A holistic, new approach to cost/benefit analysis.
The still-fresh memories of last year's Northeast blackout coupled with rising congestion nationwide have increased...
Making a Case for Information Technologies
Financial models within the utility industry are changing rapidly. Driven by competition, deregulation, and shareholder concern ov er profitability, North America's intermediate and larger-sized electric and gas companies are looking more closely at information technology (IT) investments. Regulators and the financial community are, or should be, watching such actions with equal interest.
Cost-benefit analysis has been applied to Geographic Information Systems (GIS) and Automated Mapping/Facilities Management (AM/FM) systems since the first commercial project was initiated by Public Service Co. of Colorado in the early 1970s. Since then, many of the thousands of analyses completed for such projects have used tools and techniques employed by utilities for other large capital-asset investments, especially computer systems. In many cases, utility GIS has not been viewed as mission-critical. Occasionally, some utilities have viewed GIS as a discretionary investment.
GIS is no longer just maps and records, it's about effectively operating transmission and distribution facilities, assisting in major capital-asset investment decisions, determining equipment replacement schedules, improving customer service, supporting a new wave of sales and marketing initiatives, and providing information about competitors, customer trends, economic development activity, and other strategic issues.
Statists vs. Dynamists
The utility industry can be divided into statists and dynamists. The dynamist group, though small, contains newer, more aggressive management teams that respond quickly and decisively to market threats and opportunities. The statist group is more conservative, slower to act, does business traditionally, and shows less interest in future positioning for a fiercely competitive energy environment.
Not surprisingly, the two camps pursue entirely different approaches to analyzing the costs and benefits of IT investments, particularly GIS. Static utility management teams typically require exhaustive cost-benefit analyses; construct slow, cautious implementation schedules; and rely on more conservative return-on-investment models. Dynamic utility management teams, recognizing that competitive position is linked to modern and effective IT, more readily embrace that technology for bold marketing and sales initiatives. They also recognize that GIS offers strategic support for competitive customer service, marketing strategies, and improved operations effectiveness. While they still complete due-diligence financial analyses, they also embrace strategic benefits-planning initiatives, comparative information requirements, thoughts of strategic acquisitions, and tools for more aggressive marketing and sales support.
Comparing cost-benefit analyses and results between utilities is difficult. A "benefit" at one company may be a "liability" at another. An allowable, tangible quantification at one utility may be eliminated at another as soft or intangible. Benefits in one part of the country may be nonexistent in another. Regulatory mandates in one state may be of no consequence elsewhere. What's more, with the full-scale shift from traditional rate base analysis toward market-based decisionmaking, comparisons of financial indicators resulting from cost-benefit analyses vary widely among companies. Nevertheless, we have evaluated several costs and benefits associated with AM/FM and GIS projects.
Figure 1 displays cost breakouts for investor-owned electric and gas utility GIS initiatives of moderate size. The big-ticket item is clearly data conversion (em that is, taking paper-based information, including map graphics, and loading it on computer databases. More reasonable are software applications and interface development, which offer the most tangible benefits