Blood Lust over AMR

March 2004 Energy & Utilities

In spurts and fits, industries change rapidly. The conversations and sessions at the recent Metering Billing CRM/CIS Americas 2004 organized by Spintelligent once again indicated how fast this industry is evolving.

The opening session kicked off a fury of concerns over who would be paying for the deployment of Automatic Meter Reading (AMR) and Demand Response or Load Control programs. (Demand Response and Load Control are programs wherein consumers receive either price discounts or rebates for decreasing their consumption of electricity during high-demand periods when the capacity to produce is constrained. AMR technology is required to implement these types of offerings.)

Much Ado about Something

Posturing among consumer advocates, utility executives, and AMR hardware vendors raised the hackles on many, but the rhetoric was more indicative of the growing importance of this technology than the need to make directional changes in prices. For instance, compare the remarks of a consumer advocate, a utility executive, and an AMR salesperson.

Jeff Nahigian, Sr. Economist at JBS Energy Inc., claimed that many low-consumption residential ratepayers could not shift their load sufficiently to justify the added $2 to $3 per month cost of an AMR deployment and associated Demand Response or Load Control program. It is interesting that an economist calls a residential consumer a “ratepayer”, implying that all consumers are somewhat similar and should receive the same offering of goods and services. Debates flurried about his price per household for the deployment of this technology, but that is not the key issue. His claim about the costs were made not to halt the deployment of these technologies, but to shift the cost burden from “ratepayers” to elsewhere in the value chain.

JC Martin, representing a San Diego utility, struck back with three challenges: 1) utilities need the AMR hardware costs down to lower the purchase barriers; (2) utilities need the demand response rates up to provide more than cost savings; (3) utilities need the systems and processes to put in the programs and manage the data. He too did not see that halting the implementation of AMR was a desirable goal, but wanted to ensure that the utilities improved profit margins after changing the business processes and technology. For Mr. Martin and utility executives like him, the cost of AMR and demand response programs should be born by end-customers and suppliers, but not at the utility point in the value chain.

After these two individuals stuck their claim in the ground with a “yes, the technology is coming, but not at my expense”, the vendors of AMR technology were left in an uncomfortable state. After all, if according to the economist, electricity consumers were not going to pay for it, and if according to the utility executive, utilities were not going to pay for it, then the vendors of the AMR technology would be forced to pay for it by lowering their prices and profit margins accordingly.

Knocking Down Bowling Pins

There is substance behind each of the three positions. This substance derives from the new means in which Automatic Meter Reading systems are providing value. In just one year, AMR and its related hardware and software products have moved from solving a single point business problem to solving a host of business problems. This is a template example of Geoffrey Moore’s technology adoption lifecycle wherein a technology crosses the Chasm and enters the Tornado.

At this time last year, Automatic Meter Reading was mostly seen as a means to change cost structures from labor intensive meter readers visiting each household to a technology asset dependent automated business process. At the Metering Billing CRM/CIS Americas 2004 held last week, the importance of AMR had clearly expanded beyond this single point business process solution into other areas.

AMR and the evolving software that supports the data coming from these systems is now addressing issues of capacity constraints, power quality, customer relationships, and power offerings. In the vernacular of the technology adoption lifecycle, the promise of AMR has moved from knocking down the single bowling pin problem of reading meters and has moved to strike down multiple bowling pins at once.

Measure for Measure

When AMR and its associated software and hardware addresses issues of capacity constraints, power quality, customer relationships, and power offerings, its importance in the value chain increases. For this reason, AMR vendors and the related industries can perceive the potential to continue to resists price pressure, not to succumb to it. Specifically, the suppliers of two-way real-time communication systems should be in a stronger price position than those who mostly provide systems to manage one-way monthly meter reads.

Utilities are correct to move towards passing some, but not all, of these costs to consumers. After all, power disruptions cost end-customers in lost productivity; therefore improvements in productivity should be born by those who will reap the benefits which in this case are the end-customers. AMR, as listed above, also affects capacity constraints. These capacity constraints could be managed by the addition of new power generation facilities or combined turbine peaking plants. Utilities partly create the business case for an AMR deployment by comparing its cost to that of new generation, transmission, and distribution capacity. Each of these changes in turn applies pressure for utilities to create new offerings to end-customers and, in some cases, change the nature of their relationship from low-involvement towards a higher level.

Changing relationships and price structures with end-customers raises the ire of many government agencies and consumer advocates. After all, if a utility creates a better product directly to end-customers, through higher reliability and more accurate price signals and in conjunction with market segmentation and product specificity, the importance of these government and consumer bodies is threatened. These bodies derive their importance by being the voice of the people, but when the people are able to voice their needs directly to the utilities which are able to respond with specificity, what is the importance of the third party bodies? AMR, pre-paid meters, and other technologies are not quite at the point of enabling direct interaction and specificity of offerings between utilities and customers, but they are beginning to touch the edge of the known universe.

Carpe Diem

The posturing among the different industry groups that occurred at the Metering Billing CRM/CIS Americas 2004 is a positive sign. Executives at all points in the value chain clearly acknowledged that AMR and its related hardware and software products are not a distant futuristic concept, but a realizable approach that can improve our lives. Their claims and positions are being struck to ensure their maximum take of the potential value delivered through these technologies and business processes. In short, each is attempting to seize the day, for the day has arrived.

About the author

Tim J. Smith, PhD is the Managing Principal of Wiglaf Pricing, and an Adjunct Professor at DePaul University of Marketing and Economics. His most recent book is Pricing Strategy: Setting Price Levels, Managing Price Discounts, & Establishing Price Structures.

More by Tim J. Smith, PhD