Utilities Are Not Telcos: How cVidya fails to understand the risk profile of utilities

I am no expert on utilities. But if, like me, you worked in enterprise risk in a country where the energy sector dominates the national economy, you have to be conscious of the international market in energy. You need to be aware of how energy markets are affected by all sorts of things, including scientific advice about the environment, availability of transportation, industrial change, and consumer protection, in order to understand the knock-on effects on government revenues and business activity, and hence on telecoms use. When I worked in Qatar, I also took an interest in the business of supplying water. As a desert country with a growing population, the availability of water is a constraint on the economy, and a failure in supply could cause a crisis. So, based on what I learned about these sectors, I find my mind is blown by the condescension and ignorance of cVidya. They now regularly spam telcoprofessionals.com, a website which advertises job vacancies in the telecoms sector, and which is run by the same business which handles cVidya’s public relations. cVidya’s most recent opinion piece is attributed to CEO Alon Aginsky, and discusses assurance for utilities. Please indulge me, as I tear his ill-informed nonsense apart.

Time for Smarter, Stronger Utilities

In the next decade, the utilities sector will change beyond recognition.

No it will not. This is possibly the stupidest thing I have ever read.

Consider the timelines that impact utilities. If you think building a telecoms network is slow, consider that the North American Keystone Pipeline for crude oil was first proposed in 2005, Canadian approval was given in 2007, US approval in 2008, phase 1 construction took 2 years and was completed in 2010. Since then, there have been repeated and continuing delays in approving and constructing subsequent phases of the pipeline. And even after you pump the crude oil, and move the crude oil, it still needs to be refined, moved again, sold, and put into the power station that will finally burn it, if and when you fire up that power station, because oil-fuelled stations are more likely to be used on a short-term basis to deal with peaks in demand or shortfalls in supply due to reductions in supply from other kinds of station. Or consider the new nuclear reactor that will be built in the UK. After years of government indecision, the go-ahead was finally given in 2013. The reactor will become operational in 2023. Like other nuclear power plants, when it comes on, it will stay on, generating a fairly consistent amount of electricity for the following 60 years, barring the kinds of accidents that everyone wants to avoid. To reach a deal with the consortium that will build the reactor, the British government have agreed the price to be paid for its electricity during the first 35 years of use.

When it comes to energy, or water, nothing changes rapidly. Planning timelines are long. Utilities are the one business sector we can be sure will not change dramatically in a time period as short as ten years. And every stock market investor knows this, which is why utilities have low betas (a measure of systematic risk). In fact, even somebody with only a passing knowledge of the telecoms industry should know this, because the single greatest strategic risk facing publicly-listed telcos is that they will increasingly be treated like utilities, forcing them to pay higher dividends to sustain their share price. Like utilities, telcos may become defensive, low growth, low beta suppliers of an undifferentiated product where they can only compete on price, thus generating boring but predictable returns compared to the more rapid ‘dotcom’ style growth they have previously delivered.

As governments attempt to curb climate change and rising fuel bills, energy companies are increasingly having to work with their customers to make more efficient use of electricity and gas.

This is true, up to a point. But bear in mind that Margaret Thatcher was the first world leader to talk about the need to address the greenhouse effect, giving an important speech on the topic at the United Nations; you can see the video here. That speech was given in 1989. Since then, environmentalists complain that the pace of change has been too slow. And there has been a significant backlash from climate sceptics, who question the costs and benefits of rapidly reducing use of carbon-based fuels.

Even more importantly, fuel bills are not rising everywhere. In the US, the wholesale cost of natural gas is now just one-third of what it was in 2008, thanks to the exploitation of fracking and other new technologies for extracting previously inaccessible reserves. This is an unusually dramatic change, but it is exacerbated by the time it will take the US to agree to, invest in, and construct facilities to liquify and export natural gas, even though many American politicians have called for an acceleration of such projects following recent tensions between Ukraine and Russia.

Indeed, as a proud Israeli, Aginsky should be aware that Israel is investing in its navy in order to safeguard the discovery of 36 trillion cubic feet of gas off the Israeli coast.

As well as supplying energy, utilities now need to supply information – information their customers can use to adjust their usage patterns and get the biggest bang for their buck.

In practice that means the days of quarterly, or even annual, meter readings are drawing to a close.

This is false. Even when smart meters are implemented, physical visits to customer premises will continue. The visits will partly be motivated by the need to assure the data received is consistent with what the correct meter has recorded at source. They will also be motivated by the need to identify and deter meter tampering. Aginsky’s comment reveals a deep ignorance of risk management in utilities.

Aginsky is also wrong to imply that smart metering will inevitably lead to increased use of economic incentives to change consumption patterns. There is a countervailing trend that governments protect customers by forcing utilities to offer only a few simple tariffs. Whilst a simple distinction between peak and off-peak rates may motivate some changes in behaviour, customers will not need to analyse lots of data to understand why they should prefer off-peak consumption.

In some cases, utilities are rolling out smart meters hand-in-hand with dynamic pricing – different tariff rates for different times of the day – in a bid to smooth out the peaks and troughs in demand.

Yes, but ‘dynamic’ pricing is nothing new. On the contrary, many utilities have long offered different rates for different times of day. And just as in telecoms, the prices paid by large wholesale customers will have been individually negotiated, with attention paid to opportunities to balance load relative to other customers.

And some consumers are also becoming producers of energy, feeding electricity generated by the solar panels on their roof, or a wind turbine on their land, back into the grid.

True, but this is very minor. The EU has the most aggressive targets for renewable energy, and is currently contemplating adopting a new target that 27% of energy should come from renewables by 2020. Microgeneration will only account for a tiny fraction of that target. Better insulation and improved energy efficiency of household devices will have a far larger impact than microgeneration.

These fundamental changes mean the complexity of the utilities business is rising fast. And, with rising complexity, comes greater risk.

Duh. But cVidya clearly cannot be trusted to give a fair or balanced analysis of risk. They foolishly believe that remote transmission of data makes it unnecessary to mitigate risks by inspecting meters at the customer’s premises. Meanwhile, they imply that an upswing in the popularity of solar panels will be a significant driver of risk.

Although the introduction of smart grids should improve energy companies’ operational efficiency, new infrastructure and new processes also open the door to new kinds of revenue leakage and fraud. In developed markets, billing errors, meter tampering and other forms of fraud mean between 1% and 5% of utilities’ revenue is already leaking away, while in developing markets that figure can be as high as 20%.

No explanation is given of these numbers, or where they come from. They seem very round, and very vague. This is unsatisfactory, because utilities already perform simple reconciliations of the total electricity/gas/water they supply, versus the total they bill. Consider gas and water in comparison to phone calls. Unlike the digital ephemera of telecoms networks, gas and water are physical things – you can literally compare how much you put in one end of a pipe to how much comes out of the other end. I do not believe Aginsky’s numbers are derived from actual revenue protection work already performed by utilities. That is not to suggest Aginsky is alone in stating this kind of nonsense. But repeating somebody else’s bombast will not turn it into truth.

The funny thing about these measures of leakage is that many countries have transparent laws that state expectations for how accurate utility meters must be. Even though I work in telecoms, I know that UK law requires my gas meter to be accurate to +/- 2%, and the accuracy of my electricity meter must be within +2.5% and -3.5%. If those are the accuracy tolerances of the meter, before considering anything else, then why is Aginsky talking as if a 1% ‘leakage’ is a big thing? And exactly how bothered are customers about being overcharged, when the law says my gas meter may over-record my usage by 2%, and my electricity meter can over-record my usage by 2.5%? I cannot tell if the numbers given by Aginsky include or exclude these unavoidable metering variances. Aginsky should have quoted these kinds of accuracy expectations, in order to explain the leakage numbers he gives. Instead, Aginsky has recycled the same kind of numbers that he has often used to frighten telcos. But like the boy who cried wolf, Aginsky’s technique stopped being effective after a while, and I do not believe utilities will be influenced by it.

Of course, the real issue for most utilities is not the current supposed accuracy or inaccuracy of what they measure, but the difficulty in estimating charges for usage between meter readings, and the difficulties in chasing payment from delinquent customers when there are legal restrictions on disconnecting services. But then, cVidya does not sell software that can help with either of those challenges.

With the transition to smart meters, the rate of leakage could rise even higher as utilities implement new systems and processes.

Leakage could rise? Of course it could. Or maybe it could fall. Leakage will fall, if utilities implement good systems and processes. I thought cVidya wanted assurance people to think proactively, and to prevent leakage before it occurs? It says a lot about cVidya’s disjointed strategy that they try to sell transformation assurance to telcos, but do not think to offer utilities a service that assures the new systems and processes they implement, at the time of implementation.

As well as damaging the utility company’s reputation, errors in bills may result in dissatisfied customers deferring payment, creating new credit risks, or even removing their smart meter, as has been the case in North America.

This is supposed to be about utilities, but Aginsky is just repeating his telco sales pitch without any thought. Utilities have always managed credit risk. Because most utilities are older than most telcos, they have been managing credit risk for longer than most telcos. If anything, telcos learned about credit risk from utilities, by hiring managers of credit risk from utilities. Utilities face credit risks, and will continue to face credit risks, irrespective of smart meters. In fact, one key argument is that smart meters will reduce credit risk, thanks to the continuous supply of usage information, and the end of estimated bills. Other credit risks will remain. People already complain about their bills. People already refuse to pay. Utilities already manage their bad debt, and manage their public image, but Aginsky writes as if utilities managers are simpletons who need to be told about the importance of both.

Widespread negative publicity about smart meters in a particular market could put an energy company’s entire smart grid programme in jeopardy.

This is hyperbole. Nobody is going to jeopardize billions of dollars of government-mandated infrastructure investment. In fact, negative publicity cannot even stop cVidya from producing marketing claptrap like this.

Moreover, deregulation has made it straightforward for dissatisfied customers to switch to another supplier.

Good point. But set this against the trend for increased regulation that only allows utilities to offer a small number of easily-understood tariffs. Utilities may prefer the choice to offer more complex tariffs, but if forced to keep tariffs simple, then bills will be easier for customers to check, and less likely to be incorrectly calculated.

If utilities can capture and analyse the data generated by smart meters effectively they will have a comprehensive picture of customers’ changing energy needs, enabling them to develop compelling new services…

Except that is very unlikely if governments restrict the utility’s freedom to offer varied tariffs.

But the energy sector doesn’t need to reinvent the wheel. In effect, utilities are becoming more like telcos

Everyone working in telecoms, or investing in telecoms, is worried that telcos will become more like utilities. Aginsky optimistically states that utilities will be more like telcos. Who is Aginsky trying to fool? Utilities spend a lot of time negotiating with governments. Do the CEOs of utilities think their companies will suddenly be freed from government oversight, and allowed to behave like telcos did during the dotcom boom?

In many cases, utilities’ existing systems lack the sophisticated methodology and smart algorithms that underpin the commercial Revenue Assurance and Fraud Management systems used by leading telcos.

Maybe Aginsky should explain why utilities need such sophisticated systems. So far, he has completely failed to do so. In fact, he has only revealed that cVidya has a very unsophisticated understanding of what utilities do, and the conditions under which they operate. He says they will change beyond recognition, implying they will be like the newer telcos in liberalized Western markets around the year 2000. Those were the conditions that gave rise to telecoms revenue assurance, and those conditions would suit cVidya. But there is no good reason to believe that smart metering is going to lead a sudden reconfiguration of utilities, and their business model. Governments in the countries that will first adopt smart meters are also showing an increased willingness to determine the retail prices that utilities will charge. Where governments are more relaxed about retail prices, it is because wholesale energy prices are falling.

Utilities are shaped by long-term forces that override Aginsky’s short-term thinking about crunching data. Those forces include the availability of natural resources, geopolitics, big infrastructure, social welfare, climate change, and public opinion. I think anyone who works in utilities already knows this. But then, I suspect this piece is not written for anyone who actually works in a utility, given I found it published on telcoprofessionals.com.

Eric Priezkalns
Eric Priezkalns
Eric is a recognized expert on communications risk and assurance. He was Director of Risk Management for Qatar Telecom and has worked with Cable & Wireless, T‑Mobile, Sky, Worldcom and others.

Eric was lead author of Revenue Assurance: Expert Opinions for Communications Providers, published by CRC Press. He was a founding member of Qatar's National Committee for Internet Safety and the first leader of the TM Forum's Enterprise Risk Management team. Eric currently sits on the committee of the Risk & Assurance Group, and is an editorial advisor to Black Swan. He is a qualified chartered accountant, with degrees in information systems, and in mathematics and philosophy.

Commsrisk is edited by Eric. Look here for more about Eric's history as editor.