That Was Then . . .
When the energy industry IT spending boom began to hit the millennium wall, it hit harder than other industries because of an unholy trinity of converging trends. Obviously, one was the dotcom meltdown: suddenly, CEO's began to doubt whether the latest technology bells and whistles were competitive must-haves. Then, at the same time, their CIO's began to report worrisome budget overruns and delays in implementing the giant enterprise application suites that seemed so necessary only a short while before. We’re not sad to see these two pigeons coming home to roost: wasting money isn't good for business.

But the third factor was unique to the energy business: the California re-regulation and Enron debacles froze, or in some cases even reversed, US retail open market deregulation. Since a big chunk of IT spending is about connecting utilities to their trading partners and clients, when deregulatory momentum faltered, so did IT demand.

Despite this pull-back, utilities still account for about 5% of all US IT expenditures, and the industry’s proportionate share of the US IT total continues to grow. IDC claims that US utility spending on external IT products and services totaled $1.3 billion in 2002.

This Is Now
After their binge IT buying, many large organizations were left with two problems: first how to get the enterprise systems they had recently installed to work; and then how to integrate them so that they effectively exchange, extract or present data. Both challenges may be characterized as a drive to extract ROI from prior investments.

Now, several years and hundreds of millions of dollars later, most utility enterprise IT systems are in fact finally delivering the functionality for which they were originally purchased. This frees up these utilities to pursue smaller and more controllable -- but bigger-bang-for-the buck -- projects that further exploit the newly available data. Good examples are GIS applications and related technical consulting projects, often efforts to make legacy system data more useful and actionable.

In addition, today’s economic recovery has been driving increased utility demand, sparking a cautious re-emergence of “animal spirits” among utility CEO’s and CIO’s.

IT Demand by the T&D Segment
Utility asset management and maintenance projects are well-fitted to ROI analysis and frequently show clear financial promise. Particularly attracted to such applications are asset-intense transmission and distribution (T&D) companies who, according to AMR Research, are now spending significantly more than other energy industry segments on IT infrastructure: in 2000 and 2001, about 4% of revenues. In fact, some analysts expect T&D company IT spending to increase by about 15% annually through 2007.

This is understandable: T&D executives are facing the challenge of managing an aging infrastructure in the face of demand driven not only by rising economic activity, but by the ever-increasing use of energy-intensive electronic devices. Also, years of regulatory oversight and environmental special interests have suppressed US distribution infrastructure growth and maintenance, forcing T&D executives to consider ways to manage limited assets better, something that IT increasingly promises.

For example, coincident with the increasing visibility and importance of utility asset management, IT vendors are also realizing technological advances in automated equipment and load monitoring, bringing more assets within the realm of IT system coordination.

Over There
While domestic utility retailer IT demand may have faltered, some of the most exciting software applications are surfacing at utilities in European and Asia/Pacific regions. In addition to responding to continuing deregulation -- again sparking IT demand by requiring energy players to do business with more suppliers and customers more efficiently -- overseas utilities are experimenting with increasingly sophisticated network balancing and P&L analytic functions that allow them to manage their business closer to real-time. A leader in such forward-looking IT usage is National Grid Transco. Ironically, many of these innovative applications being taken up overseas have been created and sold by American vendors forced into foreign markets to escape stateside deregulatory doldrums.

Meanwhile, Back Home
With these trends in the background, the pace of utility IT vendor consolidation (M&A) has clearly picked up. A few examples among many are Itron’s purchase of meter data management company Silicon Energy and load forecaster RER in an effort by the buyer to add more value to its automated meter data flows; and giant transaction processing vendor SunGard’s purchase of Caminus, a utility transaction management solutions provider, as well as of HTE, a public/utility sector applications vendor.

This flurry of transactions comes on the heels of a long M&A slumber in energy IT during which time a batch of new entrepreneurial IT firms attempted to exploit specialty energy application niches, often financed by venture capitalists. Those firms that focused on energy trading drew a bad hand, but many of those who specialized in utility operations (some examples are complex transaction management and load shape analysis) have prospered or at least survived. Now these survivors, no longer able to access cheap venture capital money, have become more receptive to buyers’ overtures.

Apparently, Itron, SunGard, Alliance Data and the other buyers of energy IT vendors believe that the slowed pace of US energy deregulation is not an obstacle to the long term prospects of profitably serving the computing needs of the huge and global energy business. Prepare yourself for Act II of the energy IT industry.

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Copyright 2004 CyberTech, Inc.