Weekly Brief

Creating Value for Utilities in the Cloud

Rodger Smith, SVP & GM, Oracle Utilities

Rodger Smith, SVP & GM, Oracle Utilities

The utilities industry is in the midst of significant transformation, experiencing change at a more rapid pace than at any other time in its history. Utilities’ enduring success in the face of these transformative changes requires the use of new technology approaches to better facilitate agility and innovation while at the same time decreasing upfront risk.

With increasing frequency, utilities are looking to cloud technologies as an attractive alternative to traditional, on-premises software delivery. The need to improve utility flexibility and ensure appropriate security measures are in place, as well as to keep pace with transformational changes, are key drivers for utilities investing in cloud-based software. Cloud’s promise also aligns with key business goals, including the need to increase efficiency while reducing costs.

Why Utilities are Moving to the Cloud

But how far are utilities currently willing to go with cloud technologies?

Many utilities have been using cloud technologies for some time to handle their financial, human resources, and other systems of record. More recently, utilities are now considering both SaaS or software-as-a-service (cloud-based applications with more standard offerings under specific terms), and hosted solutions (characterized as having much more flexibility and customization capabilities) to handle other parts of the enterprise, as well.

"Cloud’s promise also aligns with key business goals, including the need to increase efficiency while reducing costs"

Reasons for investing in cloud technologies vary from utility to utility, depending upon their particular needs, but keeping pace with technology changes and improving their flexibility are the key drivers most often cited, as well as increasing their focus on utility core competencies and reducing their spending on technology infrastructure.

Key Areas for Cloud Investment

As utilities begin to look for ways to incorporate cloud technologies, a good place to start is with base applications that are standardized, and with areas of exploration or new ideas.

Standardized applications are those that are critical to running a business, but do not vary much from one company to the next. Examples could include financial, human resources, and payroll applications, and even some critical applications such as the customer information system.

Areas of exploration refer to those applications and projects that are more focused on quickly evolving, new ideas or areas that require rapid innovation. New ideas projects are often launched in a pilot mode to allow the utility to try out an idea, quickly iterate, and retain some flexibility to change course along the way. For these areas, cloud offers the speed and flexibility to “play in the sandbox,” and then quickly changes course when necessary.

Other areas indicative of a cloud fit include applications or projects that need for a low-cost solution and/or a need for customization, applications or projects in which the utility lacks internal expertise, or areas in which the business model is undergoing significant changes.

Legacy systems and next-generation technologies alike are ripe for a cloud approach. While many of the technologies that utilities are taking to the cloud today revolve around transformational grid efforts and next-generation technologies—areas like meter data management, big data analytics, and distribution automation and network management—utilities are also seeing opportunities for transformation in more traditional areas of their organizations. These areas often leverage legacy applications that are becoming increasingly complex and expensive to upgrade and maintain, where the on-premises ownership experience—keeping pace with fixes, patches, platforms, and upgrades—is cumbersome at best. By replacing such legacy systems as the customer information system, mobile workforce management, enterprise management, etc., with more nimble, flexible SaaS applications that address evolving business processes in these areas, utilities can free up both employee time and utility resources to focus on more strategic initiatives.

Categorizing SaaS investments

Utility regulators, too, recognize that cloud technologies are becoming an integral part of utilities’ processes and operations. Utilities are one of the most heavily regulated industries in the world, which means that utility adoption of the cloud will be inherently shaped by utility regulators. The challenge these regulators now face is establishing how to continue to protect the public interest while better enabling utilities to keep pace with other businesses and with rapid technological change.

Each regulator has the authority to determine what goes into a utility’s rate base in his or her jurisdiction. In the United States, regulators use the Federal Energy Regulatory Commission’s Uniform System of Accounts to categorize investments as operating expenses or as capital expenses, which are added to the rate base. Typically, on-premises software has been classified as a capital expense, as utilities purchase it just as they would build/purchase a power plant. Software-as-a-service offerings, on the other hand, have typically been perceived as operating expenses. However, there is a growing precedent for including cloud-based software in capital accounts.

For example, the New York Public Service Commission ordered in May 2016 that cloud investments, which are prepaid, will earn a rate of return. This builds off of long-standing practice in which prepayments are added to the rate base. And, in Illinois, a number of utilities and software companies recommended that the Illinois Commerce Commission treats cloud computing agreements as intangible property. In this scenario, the cloud software contract is similar to a patent or copyright.

Even more recently, in November 2016, the National Association of Regulatory Utility Commissioners (NARUC) passed a resolution stating that it “recognizes that utilities best serve customers, society, the environment, and the grid by making computing resource procurement decisions regardless of the delivery method or payment model; and...that NARUC encourages State regulators to consider whether cloud computing and on-premise(s) solutions should receive similar regulatory accounting treatment, in that both would be eligible to earn a rate of return and would be paid for out of a utility’s capital budget.”

Taking the First Step

Each utility will have different needs and priorities, so a business area or application that might be an excellent cloud option for one utility may not be a priority right now for another. Rather than assessing these needs and priorities in a piecemeal, ad hoc fashion, it’s imperative that a utility build a comprehensive, integrated cloud strategy and roadmap, and assess priorities within this comprehensive strategy, keeping in mind cost savings potential, the ability to standardize a process, the availability within the utility of the necessary expertise, and the scalability of the technology to the project’s expected growth.