Utility market changes, local government and the role of GIS

Utility market changes, local government and the role of GIS

David A. Reece
Executive ConsultantlDirector UGC Consulting 6200
S. Syracuse Way, Suite 222 Englewood, Colo. 80111 (303) 773-6166, (303) 773-6618

James P. Spiers
Consultant/Attorney JP Spiers Co. 3335 19* Street Boulder, Colo. 803045
(303) 442-4733, (303) 742-1947

Abstract
Local governments are in an increasingly difficult position given the rapid evolution of the utility industries to competitive markets. With this evolution, municipalities: 1) are losing tax base through utility reductions in force/downsizing, 2) are likely to lose tax base as utility plants are written down, and 3) are likely to lose occupational fees/franchise fees for utilities authorized to operate in publicly platted rights-of-ways. In addition, municipal utilities: 1) will be challenged for customers, 2) will need to be more sophisticated in how they price their services and products and 3) are sharing rights-of-ways with a variety of new entrants. Municipalities have the opportunity to creatively deploy geographic information systems to meet these chal Ienges. Managing multiple service offerings with other municipal enterprises will require new information systems. GIS is particularly well suited to provide this information base. The paper outlines strategies for how municipalities can manage access to their physical plant through GIS. It describes how municipalities can couple GIS provided by various utility/services providers with other physical infrastructure information of the municipality to ensure the delivery of management services throughout the infrastructure. It also addresses critical issues of maintaining equity in an era of explosive growth in sectors of the uti Iities industry.

Q. What strategies are available to municipalities which fke the possible loss of tax revenues, franchise fees/occupational fees and other income as a result of changes in the utilities industry?

A. Local governments are in an increasingly difficult position given the rapid evolution of the traditional monopolistic utility industries to competitive markets. With this evolution, municipalities: 1) are vulnerable to losing tax base through utility reductions in force/downsizing, 2) are vulnerable to losing tax base as utility plant assets are written down, and 3) are vulnerable to losing occupational fees/franchise fees for utilities authorized to operate in publicly platted rights-of-ways.

For the incumbent local municipal utility, its future is equally difficult as it braces for competition. Municipal utilities: 1) are going to be challenged for customers, 2) are going to have to be more sophisticated in pricing services and products, and 3) are sharing public rights-of- ways with a variety of new entrants to the competitive utility services industry. In addressing these issues, local governments have the opportunity to creatively deploy information technologies and geographic information systems. For example, although a municipality may stand to lose sources of revenue in the competitive future, it also may be able to require those desiring access to the public rights-of-ways to provide it with a geographic information system (GIS), or funding for such a system. This information base will help the municipality better manage access to its physical plant. Ultimately, the municipality can couple the GIS provided by the utility and/or services providers with other physical infrastructure information systems to ensure the infrastructure is managed efficiently and effectively. To the extent the municipality has such a GIS in place for right-of-way access, it should price its infrastructure or right-of-way management services at the fu II cost of service, and not on an incremental basis. Municipal utilities face the same issues as other distribution utilities in the competitive future.

These issues include retaining existing customers, attracting new customers (using techniques other than rate breaks), developing new territory and pricing “unbundled” services. All of these are relatively new functions. In addition, the municipal utility may choose to couple its service with other municipal services to provide packages to customers. This wil I help control costs of services (for example, by consolidating the number of meter reading or service technicians) and will add value to service offerings (for example, by providing building audits for energy and water consumption or by undergrounding multiple utility facilities). This type of strategy is being adopted by a number of investor-owned utilities (IOUS), which are positioning themselves as energy services providers, not just electric or natural gas utilities. Managing multiple service offerings with other municipal enterprises will require new information systems, as will pricing unbundled services, particularly for “wires” services. Because of its spatial nature, GIS is particularly well suited to provide this information base within the geographic setvice area of the municipality.

Q. What are the implications of competition for municipal utilities and how does G/S create a roadmap to a more competitive future?

A. The profound changes facing regulated utilities are being accelerated principally by two economic factors. First, customers are concluding that they want their energy commodity priced at marginal cost and not at the utility’s embedded cost. What this means is that the economic cost to the customer of bypassing the network by opting for self-generation, for example, is becoming low enough to make that option a reality. What this means is that increasing numbers of customers are comparing the relatively expensive cost of “central generation stations” with the relatively inexpensive cost of new generation. Second, the traditional central generating station economies of scale in the electricity industry have been replaced by development of smaller generating units. These can be deployed on shorter lead times and with less “lumpiness” than large-scale units which often see a portion of the unit remaining idle for some time until it is needed. In other words, the range of energy resources that can be deployed to meet customer demand is wide. What’s more, these resources can be sited far more flexibly than the central station. This diversity allows the energy provider to supply “differentiated” services and products that were impossible in an era of central station generation.

Along with this increased diversity of resources is the growing understanding and desire among customers to have some choice in provider, service, product and pricing. Price has been a primary focus for many. AS competition emerges in the electricity sector, that singular focus is understandable in the short run. In the long run, however, it is naive at best as most consumers make market choices based on a number of personal factors, of which price is only one. To the savvy municipality, these dynamics represent a unique opportunity. Because cost curves have not yet fallen to the level where most consumers wil I be able to shop the electric system, current economics and scale lend themselves to a community-based level of utility services. Accordingly, municipalities should exercise considerably more control over the energy services it receives from the incumbent utility.

For example, for areas undergoing economic development and as part of its ongoing land use planning efforts, municipalities may choose to require land set-asides for distributed generation (such as fuel cell technologies), and zoning to encourage “sustainable” development (for example, building with an east/west orientation and encouraging tree planting). The need for an information system which will facilitate and perpetuate such development is critical. As noted previously, the municipality--as a condition to granting access to its right-of-way-- should require that service providers fund or provide in-kind a geographic information system that will support such land use management. For the municipal utility, the opportunities are equally good under a competitive scenario. As with any local distribution company, the need for the municipal utility to effectively price its wires is paramount; so is the need to manage access to its facilities by competitive providers in other industries. These aspects, coupled with the municipal utility’s need to plan and deploy distributed and dispersed resources that are closer to the customer and more directed to meet discrete customer needs and wants, will require additional sophistication in the information system. This wi I I be faci Iitated by integrating the customer information system, SCADA, power flow modeling, work order management and outage recovery on the GIS platform.

Q. Are municipal energy providers different from other utilities in such a way that they are insulated from threatk of competition ?

A. Municipal utilities may have legal protections which will, to some extent, insulate them from competitive initiatives being undertaken at the federal and state level. This insulation may occur where the municipality operates under a state constitutional structure that precludes legislative changes which will expose the municipal utility to competition along with other utilities. However, in those cases, it can be expected that the municipal utility will also not be allowed to compete for other load or to annex additional territory without opening up its own territory to competition; this is the so-called “reciprocity” requirement.

Beyond this, municipal utilities face the same economic threats which other utilities encounter. For example, large customers are clamoring for lower rates to help them become more competitive in their own right. As cost curves and the size of generation stations drop, at some point more and more end-use customers will have the option of leaving the system. A number of energy production technologies which are close to marketability will certainly allow for strip mall, if not cul-de-sac, energy systems. This poses significant issues for city planners while it also imposes on municipal utilities the same threat of bypass and self-generation that other utilities face.

Accordingly, while the municipal utility needs to position itself for the competitive future, it may be limited in its attempts to retain load and actually maybe precluded from pursuing new load outside its setvice territory. This leaves the municipal utility is a precarious position, particularly since the U.S. Department of Justice Antitrust Division has taken aggressive steps to limit municipal utilities from using so-called “tying” arrangements to attempt to force continued purchases of electricity from the municipality itself. Thus the municipal utility must look creatively to retain market, unbundle services which it currently provides (such as meter reading and billing, distribution services, backup and reliability services), price such services appropriately, and identify new services and products which it is uniquely qualified to provide. GIS can help the municipal utility identify customers, customer characteristics, and facilities in ways to identify retention and market potential. After all, success can be measured by how well the utility knows its market, its customers, its competitors and itself. An IOU or a municipal utility must understand itself thoroughly. Executives must know where their company’s facilities are, what those facilities’ current maintenance or repair status is and whether or not they can handle an expanded load. Modeling programs using GIS data can quickly assess the impact of new loads. Business geographies allows that information to be shared across a utility’s many departments to ensure customers are well served. A utility must also be able to assess who its competitors are, what their strengths and weaknesses may be, where their facilities are located, who their customers are, and what their short- and long-range business goals may be. Much of the information lies in written documents available to the public, or can be culled through commercial sources of business geographies applications. Competitor information easily lends itself to analysis and incorporation into a geographic analysis system.

Finally, a utility must have customer information. The information definitely must include consumption and usage patterns, but is also should include the core business geographies applications, such as demographic information, household income, lifestyle trends and related data types, which are available from various commercial outlets. Gathering and analyzing such information will help utility marketing staffs target new products and services at customers-- pinpointed by business geographies--who are most likely to buy them. Q. Municipal utilities have rights-of-way to which competitive p/ayers in other industries wil! want access. How can the rights-of-way themselves-- and access to them--be controlled? A. As utility services open to competition, congestion in and around publicly-platted municipal rights-of-ways will increase. In addition, there will be more requests to share or gain access to the structures of the municipal utility. To the extent that managing facilities maybe conducted through GIS, the management function it self will pose a unique revenue opportunity for the municipal utility through, for example, the sale of access to information. Ultimately, the GIS may represent a significant revenue center for the municipal utility, which will help eliminate uneconomic duplication of facilities, and will help maintain reliable service.

Q. What are the ihctors driving the spate of current efforts to create unique municipalization approaches?

A. Many efforts are underway around the country to create a “municipal” entity of some sort for the provision of electric service. The principal driver for such efforts is the Energy Policy Act of 1992 in which Congress the transmission system. subdivisions of the state, transmission system. competition in the provision of wholesale power by opening access to In doing so, Congress made it clear that municipalities, as political could avail themselves of this opportunity to gain access to the The law’s major caution to the Federal Energy Regulatory Commission (FERC) was that it should not grant transmission access for what are known as “sham municipal” transactions. The Energy Policy Act also made it clear that the FERCcould not authorize retail wheeling, leaving that option to the states. Many states already have begun to investigate issues related to retai I wheeling, direct customer access, and energy industry restructuring. As those developments continue to unfold, other entities have launched aggressive efforts to utilize the federal authorization of “municipalization” to further wholesale transactions.

A less frequently discussed, yet still plausible, competitive positioning issue is the potential privatization of a municipal utility. Such an issue involves many challenging issues including amending municipal charters and managing any political fallout that may occur. Nevertheless, deployment of GIS technology can help fil I two primaty roles: to assessthe competitive threats, opportunities and potential viability of a privatization, and to make the system more attractive to privatization enterprises.

Q. Everyone knows what a kilowatt-hour costi, and we are Iearning what ancillary services cost at wholesale but how do we know what distribution wires cost or how much ancillary services cost retail?

A. The electric utility industry has had a long tradition of providing bundled services at a bundled price that is adequate to cover the revenue requirement and provide a “profit” for the utility. In electricity, as in telecommunications under the long-ago AT&T umbrella, the need to offer--and price--discrete services and products was virtually nonexistent. All that has changed.

At the federal level, the FERC has embarked on an aggressive “wholesale” unbundling of services and products, unbundling generation from transmission and ancillary services from transmission and generation. Currently unresolved is how to price transmission, whether it be a “postage stamp” rate for the entire system (one price fits all), zonal, distance based, or some other form. In addition, considerable discrepancy exists over what ancillary services actually are and how they should be priced. As difficult and confused as this effort is at the wholesale level, it is doubly difficult at the distribution level, given the complexity of engineering and the entirely different array of ancillary services; for example tree trimming. These may not be as sexy as “voltage support” at the wholesale level, but they are just as important and must be priced correctly if competition is to develop over the local wires. The distribution system has unique cost drivers at the geographic level, which when coupled with system planning, control and operations, and modeling, can provide a unique basis for pricing wires and services.

To the municipality and the municipal utility this is significant. First, as with any local distribution provider, pricing the wires and ancillary services “correctly” is the first step to ensuring cost recovery and to avoiding uneconomic system bypass. Second, it provides a basis for managing access to facilities and structures for other competitive industries. The municipal utility and the municipality itself have the ability to earn and learn from other industries and can deploy GIS in support of such efforts.

Q. What are the broad implications to the municipal uti/ity posed by the current merger mania?

A. One key issue posed by the competitive future of the electric industry is how existing providers can cut costs and expand service offerings over the same fixed cost base. Many utilities are aggressively pursuing mergers with neighboring utilities or are considering hostile takeovers as remedies. Where does this leave the municipal utility? Most of the symmetries of a merger occur when neighboring systems merge and the systems are interconnected, both physical Iy and administratively. Municipal systems in general have not been pursuers of merger opportunities. Such a strategy often would mean losing the municipal identity and related fiscal support. In other cases, there simply is no neighboring municipal utility with which to merge. However, new models have developed around the country where municipalities and distribution cooperatives have entered into joint ventures for service provision and where investor-owned utilities and municipalities have pursued joint venture arrangements. Ultimately, to consider the viability of a merger, it is important to know the nature of interconnection, the compatibility of resources--physical, human and information--and the efficiencies to be gained. The GIS platform is critical to such analysis and should be deployed accordingly.

Q. What is driving the convergence of services in the communications and electricity industries, and what role does it suggest for the municipality?

As with merger mania, “convergent” mergers, which create new alliances and business relationships between diverse utility service providers, will require unique information sets to understand the true symmetries of such convergence. These mergers wil I be driven by customer characteristics, market segmentation, and efficiencies, as wel I as the interconnection of physical, human, and information resources. Ironically, the municipality has been the traditional point of convergence for local distribution infrastructure services, typically for electricity, water, waste water, and trash removal, among others. Accordingly, municipalities are uniquely positioned to evaluate the synergies of other convergence. The municipalities’ long tradition of considering development of GIS platforms which will handle the information exchange and needs of multiple infrastructure industries should position municipal utilities for the competitive future.