Information Architecture: Building the Right Foundation for Customer Choice in Energy

Fortnightly Magazine - September 15 1999

The crazy quilt emerging in restructured markets only impedes competition.

The enthusiasm among energy retailers has become infectious. It grows as each successive state opens its market to competition. Yet behind the promise lies a grim reality.

Retailers struggle against a tide of thin margins, high customer-acquisition costs, inconsistent rules and regulatory prescriptions for the unregulated market. With all the rulemakings and workshops, the dollars budgeted by utilities to implement retail choice rise above even the level of spending to eradicate the Y2K millennium bug. Corporate strategy slips back and forth as if caught between the flippers in a pinball game. And customers, the target of all the economic affection, often seem aloof - torn between the safe haven of consumer protection and the allure of risk-based pricing. In short, customer choice experiences make apparent the need for new approaches in order for the larger market to succeed.

One problem is the diversity in approaches to information handling among restructured states. Lack of a coherent model for information processing, transfer and optimal use for market operations marks a key failing for which a remedy must be found, and soon. To the extent that can be done, the odds will improve that direct access will deliver economic benefits to customers. Failure to standardize the information architecture almost certainly will spell the demise of many competitors and delay the next stage of energy deregulation.

Patchwork of Markets

and Processes

A new competitive energy market is moving ahead in select locations - California, Massachusetts, Rhode Island, Pennsylvania - with others soon to follow. Lawmakers and regulators in most remaining states have begun to consider competition as a viable alternative to monopoly regulation. About a dozen states have lurched forward with implementation plans. As a result, what exists in the United States cannot be described as a market or series of markets, but state-level re-regulation, a tentative step toward a national energy market.

Re-regulation means different things in different states. Is it wholesale competition or retail, or both? Which comes first? Is competition a tool for serving residential and small-business customers, or just large industrial companies? And what parts are competitive - energy alone, or related services like billing and metering, as well? Should competition be introduced to customers all at once, or in phases?

To specify a competitive infrastructure, plus the information architecture that must accompany it, one needs consistent business processes. Yet even a superficial review of recent U.S. industry experiences suggests that the utility wheel is being reinvented in every state and franchise area. Despite the recent launch of several consensus-building initiatives, regulators appear not to recognize the need to consistently enable the market processes and information flows that must work well in order for consumers to realize long-term benefits. (Among such initiatives are the Utility Information Group, Collaborative for Uniform Business Requirements, the North American Electric Reliability Council's Retail Access Working Group, and the Edison Electric Institute's consensus-building process for uniform business practices.)

Most experts agree that several conditions must be met for energy competition to succeed:

- A liquid and mature wholesale market for each energy commodity;

- Retail offers made to mass-market consumers;

- Financial risks made manageable and hedgeable;

- Market power not concentrated among a few participants;

- Consumer confidence maintained; and

- Information requirements of the competitive energy marketplace must be addressed effectively.

Information technology (IT), and the Internet in particular, can enable market transition and help address painful information problems already being felt in states that have restructured. (See sidebar, The Internet: Tomorrow's Solution Today.)

The Front Lines of Choice:

Trial and Tribulation

To appreciate the need for timely information flows and processing, one need only survey the plight of those who have forayed into competitive energy markets. Retailers, utilities and customers are suffering startup pains of what might be called the market's Pleistocene Epoch. Many of the startup problems stem from unmet information requirements, generally associated with the relationships, transaction flows and operational dependencies depicted in figures 1 and 2.

Retailers, for instance, have experienced a harsh and unforgiving market characterized by lack of financial-hedging instruments, razor-thin margins on the commodity, a state-by-state approach to market rules and, ironically, a national economic cycle so favorable that it is difficult to draw corporate customers' attention away from revenues to cost-reduction. Thus, weak performance by an energy marketer in handling any retail transactions can spell doom.

Utilities, while not necessarily exposed to the same threats as retailers, have found themselves on an unfamiliar voyage without a navigational chart. Some are forced to divest or separate their generation assets and subsequently find themselves on a competitive playing field. After settling recovery of generation-related stranded costs, utilities naturally tend to perceive moves toward competitive metering and billing as potential sources of new strandable costs. Moreover, utilities' existing information systems typically don't meet the new requirements being created in the marketplace. And on top of all that, rate freezes generally are a key part of most utility settlement agreements related to choice. There are new risks and cost pressures, accompanied by new rate limitations.

For the nation's rural electric cooperatives and municipal electric systems, customer choice often includes the need to apply market rules designed for investor-owned utilities. These rules do not fit the scale or nature of co-ops and munis. In addition, these utilities' relative smallness creates extreme budget pressures and calls for creative approaches to implementation. Implementation costs, it turns out, do not necessarily shrink in proportion to the smaller number of meters served.

Last but not least, customers have experienced the confusion of a major change in the way they are served, offers that are competitive but not necessarily comparable, a benchmark price for comparison that is set by regulatory order rather than market processes, and a sense of exclusion from the design process. The revolution is not customer-driven, and sometimes the results reflect lack of adequate customer involvement.

Help is needed, and the good news is that promising business approaches and technology are available for immediate application where there is the collective will and shared sense of urgency.

Market Problems With

Technological Solutions

The requirements retailers face as they expand service into new states tend to be different each time. Customer-enrollment processing, available billing models, formats for electronic market transactions, data content requirements and even load-profiling approaches generally are non-standard, and this reality drives administrative overheads upward. These non-standard processes and protocols - and their extra costs - obstruct entry for some retailers, and ultimately may precipitate decisions to bypass some markets. Specific problems seen in new markets include:

- Interface requirements unique to jurisdictions and franchise areas,

- High acquisition costs for retail customers,

- Commodity margins so thin as to make the business unsustainable,

- Inconsistent rules about measurement vs. estimation of retailer loads,

- The non-liquid wholesale market,

- Difficulty reconciling wholesale power bills against retail usage,

- The ill fit of load profiling when markets mature and become liquid and volatile,

- High transaction volumes unforgiving of less-than-robust systems,

- Bottlenecked customer-usage information,

- Inflexible customer information systems unable to process the required data, and

- Divergent rules for electricity and natural gas in the same territories.

One way to structure discussions about these new information requirements and how they may be accommodated is to consider the information elements each party needs and when, and how the process of defining information requirements has changed. Obviously, these decisions and responsibilities are no longer left unilaterally to the utility. The table on pages 46 and 47, Information Requirements of Customer Energy Choice, highlights but a small number of the observed problems related to information architecture. The issue of who performs which information-related processes can be debated later.

The table provides a framework for constructive debate about how to solve these problems, as a prerequisite for consensus building. By considering how each problem affects key processes, one can infer the extent to which retailers, utilities and others will be committed to solving them. By pointing out the consequences of failing to respond, one can underscore the value of stakeholders coming to the table and negotiating. And by structuring potential solutions into opportunities for standardization, centralization, outsourcing and enabling by Internet access, one can broaden stakeholders' appreciation of both the objectives of an overall architectural framework and the latitude they may have during negotiations to realize their own interests.

The goal, make no mistake, is to begin serious negotiation among stakeholders that will lead to the sometimes small shifts in positions necessary to come to agreement on an initial set of best practices, which can be expanded upon later.

Eric Cody is president and founder of the retail access advisory group of NEES Global Inc., a consulting practice that advises clients serving more than 31 million meters in 30 U.S. states and four foreign countries on the detailed business processes and operating requirements of customer choice. The opinions expressed in this article are the author's alone and do not necessarily represent the views of NEES Global Inc. or its affiliated companies.


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