InformationWeek

Utilities:Survival Of The Most Competitive

By Marianne Kolbasuk McGee
Issue date: Sept. 9, 1996

he utilities industry is entering the next stage of its evolution as an increasingly deregulated environment fuels a newly competitive atmosphere. This transition, similar to the one that the banking and telecommunications industries went through a decade or more ago, is bringing new challenges to the utilities industry as companies prepare for the changes to come.

Deregulation in the power business will mean, for instance, that utilities will be able to share their power lines with other types of companies that also want access to residential and business customers via fiber-optic cables. They're preparing to share the costs of power lines through alliances with telecommunications carriers, cable-TV providers, and others.

Deregulation also means that electricity providers, which previously enjoyed virtual monopolies within their own geographic areas, must prepare to compete against other utilities for business and residential customers. Consumers familiar with the marketing gimmicks used by AT&T, Sprint, and MCI to entice them to change long-distance carriers may soon see once-staid utilities duke it out the same way.

To prepare for the new age, utilities are looking at how they can use IT to leverage current strengths--mainly their existing customer bases--and find ways to expand their servic es as well as their business.

"Information technology is becoming the key to our competitive thrust," says Joseph Valentine, VP of information services at American Electric Power in Columbus, Ohio, which provides power to 2.9 million customers in seven states. American Electric has multiple IT projects under way involving electronic data interchange, intranets, and other technologies that will set the stage for its new competitiveness.

Jim Smith, the acting CIO at Northern States Power in Minneapolis, agrees that IT is a key to success for his industry. "The utility industry is going through the same kinds of evolution that deregulation stirred in the banking industry during the 1980s," he says. "For players in this industry, just as it was in banking, it's either automate or perish."

Smith says that automation and IT solutions provide "true economies of scale and improved productivity. It's our plan to be among the most technologically sophisticated." Northern States Power's projects range from improving customer service through greater use of client-server systems to enhancing geographic data gathering with information systems.

"Without a doubt, information technology will execute change in this company," Smith says.

Northern States Power, like many of the utility companies in the InformationWeek 500, has a number of innovative, ongoing IT projects that will help guide the power company into the emerging competitive landscape.

The Changing Climate
In the upcoming phases of deregulation, utilities will first find themselves competing against one another for industrial customers--bidding for contracts to provide the energy needed to run factories, for instance, says Brad Holcombe, a partner with Andersen Consulting's utility practice in Chicago. This means that not only will pricing be important, but the range of services a company can offer will also be crucial. Then the war will escalate into the residential market.

"If you look at a utility pre-deregulation, it'll have a 100% market share within its geographic area, but overnight it could lose a third of its customers as a result of new competition and deregulation," Holcombe says. "Utilities have to prepare to fight to keep these customers and attract new ones."

That's why utilities are focusing on improved, expanded, or new services that can include revamped customer service systems, field service systems, geographic information systems, and automated meter-reading systems, says John Sequeira, a partner in Ernst & Young LLP's utility practice in Washington.

American Electric Power, Consolidated Edison, Northern States Power, Pacific Gas & Electric, and other utilities are among the power companies that have projects under way involving some or all of those business activities.

"What might've seemed like no-brainer IT projects for utility companies to have done in the past--but didn't--are now being looked at more carefully," says Sequeira.

New Profit Pressures
For instance, geographic inf ormation systems--designed to provide mobile field people with electronic maps of details such as the power lines in a community, wires running to individual buildings, and dangerous gas lines--are being implemented at many companies, including New York's Consolidated Edison.

That's because the system will improve productivity and customer service in the long haul, says Con Ed VP of information services James O'Brien. And productivity, customer service, and cost efficiencies are becoming the new rules of the game.

"In the past, utilities did not have to worry about payback on investments," says Sequeira. "They only faced their own boards' prudence reviews. But now, in the looming competitive environment, that mind-set is changing. The questions are, does the customer need the new service, and can we recover costs?"

While industry analysts say IT spending at utilities is on the rise because of the many projects being launched in preparation for competition, Sequeira says it also means utility compa nies are reevaluating their IT spending. That's because IT organizations have more demand on them from various business units within their companies, so they need to look for ways to optimize that IT spending.

"If it doesn't make competitive sense to charge a customer $10 a month more to pay for a new service, then it won't be implemented," Sequeira says. "Spending that might otherwise have taken place is put on hold."

Most utilities have prided themselves on providing quality customer service to consumers, Sequeira says. "But if a 95% customer satisfaction rate was good before, it will be looked at much more carefully in the next 10 years. Could you imagine if 5% of Disney's [theme park] customers said they were dissatisfied? That wouldn't fly at all."

As a result, customer service systems are being revamped not only to optimize service but also to improve productivity. Systems that give customer representatives the ability to handle a consumer's phone call regardless of the problem--whether it's a complaint about a power outage or a billing question--are being implemented or have recently gone online at many of the IW 500 utility companies.

"The stampede has started," says Andersen's Holcombe. "It takes two to three years to fully reorient people and processes and to work out the bugs in new systems. The best utility companies are getting ready for the new level of competition by doing that work now."

New Territories
Expanded geographic information systems (GIS) are a big part of the new push--not only because they can improve the productivity of field service workers and other employees, but also because they can give a utility insight into how it can gain business opportunities, says Leslie Buttorff, a VP at management consulting firm A.T. Kearney in Denver.

Buttorff says some utilities are implementing expanded GIS-type systems that also provide national directories of how large commercial customers are using energy. This will be a key tool for utilities in competing for t hose companies' business, according to Buttorff.

Such systems, which for the most part are just being developed, will allow utilities to better market their services. Consolidated Edison, which provides electricity to 3 million customers in the New York metropolitan area, is completing work on a new GIS to improve field service efficiency.

Con Ed is also revamping its financial applications and implementing data warehousing that will allow the company to "better control expenses because the information that is provided to our users will allow them to plan better," says O'Brien.

"There's tons of data readily available once you're able to slice and dice it," O'Brien says. Better data access also will help Con Ed develop marketing programs aimed at specific customers.

The Internet also opens marketing options for utilities. At the very least, most have launched home pages on the World Wide Web, and others are looking at how the Net eventually might provide new service opportunities to customers.

"We're looking to do things to allow our large customers to view [energy usage] information over the Internet," says Con Ed's O'Brien. "Although there are security issues we are still addressing before we provide this kind of capability, we view this as another way to provide better service to our customers."

Utilities are also eyeing the Internet for electronic commerce transactions involving the purchase and sale of transmission supplies. Several of the IW 500 utilities, including Northern States Power and Duke Power, are helping to fund an industry project called Oasis that will provide a real-time electronic bulletin board with pricing and other critical information.

The bulletin board is slated to go online in November and will eventually support electronic transactions. It's just one more key weapon utilities can count on in an increasingly competitive market.

To view the IW 500 Utilities chart in PDF format click here

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