Can an investment in AMR be justified?

Most utilities that have AMR have made the decision for reasons other than return on investment. If you ask why, some will tell you – off the record – that they simply wanted to avoid the headaches associated with managing the manual meter reading process. Managing this workforce can be extremely challenging, due to expansive geography and turnover.

In other cases, the utility had a very low accuracy rate or high estimate rate as a result of problems with gaining access to its metering equipment. For example, in Florida our accuracy rates are in the 99% range. In the north-eastern United States, it is typical to find that some utilities only read 80% of their meters every month. The AMR business case may be more attractive financially if utilities can improve accuracy and cash flow. 

I have worked with many of my counterparts, industry consultants and technology providers to gain a better understanding of the business model for metering automation. One thing is clear – many formidable players have tried and failed to justify AMR systems for one reason or another.

UNDERSTAND YOUR COSTS

Most business cases start with process cost. By making a fair assessment of all costs associated with the core function – meter reading – you can determine what avoided cost applies to the deployment of AMR; in other words, what the difference in cost is between manual meter reading and AMR. For the most part there is actually added cost, so utilities are forced to find ways of generating new revenue with AMR systems.

Three years ago I travelled around the country interviewing utilities that had AMR trials or pilots underway. The industry was in turmoil, and everyone wanted to know what deregulation meant at the meter. Vendors and outside interest groups were suggesting that the meter was the ‘gateway’ to the customer; a gateway that would enable the delivery of new products and services and generate millions of dollars in new revenues. 

HANDS-ON EXPERIENCE AT FLORIDA POWER

As a result of this industry movement, we believed it made good sense to invest in a research trial to gain some experience with AMR systems. In late 1996 we developed a system requirements plan and launched our own version of AMR in Orlando, Florida. The system, developed by Scientific Atlanta, was intended both to read meters and to provide communication between the customer and the utility. To do this access to a cable TV network was needed. We were able to secure an agreement with a network provider, and test the broad functionality of our AMR system.

The system performed to specification – although I must confess that new problems come with deploying technology which can be as difficult to manage as the workforce! We tested features such as remote meter reading, real time pricing, outage detection, in-home appliance control and sub-metering of appliances. During the year-long trial, a team of financial analysts began developing business models. Focus groups were assembled with customers participating in the trial. It became apparent that new revenue had to be generated to justify a return on the AMR investment, no matter how you presented the financial picture. In short, a meter reading is just that: for now, anyway! The only conclusion I can share is – do it the cheapest way possible.

There were other issues that stalled the business model. Most customers saw no value in the information AMR systems can provide. They simply wanted an accurate bill, a fair price and reliable service, and they seemed reluctant to engage in the use of sophisticated devices such as programmable thermostats and load profile software. Sub-metering their home also provided little value; the information was boring to the average consumer. 

The most interesting finding involved real time pricing and load control. We offered various pricing schemes, but saw little change in energy patterns. In fact, our trial customers were not motivated to make any significant changes in their lifestyle in order to save $10 on a total bill of $100. It is often held that large investments in technology, which result in saving consumers money, will give a utility a competitive edge. I question whether this is valid. Many times we march off in search of a complicated answer to a simple question. 

Outage detection might be another misunderstood benefit associated with AMR systems. Most consumers believe that utilities already know when their power is out, and are therefore unwilling to pay for outage detection as a distinct product. Outage management today is effective, and there may only be a small gap for operational improvement. I question whether the customer will perceive enough value from this investment to give the utility a competitive edge. If the majority of your customers believe reliability is a concern, there are other investment strategies to consider. 

SOME DISADVANTAGES

I think it is important to understand that earlier attempts to deploy advanced AMR systems had some distinct disadvantages. First, most utilities do not own ‘last mile’ communications infrastructure. We have to rely on, and pay market price for, the communications medium used to transport meter information. And this is not a one-time cost; the need for communication is ongoing. Secondly, although the fundamentals of the advanced AMR systems were sound, the market has not responded. A gap exists between what consumers want and what we need to sell to justify an investment in AMR systems. Consumers have not even had a chance to react to choice yet, much less form an opinion about a kilowatt-hour or how often we read their meter.

We also need to consider the hard cost of the metering equipment itself. Meter manufacturers have done an outstanding job applying technology as meter equipment functionality continues to expand while prices remain competitive. One of the most promising advanced AMR interface devices for residential applications had a target market price of $250. This did not include the meter or communications network costs. Compare that to a new single-phase residential meter that may be priced at less than $35, and you begin to realise how important AMR’s ancillary benefits become. Yes, there are more inexpensive and less functional methods of automation, but it is difficult to overlook the additional metering equipment cost associated with any system.

If you follow this discussion full circle, then you are back to just reading meters. Now AMR can play a role from an operations perspective if it makes financial sense. The more interesting angle here is that most fixed networks being deployed today are being started from revenues to provide meter reading.

JUSTIFYING AMR

If you look closely at who is deploying AMR, you will find a number of new approaches and investment strategies. Creative outsourcing through O&M contracts, synthetic leases and back-end loaded financial tools can help you come up with the right answer in your business case. Clearly, the network providers view the meter reading market as a huge anchor tenant to justify network construction. I believe the network strategy encompasses a larger portfolio of telemetry based services – vending machine and copier machine monitoring and so on. This is not to suggest that there is anything wrong with deploying an AMR system. My recommendation is that you first make sure it works, and that you can afford to lose control of this piece of your business.

Of course, there are other niche applications where AMR may make financial sense. For example, multi-utility (gas, water and electric) applications leverage meter density – important when the number of meters per square mile plays a key role in achieving process efficiency and cost justification.

Many utilities also view AMR as a strategic step toward lowering cost, increasing service and preparing for choice. I remain uncertain as to what deregulation will bring, but I do know that we must continue to provide value to our customers and to invest wisely. If customers perceive there is a value in daily meter reading, or if it becomes an imperative to direct access, then AMR may be necessary. If not, we must make sure that the lower costs driven by AMR systems are passed on to the customer.

Another viewpoint concerns the so-called ‘competitive model’ for the metering business – the question of whether metering is a profitable business today, and whether it can grow in the future. It makes sense to invest if the business is able to grow through automation-enabled services or product line extensions. On the other hand, some industry participants believe that complex metering data and real-time information for customer accounting purposes and direct access will force the industry to automate.

In both cases some strategic value is placed on AMR, thereby justifying the decision to invest in this technology. As things stand today no-one can discredit either argument – but financial risk and questionable returns are possible in both scenarios.

THE ROLE OF METERS

I believe the industry has been under a lot of pressure to do something with the metering piece of the business – but the possibility exists that metering and related operational issues are not totally clear. Do we understand the role that metering plays in the value chain linking utilities to their customers? While market research tells us that the customer views the meter as a means to provide an accurate bill for service rendered, some consultants recommend that we leap outside our core capabilities and align with a strategic partner to expand that role. What products and services will the new metering process offer? How will the utility benefit? Does the partner have a complementary strategic focus? And, most important, can our customer make the same leap? These are questions for discussion – and only time will provide the answers.

A prudent deployment of any AMR system will most likely encompass a mix of telecommunications architecture, while the features associated with ‘behind the glass’ technology (outage detection, interval data, theft detection and so on) become a function of what you can afford and what the tangible benefits are.

From a regulatory perspective, I anticipate that meter reading will be unbundled on the bill. I believe that third parties will be allowed to provide metering services as well. However, there has been no indication that meter reading frequency will change drastically.

I think most people believe that some profiling information will be required for larger customers, but that residential information requirements will continue on a monthly basis. For decades, utilities have been metering commercial and industrial customers on an interval basis for one reason or another. If this information becomes a requirement for every customer, I believe it can be accomplished with cost effective technology available today. The real issue will be how we move, present and manage the vast amounts of data we will create.

Long-term, I think meter reading and billing will become a ‘cost to do business’ and the larger incumbents will most likely resell their services to marketers and agents of the customer. Which doesn’t mean that AMR is dead – niche applications will continue to pop up wherever it makes business sense.