Utilities Consider Communications-Enabled Services
By Tony Fakonas, Andersen Consulting
What types of value-added services will customers demand from their energy services providers in an environment driven by the power of choice? Perhaps they would like to save time and money by starting the dishwasher while at work. Maybe they will prefer the convenience of bundling diverse household services such as energy, telephony, entertainment and data services. Tomorrow`s customers might demand interactive services such as remote billing and real-time energy usage monitoring through personal computers.
To succeed in the future, utilities must identify customer-focused strategies that will clearly define their competitive advantages and position them accordingly in the markets they choose to pursue. Providing enhanced and innovative value-added customer services and products will be crucial to building customer loyalty, defending existing market share and attracting and retaining new customers.
Linking utilities and their customers through two-way communications will be key to offering the kinds of services and products that will maintain or create competitive advantage. Fortunately, communications-enabled services provide countless opportunities for organizations to tailor products and services to the specific needs of industrial, commercial and residential customers. Moreover, these services provide numerous customer and operational-focused alternatives that contribute to three critical objectives for utilities: to reduce costs and improve operating efficiency; to retain and attract customers; and to create new sources of revenue by providing new, value-added services.
Most of today`s pilot programs and trials can be delivered through either broadband technologies, such as fiber-optics and coaxial cable, or narrow-band alternatives, such as twisted-pair and radio frequency. However, broadband communications offer the most flexible capabilities for current and future services. In addition, developments in other industries such as retail, banking and entertainment indicate that interfaces best supported by broadband communications capabilities will likely be used by many utilities` customers for other services.
Broadband refers to a high bandwidth communications media capable of carrying large quantities of information, including voice, data and video. Broadband enables this information to be carried at rapid speeds simultaneously to and from many users, a key element that allows many options including services bundling. Additionally, developments in the telecommunications, entertainment, retailing, information services and other industries will establish primary customer interfaces through televisions, personal computers or similar devices. As customers become comfortable in interacting with other service providers though existing broadband delivery modes, they will demand similar options for energy services as well.
Broadband provides the range of services needed to respond to future competitive threats and offers significant advantages because of its functionality potential and flexibility. Furthermore, due to the cost associated with enabling a communications-based infrastructure, utilities should consider the best long-term options-avoiding solutions that may become obsolete.
Moving Into the New Frontier
In the mid-1980s, Glasgow, Ky., a community of 14,000, feared competition in the coming unregulated environment for its municipally owned electric utility and wanted competition in the local cable television marketplace.
To address these concerns, the Electric Plant Board of Glasgow determined that existing technology was the answer. A broadband network emerged as the solution by providing the means to construct a city-wide system that would allow load management capabilities and cable television signals on the same cable, as well as expanded capacity for many new services that could be based on community-wide data connections.
The Electric Plant Board identified ambitious goals, rooted in encouraging competition and providing services the citizens desired. One theme aligned the goals enhancing the business environment in Glasgow including:
Reduce costs of energy management services;
Offer modern, sophisticated and affordable cable television service that is controlled locally and operated on a not-for-profit basis;
Provide an alternative telephone service; and
Reinvent the municipal electric utility as a technology utility.
By internalizing these functions, offering lower rates for cable television and telephone and linking data communications community-wide, Glasgow puts more money back into its local economy. Since the project`s inception, conservative estimates indicate that the competitive cable television environment alone has saved residents approximately $6 million.
Today, the project uses its communications network to provide city-wide energy management activities in the same way that similar services are carried out in an individual office or industrial facility. Residents and businesses can be linked through a local data information network (though not everyone is connected at the present time). Additionally, Glasgow citizens pay some of the lowest cable rates in the country, about $13 per month for basic 48-channel service.
Energy Information Services
In 1994, Pacific Gas & Electric (PG&E), Tele-Communications Inc. (TCI) and Microsoft Corp. agreed to an Energy Services Trial to test market the delivery of energy information services using cable television systems.
PG&E delivers the energy application software and back-end server and TCI provides the broadband network and television set-top box, while Microsoft supplies the in-home operating system for utilities customers in Walnut Creek, Calif. This program will bring the customers on-line with a broadband fiber-optic telecommunications network.
PG&E`s trial services will include automatic meter reading, real-time outage monitoring, time-of-use monitoring including the timing and cycling of heavy appliances, and household lighting control. In addition, customers will have access to real time energy prices on their television screens.
Broadband Activities Increase
Cox Communications Inc. and Virginia Power recently agreed to test the delivery of interactive energy management services.
In another ambitious undertaking, Public Service Electric and Gas announced it is working with a team that includes American Meter Co., Andersen Consulting, General Electric, Honeywell and Intellon to develop and deliver an integrated two-way communications system.
What should utilities evaluate when considering options presented by communications-enabled services?
First, they should ask, What will the future look like? Taking into consideration uncertain regulatory, competitive and technological changes, utilities must determine a vision of the future. Preparing for an unpredictable industry structure is a difficult task, but reasonable assumptions can be made:
Competition will continue to increase;
Regulatory structures will change significantly, but regulations will exist in some form;
Other industries, such as telecommunications and financial services, are moving toward direct customer interfaces through personal computers and televisions.
By determining a vision of the future, forward-thinking utilities can begin preparing for this uncertainty, and in most cases, consider the possibilities presented by communications-enabled services.
Second, they should determine strategic intent. Utilities need to select and exploit the strategic intent most suited to the capabilities of their organization by evaluating their future market (customer) requirements alongside their key skills and capabilities.
Utilities will have to ask tough questions about their business pursuits in the future. What does our company do best? What is our competitive advantage? How can we sustain this in the future? How can we strengthen our core competencies and competitive advantage? What is our strategic intent going forward?
The challenge for utilities is to ensure that these objectives and subsequent actions are aligned with their strategic intent. Some variation of communications-enabled services will likely support a utility`s strategic intent, because the benefits of these services are both operational-focused and customer-focused.
Third, what are the infrastructure alternatives? Utilities contemplating communications-enabled services have two basic choices for developing the necessary infrastructure: build their own, or access a full-service network owned by another private provider. Although utilities already have extensive networks, most would need to build connections to a large number of end-user customers, which would require substantial capital investment, not to mention the costs of system maintenance and periodic upgrades. Therefore, completing a broadband infrastructure is not likely to be practical for most utilities.
Accordingly, utilities should seriously consider aligning with partners to help achieve their goals. Utilities may choose to align with cable companies, local exchange carriers or inter-exchange carriers. Ideally, these relationships will benefit each alliance partner equally, reflecting the fact that utilities and their potential partners often bring different and complementary contributions, creating the potential for services bundling.
Fourth, determine expected benefits and costs to implement new services. By determining and pursuing a clear strategic intent aligned with the primary business objectives, utilities will be able to determine more accurately the types of services it should consider providing.
Communications-enabled services can provide significant benefits to utilities, particularly when services are bundled for more cost-effective delivery. However, company-specific economic analyses of communications- enabled services will determine expected benefits and costs associated with these services.
In its simplest form, a utility`s decision about whether and how to proceed with offering communications-enabled services can be reduced to determining if the expected benefits exceed the costs.
The benefits model must allow for varied assumptions about future competition. For example, effective models will be based on three or four potential industry scenarios, with varying degrees and forms of competition and customer choice. Utilities ought to consider each scenario, but base further analysis on the most likely outcome in their marketplace. Analysis of several representative utility profiles and competitive scenarios indicate that the potential expected benefits can be substantial, especially as the level of competition increases.
Value to the Utility
The total benefit to the utility needs to incorporate more than simply the expected dollar benefits of the services:
Total benefit = Expected dollar benefit +
Functionality premium + Strategic value.
The expected dollar benefit is the contribution to the three principal objectives of cost reduction, retaining customers and generating new revenues.
The functionality premium and strategic value components take into account additional value that accrues from the choice of communications approach. For example, increased functionality can include speed or bi-directional signals.
Strategic value reflects the flexibility of communications media to support future requirements and services that are not considered or implemented today.
Determining the strategic value of communications-enabled services is subjective and depends on the specific marketplace and business situation that utilities envision. For utilities that are used to clear engineering analysis to demonstrate cost effectiveness, assessing the strategic value will likely be one of the most difficult steps in the decision-making process.
Utility Cost Model
To offer communications-enabled services, utilities must address both communications and non-communications costs. Non-communications costs are those that are unique to the service and do not significantly affect the cost of the communications network. Essentially, these costs depend primarily on the design of the services to be offered. The communications costs relate directly to the cost of providing the link between utilities and the customers or other facilities, including the cost of building or accessing an existing communications network. For most utilities, this cost prohibits the construction of a proprietary broadband communications network.
All non-communications costs should be subtracted from the expected gross benefits.
The difference between the expected annual benefits and the non-communications costs plus expected return represents the contribution available to pay for obtaining connection to the communication network. If the difference is negative, the services or group of services should not be analyzed further. The contribution available to pay for communications can then be compared to the costs of the utility`s available options of building the communications network using a third-party network. If the cost to build exceeds available capital, building a network is not viable. However, if a utility can obtain access to an appropriate communications network for less than the cost to build, the utility can either increase its profit or decrease its prices (or a combination of the two), thereby improving its competitive position.
Communications-enabled services present new challenges and opportunities and should be pursued in coordination with the strategic intent of each utility. The potential applications of these services seem limitless, but one thing remains certain: as the industry structure continues to disintegrate and competition increases, the value of customer-focused services will become increasingly important.