Critical Concepts in Revenue Protection

Critical Concepts in Revenue Protection Leo P. Dalbec IURPA-NURPA Joint Conference Danvers,Massachusetts October 12, 2001

Introduction. • Rp-a set of universal concepts and values about metering accuracy & integrity requiring local business decisions for appropriate local application; • One size does not fit all; each of us must reshape practices to suit local needs; • Shifting utility landscape from a regulated model to a marketplace-driven model; • Expanded array of stakeholders exerting their influence on a traditional business; • New players bring with them a new set of expectations; • Deregulation, re-regulation and privatization changing the traditional utility landscape worldwide; • Competition has been reinterpreted the role of the meter; • Our abilities to adjust and to survive are being questioned; incumbency does not guarantee survival; new trends are often beyond are control; • Legal statutes have become woefully inadequate for lack of ongoing maintenance; and threaten our abilities to recover identified losses;

Introduction. • Commissions and Courts question the statute of limitations on recoveries; • Cost-cutting initiatives of all sorts have decimated our effectiveness and increased the exposure to our metering; • Our failure to make a convincing business case to senior management has often made our ranks a dumping ground for displaced employees, and the first group to fall to the cost cutting knife; • Complacency about all security, including metering, comes at a price; • Can we shift gears sufficiently to impact the changes being imposed upon us? • We need to rethink how we work and how we deliver our core services.

Demonstrating ‘added value’ of R.P. to senior management • Ineffective marketing; ongoing process • Tie ‘added value’ to objective benefit: cost performance ratios. • Identification and Recovery of revenue losses: • Operating costs (losses) reduction • Revenues increase • Recoveries receivables turned into cash flow • Unaccounted-for-losses (non-technical losses) reduction • Net earnings increase • Need for effective reporting of group activity. • Link group performance to annual benefit:cost targets. • Track benefit:cost performance history. • Tie non-technical-loss levels to annualized kwh/mcf increases.

Shifting ‘Stakeholder’ Landscape • New set of stakeholders who perceive latent worth in our industry. • Competitive players who were seasoned in the market place. • New set of expectations of all players. • Regulators gradually ceding control of the industry to the marketplace. • Competition increasingly replaces regulation.

Stable ‘stakeholder’ environment-IOUs • Customer reliable service at reasonable (fair) price; no choice. • Regulators advocate for reliability, fairness, and cost-of-service issues. fluctuating cost-of-service based rates. scope of jurisdiction: Gencos, Trancos, Discosd. • Stockholders healthy earnings; guaranteed rates of return. • Management served Genco, Transco and Disco as one company. exclusive franchise territories. efficient, reliable service at least possible cost. strict regulatory oversight. • Most successful utilities invested heavily in political capital, and anticipated the move to a more competitive marketplace by becoming least-possible-cost providers of utility services.

Shifting ‘stakeholder’ environment-IOUs • Customer reliable service; stable and competitive price; choice of providers. • Regulators modified roles with Transcos (TSP) and Discos (LDC); long-term fixed distribution rates (M&A driven); Gencos (ESP) first competitive platforms; disaffiliated; advocate for customers with old and new stakeholders. • Stockholders earnings dependent on efficiency initiatives rather than on guaranteed rates of return; • Management customer choice gradually eroding exclusive-franchise concept; premium on cost control; most efficient=most competitive; rate-relief options no longer exist; engineer cost out of operations with efficiency initiatives; partnering with providers and regulators to facilitate customer choice; interim role as provider of last resort; anticipate much diminished role of LDC in future. • ESPs competitive energy-services providers; competition-driven choice; contractual relationship with retail customers—choice; contractual basis with LDCs for sundry services; • TSPs competitive transmission-services providers; competitive choice; ‘for profit’ LTOs and RTOs; increasingly competitive and independent • MSPs competitive metering-services providers; provider of metering services by various stakeholders.

Stable/Shifting ‘stakeholder’ environment-Munis and Coops. • Customers reliable service; price stability; low cost without choice; • Stockholders pure cost-of-service rate structures; share in losses equally in the form of higher rates; benefit from efficiencies and recoveries equally-lower rates. • Regulators not regulated • Management accountable to Commission representing customers; customer oversight replaces regulatory oversight; efficiency initiatives mitigate cost structures; tax-exemt advantage; competitive options are few. • ESPs less appeal as alternate choice to customers; competitive-energy-supplier choice to groups of Munis or Coops. • TSPs competitive transmission-services provider in tandem with ESPs; services provider for local trans./distribution networks. • MSPs contract metering services to minimize O & M costs; provider of metering services shared by various stakeholders.

Stakeholder Expectations. • New stakeholders rewriting the rules of delivery of electric service; seek access to our customer base to offer new products and bundled services; premium on metrics and real-time metering for reliability of load-estimation/settlement processes; new publics with legitimate interest in metering and related infrastructures; expanded metering at more delivery/inter-tie points creates increased exposure and liability; marketplace remedies to disputes via litigation.

Sealing and Locking Practices. • Worldwide, a wide range of utility practices with seals and locks. • None, at all, to complete lockdowns of metering equipment. • Universal values nevertheless require local decisions and applications. • Preventive measures first to fall to cost-cutting initiatives; difficult to document/measure their benefits; soft savings and deterrence not easily measured, and do not sell well. • Complacency about meter security comes at a price. • Developing countries: • Drivers: privatization, electrification and nurturing cultures of payment. • Requisites: clearly defining boundaries; developing concepts of private property. • Seals and locks: symbols of new limits; educational function. • “good fences make for good neighbors” Robert Frost.

Sealing and Locking Practices. • Wholesale metering: • Inter-tie points; delivery points and substations: security long overlooked; • Need Same levels of vigilance and protection as retail metering assets; • Exposures and risks considerably greater; liability as well; • New publics with vested interest in our metering; • Design greater degree of protection in substation construction. • AMR deployments: • Expensive ventures prompting efforts to engineer cost out projects; • Increased exposure and risk with absence of monthly review by field force; • Minimum protection measures: seals only; locking devices too costly; • Complacency and shortsightedness about preventive measures increase risk levels.

Automated Meter Reading (AMR) • Deployments designed to engineer O&M costs out of distribution services; • Protective functionalities of AMR systems are limited and often overstated; • Afford a measure of protection from tampering, but defenseless against service bypass; • Fixed-network systems offer most promising levels of protection from tampering; • Mobil AMR systems less effective, requiring greater home-grown modifications to effectively interact with CIS, CSS, OMS to deliver reliable error-flag reports; reliable flag reports can be achieved-high maintenance and labor intensive; *commonplace to disable error-flag functionality as a management practice. • Protective-strategy modifications; • Difficult to find appropriate substitute for motivated and well trained field force; • Imprudent to place all eggs in one basket;

Automated Meter Reading (AMR) • Need a selection of proven proactive initiatives: • Post-deployment field audits • Include AMR meters in annual sample testing • Include AMR meters in annual field audits • Enlist support of commissions for aggressive measures when tampering/bypass found: • Seek tariffs to install high-level security locks at customer expense • Seek ‘Terms and Conditions’ that provide for discontinuance of service and relocation of service at customer expense • Encourage commissions via interactive dialogue to support added security measures as a result of lowering operating costs; fix responsibility on customer

Critical Issues and Trends. • The meter • Seen as “a tool for competitive advantage,” not only as the cash box of the utility; • Viewed by stakeholders as the access portal to the consumer; • Interest is less about meter ownership, and more about control of meter data; • Premium on metering accuracy and integrity for reliable and true price signals, and accessible real-time data to capture the competitive opportunities of the market place; • The consumer is no longer the traditional passive player in this equation; • Losses of data, determinants and revenue erode every stakeholders competitive edge; • Tracking trends in tampering-related losses v. service-bypass-related losses; • Can metering products meet the new challenges of the market place? • A troubling observation…….

Critical Issues and Trends. • Legal statutes and Recoverability. • Dearth of effective legal remedies….that reflect the present-day realities of the energy-delivery industry; • Need for amended statutes sufficiently encompassing in their scopes, and robust in their sanctions… to provide deterrence ant to expedite the loss-recovery process at the least possible cost; • We need to better understand, and to better promote, the ‘product v. service’ issues than too often handicap effective recovery efforts; • When referring to gas, water and electricity, as the property of a utility, we need to add language, or in the control of a utility, if we are to correctly reflect product ownership in our business; • Robust sanctions, reflecting the impact of larger losses, provide deterrence than the prospect of multiple-damage penalties. • Long-term recoverability of losses has come into jeopardy as Courts, Regulators and the legal community question/disallow the long-standing tenets of utility-rate doctrine predicated on the doctrine of unjust enrichment;

Critical Issues and Trends. • And issues of more-abbreviated statutes of limitations present even greater challenges; • How do we demonstrate credibility and due diligence in the Courts, when we must explain limited locking and sealing practices, the discontinuance of proactive initiatives, and, in some cases, the dissolution of Revenue-Protection units in the name of cost control? • How prepared are we for the road ahead?

Conclusions. • The new stakeholders in the energy-delivery business will give us an expanded constituency to serve; • To compensate for the drastic of our internal reporting networks---field forces---we must pursue replacement security options as proven locking/sealing practices, proactive initiatives, and improved AMR security functionality; • Frugality with meter locks and seals at AMR deployment can only prove to be foolhardiness in the long-term; • To remain effective at loss management, Revenue Protection must adopt high-value proactive initiatives, and not only respond to reports of problems; • The recovery limitations imposed by the regulators and the Courts suggest due diligence and well-planned proactive measures; • Increasingly , core customer services will be limited to those provided by call centers; • Increasingly, as well, metering services are being seen as shared services benefiting an expanded constituency, and a prime candidate for an affiliated unregulated status;

Conclusions. • If one adopts the premise that Revenue Protection applies the same metering sciences to integrity objectives rather than to production goals, than one mike make the case that R.P. is an equal candidate for shared services in an unregulated landscape;scientific objectivity could then replace the politically-charged work scene for both metering sciences and Revenue Protection; • In the shared-services model of metering and R.P., meter ownership becomes less of an issue to the MSP than does exclusive control, the sine qua non of any expectations of reliability and integrity; • Before we change our organizations, however, we must change ourselves; • The premium that we place on privacy must be balanced with our concerns for security; • As we rethink how we work and deliver our core services, we must maintain our sprit of self-audit, remain forward-thinking, and seek innovative solutions to business issues; • The marketplace will replace the commissions to give us direction.

Critical Concepts in Revenue Protection