations, to help drive growth and expand local economies. It’s good for our business and I think it’s clearly good for Texas.
EL&P: Is there anything that I didn’t ask that you’d like to comment on?
Baker: I think we’re in interesting times in this business. Is this the most interesting? As we sit here, at least for today, it certainly is. The extra piece that’s been added to the equation that wasn’t there in recent times is clearly the security question that unfortunately has been generated by the 9/11 incident. Those issues of how we can provide secure power for people to keep this country viable are challenging, but I think we’ll get there. We’ve made it this far.
It’s interesting that a number of companies in our industry are at or close to 100 years old. That’s fairly unusual. I think that looking out over the next 100 years, you can say, “You ain’t seen nothing yet.” I told a group of employees recently that new people coming into this industry are in for an exciting ride. It will be a very challenging, interesting, and, I hope, rewarding career for people.
Some may think this is the ho-hum utility business of 40 years ago, but in times of continuing global electrification, global energy markets, demands for near perfect electric service quality, national security, and increasing environmental needs, this is not your grandma’s Oldsmobile. No offense to Oldsmobile.
TXU and CURRENT Communications to create multipurpose “smart grid”
TXU Electric Delivery and CURRENT Communications Group LLC announced an agreement to transform TXU Electric Delivery’s power distribution network into the nation’s first broadband enabled “smart grid.”
CURRENT will design, build and operate the broadband over power line (BPL) network covering the majority of the TXU Electric Delivery service area, including approximately two million homes and businesses in the Dallas-Fort Worth Metroplex and other Texas communities. The “smart grid” is designed to enhance TXU Electric Delivery’s ability to deliver top-decile electric service reliability and provide the potential for additional products and services from retail electric providers that will enable businesses and consumers to manage their electricity usage and costs.
Overlaid on the existing electric distribution network, the CURRENT BPL network solution incorporates advanced digital communication and computing capabilities that provide real time monitoring through the electric distribution network, enabling TXU Electric Delivery to:
“- Increase network reliability and power quality
“- Prevent, detect and restore customer outages more effectively
“- Implement automated meter reading more efficiently.
Additionally, CURRENT will leverage the same BPL network to provide homes and businesses with high performance broadband and wireless services, including voice, video and high-speed Internet access delivered over existing electrical lines by simply plugging into any home outlet.
Under the terms of the agreement with CURRENT, TXU Electric Delivery will procure services over 10 years for approximately $150 million to utilize the smart grid capabilities of CURRENT’s BPL network.
When the agreements become effective, TXU Corp. will become an equity holder in CURRENT. Existing CURRENT shareholders include Cinergy Corp., EnerTech Capital, Goldman Sachs Group Inc., Google Inc., The Hearst Corp., and Liberty Associated Partners LP, of which Liberty Media Corp. is a significant limited partner.
TXU Electric Delivery and CURRENT expect to begin deploying the BPL network in 2006.