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15
Electric Utilities and the NII:  Issues and Opportunities

John S. Cavallini and Mary Anne Scott
U.S. Department of Energy
Robert J. Aiken
U.S. Department of Energy/Lawrence Livermore National Laboratory

The electric utility industry is immersed in a changing environment, and deregulation is a key pressure driving this change. Careful strategic planning is needed to determine what the future business of the electric utilities will be, and there are concerns about the utilities' competitive status. Embedded in this restructuring evolution and coupled to the growing need to provide more in supply-side and demand-side management is the opportunity for the electric utility industry to become a significant player in the deployment of the national information infrastructure (NII). As an Electric Power Research Institute (EPRI) study concluded,

Energy production and delivery will be tightly coupled withtelecommunications and informationservices for the foreseeable future. In order to control access to thecustomer and prevent erosion of theircustomer bases, utilities will be driven to become more aggressive indeploying both supply-sideinformation technologies for improved operation of their generation,transmission, and distributionfacilities; and demand-side Energy Information Services (EIS). Thoseinformation services will enableutilities to provide higher quality services at lower cost with lowerenvironmental impact, and to givetheir rate payers better control over their power usage 1R.

The entry of the electric utility industry into the telecommunications arena, which is driven by the need to provide energy information services for the generation, delivery, and utilization of electric power, can affect competition in this market and contribute to the goal of universal service. However, significant policy implications must be addressed.

An Industry in Transition

After two decades in which competition in the energy market increased somewhat, the Energy Act of 1992 provided legislative authority to the Federal Energy Regulatory Commission (FERC) to mandate open wholesale transmission access. As a result, there is an even greater imperative for the electric utility industry to reexamine its business strategy. Utilities must determine how to remain competitive as this historically vertically integrated monopoly becomes restructured into focused organizations that will compete in the marketplace for energy supply and delivery services. The overall issue is how to provide high-quality energy cost effectively, while reducing the need for the capital investment of new generating capacity, cutting back on the depletion of nonrenewable fuels, and reducing emissions. Coupled with these elements is the need to focus on customer service and satisfaction. On an individual utility basis, the issue is deciding what part of the market to focus on, how to maintain and build the appropriate customer base, and how to maintain and increase market share. The utility choice of business lines includes generation, transmission, distribution, and value-added services, and these businesses may or may not be segregated into separate subsidiaries.

In a strongly regulated environment, industry has little incentive to be innovative—there is a vested interest in proven technology. The prevailing philosophy is that it's okay to be Number Two and that there is no need to lead the pack. However, the competitive, nonregulated marketplace encourages innovation, and industries adopt strategies to manage rather than avoid risks in their use of new technologies. The electric utility industry is



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Page 123 15 Electric Utilities and the NII:  Issues and Opportunities John S. Cavallini and Mary Anne Scott U.S. Department of Energy Robert J. Aiken U.S. Department of Energy/Lawrence Livermore National Laboratory The electric utility industry is immersed in a changing environment, and deregulation is a key pressure driving this change. Careful strategic planning is needed to determine what the future business of the electric utilities will be, and there are concerns about the utilities' competitive status. Embedded in this restructuring evolution and coupled to the growing need to provide more in supply-side and demand-side management is the opportunity for the electric utility industry to become a significant player in the deployment of the national information infrastructure (NII). As an Electric Power Research Institute (EPRI) study concluded, Energy production and delivery will be tightly coupled withtelecommunications and informationservices for the foreseeable future. In order to control access to thecustomer and prevent erosion of theircustomer bases, utilities will be driven to become more aggressive indeploying both supply-sideinformation technologies for improved operation of their generation,transmission, and distributionfacilities; and demand-side Energy Information Services (EIS). Thoseinformation services will enableutilities to provide higher quality services at lower cost with lowerenvironmental impact, and to givetheir rate payers better control over their power usage 1R. The entry of the electric utility industry into the telecommunications arena, which is driven by the need to provide energy information services for the generation, delivery, and utilization of electric power, can affect competition in this market and contribute to the goal of universal service. However, significant policy implications must be addressed. An Industry in Transition After two decades in which competition in the energy market increased somewhat, the Energy Act of 1992 provided legislative authority to the Federal Energy Regulatory Commission (FERC) to mandate open wholesale transmission access. As a result, there is an even greater imperative for the electric utility industry to reexamine its business strategy. Utilities must determine how to remain competitive as this historically vertically integrated monopoly becomes restructured into focused organizations that will compete in the marketplace for energy supply and delivery services. The overall issue is how to provide high-quality energy cost effectively, while reducing the need for the capital investment of new generating capacity, cutting back on the depletion of nonrenewable fuels, and reducing emissions. Coupled with these elements is the need to focus on customer service and satisfaction. On an individual utility basis, the issue is deciding what part of the market to focus on, how to maintain and build the appropriate customer base, and how to maintain and increase market share. The utility choice of business lines includes generation, transmission, distribution, and value-added services, and these businesses may or may not be segregated into separate subsidiaries. In a strongly regulated environment, industry has little incentive to be innovative—there is a vested interest in proven technology. The prevailing philosophy is that it's okay to be Number Two and that there is no need to lead the pack. However, the competitive, nonregulated marketplace encourages innovation, and industries adopt strategies to manage rather than avoid risks in their use of new technologies. The electric utility industry is

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Page 124 moving toward the latter and as such will be forced to consider the opportunities offered through telecommunications and information services to a much greater extent. As is discussed below, this is fortuitous for the deployment of the NII. It supports the vision that it is possible to create an information infrastructure and the tools to support smart energy decisions by all consumers and lessen the U.S. balance of payments and dependence on foreign energy sources. Many electric utilities have extensive telecommunications facilities that they use for conducting their business—maintenance and operation of their generation and distribution systems to ensure reliability and quality of service to their customer base. But some utilities rely on services provided by telecommunications providers. Important assets that utilities bring to the table that could be used in providing telecommunications services for themselves or others include extensive rights-of-ways extending to businesses and residences, a ubiquitous presence in residential and business locations, and extensive system facilities (such as conduits, poles, transmission towers, and substation sites) that could be used in telecommunications networks. The FERC recently announced a Notice of Proposed Rulemaking (NOPR) that outlines the mandate for the electric utilities to open their transmission facilities to all wholesale buyers and sellers of electric energy 2R. Included in the NOPR is a notice (RM95-9-00) of a technical conference on "real-time information networks" (RINs) that would give all transmission users simultaneous access to the same information under industry-wide standards. Thus it is clear that within a relatively short time frame, the need for this information system and telecommunications service will directly affect the 137 utilities required to open up their transmission facilities. The Organization of the Electric Utility Industry There are three main categories of electric utilities today—the investor-owned utility (IOU), the municipal utility, and the rural cooperative. A fourth, often-discussed utility is the registered holding company (RHC), a subcategory of investor-owned utilities. These are the multistate, investor-owned holding companies that must be registered with the U.S. Securities & Exchange Commission (SEC) under the Public Utility Holding Company Act (PUHCA). Reform of this act is being considered. When the electric utility industry was born late in the nineteenth century, it appeared first in the form of IOUs with the corresponding corporate charters shaping its existence. As electric service spread and came to be viewed as a necessity rather than a luxury, public discontent grew with the selective nature of the coverage provided by the IOUs. By 1900, many cities and some counties had created a municipal utility as a unit of the local government, with the charter to provide service to all its constituency. Financing was primarily through tax proceeds and future system revenues. Later, during the New Deal, the rural cooperative was born as a customer-owned, not-for-profit membership corporation. This progression of organizations was driven by requirements of customers and (to some extent) strategic objectives of the industry. This progression continues today, albeit in a somewhat different form. About 95 percent of the U.S. population is served by the electric utilities 3R. Of these customers, 76.4 percent are served by IOUs, 13.7 percent by municipal utilities, and the remaining 9.9 percent by rural cooperatives 4R. Few can choose their supplier of electricity—in most cases it has to be the local provider. However, the possibility for options in choosing a provider offered through what is referred to as "retail wheeling" could make more competitive choices available
5R. Utility Authority with Respect to Telecommunications Each utility organizational type functions differently within regulatory environments that vary according to jurisdictional boundaries. As discussed extensively in a report examining these issues, all have legal authority with respect to telecommunications to build infrastructure and to deliver at least some telecommunications-based services related to the delivery and consumption of energy 6R. It is legally sound, though possibly contentious, for a utility to build the facilities needed to communicate with its customers and possible suppliers and to develop the information services needed for effective energy management. However, the reaction of regulators and

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Page 125 competitors could be negative should the utility attempt to exploit the excess capacity created by using this infrastructure. The utility has at least three strong arguments to counter any challenges and support its position: First, since utilities have clear rights to bring such facilities andenterprises into being, theyhave considerable leverage with regulators and competitors alike to achievenew arrangements thatacknowledge the utilities' rights and interests and build upon them. Second, since utilities have undeniable rights to read their own electricmeters throughtelecommunications pursuant to their existing authorities, they may also haveFirst AmendmentProtections…to send any information they wish over their wires.… Finally, the nation's need to finance construction of the NII and make ituniversal gives electricutilities a compelling reason to gain regulatory favor for the use of andprofit from their excesstelecommunications capabilities 6R. Of these arguments, the final is the most compelling, because it provides leverage that can further the goal of universal access for the NII, especially in rural areas. The cable industry and telecommunications providers are less likely to provide the necessary infrastructure in rural areas because of the low-density customer base. Benefits of Energy Information Services There are several characteristics of energy supply, distribution, and consumption that can be and have been exploited to realize efficiencies and energy savings. The use of telecommunications-based information services could potentially enhance efficiency and savings substantially. From the industry's perspective there are many benefits to be accrued from the application of both supply- and demand-side information services. From the supply side, real-time information permits a shift to less conservative operations. Smoothing of peak power loads is possible, and spinning reserves can be reduced. Increased information can lead to reduced energy theft. Load balancing between utilities is feasible. Meters can be read remotely, and remote control of service is possible. Most importantly, power can be used more efficiently, reducing the need for new generating facilities. For example, linking electronic sensors and automated control systems along transmission and distribution lines offers the possibility for applications such as the optimization and brokerage of dispatch and emissions credits, automatic meter reading, and remote service control. Similar deployment could be made in a commercial building with transmission to the utility of detailed information on end-use energy consumption, along with temperature and other relevant measurements. The analyses of such data could produce models that could be applied to improve utility load forecasting, improve building energy models, improve analysis of building energy efficiency, and diagnose electrical system problems in the building. Energy consumption varies with the consumer as well as the time of day. Residential, commercial, and industrial sectors have differing requirements. The use of real-time pricing (RTP), which provides a direct relationship between the cost of electricity and its demand, can provide an incentive to encourage customers to conserve power when demand (and hence cost) is highest. This choice gives the customer a reasonable amount of discretionary control. The use of direct load management involves direct utility control of customer appliances to reduce consumption during periods of peak demand. Target appliances include those used for electrical heating, air conditioning, and hot-water heating. The demand-side management approach with the most stringent time response requirements is rapidly curtailable loads (RCL). Load must be shed within 20 seconds or less. Only large commercial and industrial customers currently have interruptible power tariffs. Customer applications are generally referred to as demand-side management (DSM). A more comprehensive term, energy information services (EIS), is used when DSM is coupled with remotely provided information services. Although each of these approaches (as well as others) is currently being used, the benefits derived can be enhanced with the increased application of the evolving information and telecommunications technologies.

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Page 126 Issues and Approaches The pressures of increased competition and rapidly evolving technology converge forcefully enough to mandate that utilities develop robust business strategies. There are also compelling arguments to justify the consideration of public policy issues related to electric utility involvement of the electric utility in an effective deployment of NII. Those arguments are tied to economics, technology, and regulatory issues. Utilities, legislators, and the public are struggling with the notion that utilities could provide the ''last-mile" energy service capability as well as more general NII access to the consumer, either competitively or together with the cable and telecommunications services sectors. Should the electric utilities provide the last-mile access to support their energy services requirements, only about 5 percent of the fiber-optic network capacity would be needed to satisfy that requirement. The excess capacity could be leased or sold to other information service providers, subject, of course, to appropriate regulatory provisions. All these elements are important to the vision for the NII wherein deployment is accomplished economically and equitably in an open, competitive marketplace and with universal service assured. Economic Issues Since electricity is fundamental in some way to every product and every service in the United States, it is not unexpected that the cost of electricity should have an economic impact. Consistent cuts in real electric power costs during the 1950s and 1960s were a factor in economic growth. The following decade saw a reversal in that trend, with real prices for electric power increasing. Energy information services offer the means to help reduce total energy costs. Summarizing the benefits discussed above, total energy costs can be reduced through (1) improved operating efficiency, safety, and productivity of electric utilities; (2) optimized power consumption, reduced energy costs, and improved energy efficiency for customers; and (3) deferral of capital investments in new generation, transmission, and distribution facilities, and minimization of environmental impacts. In addition, there are at least two other significant effects with positive economic implications: (1) the creation of new energy-related businesses and jobs, and (2) new growth opportunities for utilities as well as for other sectors of the economy. Finally, telecommunications facilities and services provided by the electric utility that did not exist before would be available to support the emerging information infrastructure. These benefits can be illustrated quantitatively by economic research analyses, by proposed utility projects and their projections, and by utility projects in operation. In a plan filed by Entergy, Least-Cost Integrated Resource Plan—A Three-Year Plan, with several public utility commissions in its service area, that utility proposed a Customer-Controlled Load Management (CCLM) project that would eventually serve over 400,000 customers. Its projections showed a cost/benefit ratio of 1 to 1.57. That is, the projected 20-year electricity benefits (or avoided energy supply costs) would be $1,845 per household, while the cost of deploying and maintaining broadband telecommunications infrastructure would be $1,172 for each household 7R. The local regulators in the city of New Orleans, included in the plan, challenged Entergy on the basis of technical and regulatory uncertainties. The utility's intentions for the use of excess capacity and accounting for it were never clearly stated. Critics were concerned that the utility stockholders would exploit the windfall excess bandwidth for profitable, unregulated telecommunications. This concern must be dealt with for any future such proposals. There are also indirect economic benefits of electric utility contributions to information infrastructure and services deployment. Several recent studies have considered and quantified the ties between telecommunications and competitiveness. A selection is highlighted here. 1. By instituting policy reforms to stimulate infrastructure investments in broadband networks, an additional $321 billion in GNP growth would be possible over a 16-year period beginning in 1992.8R 2. Jobs can be created through investments in telecommunications infrastructure. Should California increase its telecommunications infrastructure investment by $500 million to $2.3 billion per year over an 18-year

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Page 127   period, such investments would produce 161,000 jobs, $9.9 billion in additional personal income, and $1.2 billion in additional state and local tax revenues.
9R 3. Productivity is enhanced through access to telecommunications infrastructure. It has been calculated that between 1963 and 1991, telecommunications have saved the U.S. economy $102.9 billion in labor and capital expenditures 10R. 4. Export activities are also supported by telecommunications infrastructure investments. One study demonstrated that between 1977 and 1982, increased competitiveness induced by improvements in telecommunications infrastructure led to an increase in U.S. exports of over $50 billion 11R. A recent study conducted by DRI/McGraw Hill under conservative assumptions and determined that the deployment of energy information services and the full use of the telecommunications infrastructure supporting those services could make a significant contribution to the U.S. economy. Specifically, it would do the following 12R: • Improve U.S. productivity by reducing total real energy costs by $78 billion between 1995 and 2010; • Increase national employment by an average of 63,000 jobs per year; • Produce a cumulative $276 billion increase in GNP between 1995 and 2010; • Achieve a cumulative increase of $25 billion in U.S. exports because of improved business productivity; • Reduce the federal deficit by 2010 by a cumulative $127 billion; and • Increase real personal income by a total of $173 billion, or $280 per household, through both energy cost savings and improved economic activity. As noted above, most utilities have telecommunications infrastructure that they use for their internal business needs. Some have begun to develop and test energy information services. Few, however, have entered into providing telephone or cable TV services. An exception is the municipally owned electric utility in Glasgow, Kentucky, a community with a population of 13,000. In 1988, the Glasgow Electric Power Board installed a broadband network designed to support the standard communications needs of the utility, to provide innovative new energy information services, and to offer cable TV services. The program has been quite successful. An interesting observation made by this utility is that a customer might not be interested in having his or her water heater controlled to gain a credit of $3 to $4 a month on the electric bill but may well be interested in having the water heater controlled in exchange for reception of a premium channel such as HBO 13R. This observation offers support for the concept of having a single gateway into the home for all information services. The customer's perception of value is just as important as the real value. This competition in cable TV in Glasgow has reduced prices. Before the broadband network installation, the local cable provider, TeleScripps, offered standard service in the area for $18.50. After the utility offered its service at $13.50, TeleScripps immediately dropped its rate to $5.95 and increased the basic service from 21 to 48 channels. Despite this aggressive competition, the utility has reached a market share of about 50 percent. A more significant point, however, is that the local citizens in Glasgow have reduced their cable TV bills, and those savings have stayed in the local economy and are supporting local development 13R. Statistics are not available on the energy savings results, since to this point those have been limited. Glasgow purchases all its electricity from TVA, and at the time the network was installed TVA did not offer a time-differentiated wholesale rate structure. It was not possible to pass the cost savings from load shift to customers. However, when wholesale wheeling becomes available, Glasgow is clearly positioned to use that to its advantage. It is also well positioned to provide its population access to the NII. Recent Strategic Alliances In recent months there have been a number of alliances announced that are aimed at teaming players in the areas of energy services with those who provide telecommunications services and develop sensors. Retail

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Page 128 competition for large customers is likely in the near future, analogous to the situation wherein many large facilities have more than one major telecommunications service provider selected on the basis of the best possible price and for ensuring reliability. The time line for extending retail choice to residences and other industrial and commercial sectors is less certain except for isolated pockets that demonstrate certain advanced technology applications. In any case, it is clear that the alliances mentioned below, as well as others, are moving in anticipation of this eventuality by virtue of changes in their business and technical models. In January 1995, AT&T announced the formation of a multicompany team "to develop and deliver a cost-effective, fully integrated, two-way customer communications system for the utility industry" 14R. Its development partner in this activity is Public Service Electric & Gas (PSG&E). Members of the team are American Meter Company, Anderson Consulting, General Electric, Honeywell, and Intellon. The short-term objective is to provide remote meter reading, power outage detection, real-time load management, and warning of meter tampering. The long-term objective will focus more on increasing customer control of their energy use. A notable observation about this alliance is that the utility has managed to share the risks
15R. Although AT&T is heading the project, the niche expertise of several other companies is key to the success of the endeavor. In mid-April 1995, TECO Energy and IBM announced a pilot agreement "to demonstrate and evaluate an advanced 'smart' home energy management and communications system that will enable residential electric utility customers to better control and track their energy consumption, right down to their appliances" 16R. In addition, the system can serve as a gateway to the home for a variety of communications by serving as the interface for providers of voice, video, and data services—it can be the access point for the emerging information infrastructure. The system is configured to connect energy measuring and monitoring devices to a personal computer in the home and to a control processor attached outside the home. This processor acts as a central controller for a local area network via the existing in-house electrical wiring. With this configuration, residential customers can measure their energy use and costs 24 hours a day, and utilities can administer new, more effective energy management programs. Also in January 1995, CableUCS was announced as a consortium of four of the nation's top cable operators—Comcast Corporation, Continental Cablevision, Cox Communications, and Tele-Communications Inc. 17R. CableUCS was formed to foster, build, and manage strategic relationships between cable operators and utilities—gas and water, as well as electric—and to promote the development of equipment and systems that will use the two-way telecommunications capabilities being deployed by the cable companies. Other notable strategic alliances are (1) Entergy with First Pacific Networks, (2) SoCal Edison with Cox Cable, and (3) PG&E with Microsoft and TCI. In addition to the energy services mentioned specifically above, others addressed by these alliances include energy theft detection, customer surveys, real-time pricing, power quality monitoring, and distribution system automation. Factors Influencing Strategic Alliances As discussed above, the electric utilities have a choice—deploy and operate their own telecommunications infrastructure, or use infrastructure provided by other telecommunications service providers. A study by Anderson Consulting stated, "In most cases, the benefits and risks of using a third-party provider's network outweigh the benefits and risks of a utility owning and operating its own network" 18R. This is especially true with respect to the utilities' Supervisory Control and Data Acquisition (SCADA), which requires real time and high reliability. Although most of the management of the electric grid is through use of the utilities' own telecommunications infrastructure, there are some experimental projects that use cable, wireless, and other services for providing last-mile access for energy services management. Possible synergism between the utilities and the cable and telecommunications providers could be exploited such that the utilities could take advantage of the last-mile infrastructure already in place to address the energy application currently deployed. However, the future will require enhanced capabilities, as noted in the Anderson Consulting study: "For the present, narrowband alternatives such as radio-based infrastructures are adequate to deliver many of the communications-enabled

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Page 129 services being considered. Nevertheless, trends in other industries are moving toward customer interfaces through televisions and personal computer; these interfaces will require broadband" 18R. To use existing cable infrastructure for two-way communication, the cable providers will be required to retrofit their infrastructure to handle high-bandwidth, two-way interactive traffic. In addition, since most of their current infrastructure is residential, they will have to partner with other providers or extend their reach to the business and industrial sectors. The cable companies reach about 62 percent of residences
19R. The local telecommunications providers, local-exchange carriers or regional Bell operating companies (RBOCs), have a much larger footprint with respect to residential customer base, 94 percent—one percentage point less than the electric utilities 13R. However, even though the telecommunications industry has made strides in the amount of information provided over conventional twisted pair lines, a more economical approach for the utilities is probably providing fiber directly to their customers. This could be funded by the sale of excess capacity as mentioned above or through energy savings earned through energy management services by the utility or the customer. Technologies The current technologies for energy information services are quite diverse. They range from proprietary SCADA and energy services protocols to systems based on open protocols, such as Open Systems Interconnection (OSI) and the Transmission Control Protocol/Internet Protocol (TCP/IP). Most residential solutions rely on the X10 protocol, implemented with simple command controls using frequency modulated power line carrier communications. CEBus, a protocol proposed by the Electrical Industry Association, and the LONWORKS protocols developed by a joint effort of the Echelon Corporation, Motorola, and Toshiba, are two new entries in the residential energy management arena 20R. These two solutions can be implemented over a variety of media that include twisted pair lines, infrared, fiber, coax, and radio frequency. Yet most of these solutions have significant drawbacks for addressing the requirements of a general local area network configured to support advanced information and energy appliances. Advanced energy distribution and management systems are being tested with infrastructure deployed by utilities, through Internet services, and with infrastructure formed by combining the resources of existing utility, telecommunications, and cable providers 13R,21R. There are also some instances of more advanced systems. PG&E is using the TCP/IP protocol suite for managing its energy distribution system. In addition, EPRI provides an energy information services network that is multiprotocol, using both OSI and TCP/IP based services such as WAIS and Mosaic. In the future, technical requirements will require compatibility with existing as well as emerging technologies such as asynchronous transfer mode (ATM), multimedia, field data transfer, security, wireless quality of services/resource management, TCP/IP, and more. Trials are under way for enhanced monitoring and predictive maintenance of energy distribution and generation systems. This application requires a large number of addressable nodes with the capability for gathering and transmitting observation data to a centralized location for analysis. Access to such energy-related information, including accounting and billing information, will be required by users. Such access will be over both the Internet and any alternate route provided as part of the utility/user infrastructure for real-time energy demand management and control. To meet this requirement, utilities must operate a multiprotocol system, and the end user will need an inexpensive multiprotocol gateway/interface/desk-top box. Real-time protocol support will be needed for such applications as time-of-day pricing or real-time pricing and both multicast protocols and the infrastructure to handle the reverse aggregation of responses in real time. Scalable network management tools are also required to handle the plethora of devices employed to support both the energy related and information related infrastructure. These same tools must also allow for the end-to-end maintenance and operation of the energy system over the various media that may be used. Finally, secure mechanisms and protocols are needed before any real energy related business will be conducted over an open packet switched network such as the Internet. Remote control of end-user appliances can be done only in a secure environment, and users will likely demand reasonable control over the other data and information that pass through their information access gateway. Technologies are beginning to emerge that can handle these requirements, and so considerable growth in this area can be forecast.

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Page 130 A real need exists that is not being adequately addressed. A general purpose gateway and a control model implementation should be configured for residences so that consumers can control both their energy and their information appliances from a single source—a PC or a unit attached to their television. In addition this concept should permit users to control what data and information pass beyond the walls of their premises. To effect such a solution, the utilities must define the data and information exchange paradigm, that is, the electronic data interchange (EDI) between the utility and the customer. The beginnings of this activity are the focus of part of the recent NOPR issued by FERC and discussed above. The decision of utilities to adopt a narrow set of technical standards for the purposes of achieving interoperability or economies of scale may at first seem to be a sound choice. But over the long term this decision may put them at a disadvantage
22R. The NII and the Internet, as well as any energy system infrastructure, will continue to be a heterogeneous mix of media and protocols. Hence, interoperability will be possible through the use of open access and standards for gateways and interfaces, not through an end-to-end homogeneity based on a single protocol. Recommendations and Issues to be Resolved The question could be asked, Is there a compelling application for the NII that is serving as a driving force for a rapid deployment? And are the applications that could be suggested as an answer to this question contributing to the competitiveness of the United States? Why not put more emphasis on providing energy information services, since this is a ready NII application? Why not partner electric utilities with other service providers? There may not be sufficient revenues to deploy the NII without participation by the electric utilities 12R. Technology Needs In early 1994, the National Research Council was directed to examine the status of the High Performance Computing and Communications Initiative (HPCCI), the main vehicle for public research in information technologies. Two of the recommendations from the report of the committee that conducted that review are relevant here 23R. • Recommendation 7. "Develop a research program to address the research challenges underlying our ability to build very large, reliable, high-performance, distributed information systems based on the existing HPCCI foundation" (p. 10). The three areas identified by the committee where new emphasis is critical to supporting the research needs associated with the information infrastructure are "scalability, physical distribution and the problems it raises, and interoperative applications." • Recommendation 8. "Ensure that research programs focusing on the National Challenges contribute to the development of information infrastructure technologies as well as to the development of new applications and paradigms" (p. 10). It is clear from the discussion of technologies that these recommendations are relevant. For example, the development of an open nonproprietary premises gateway may prove to be the single most important advancement for both the energy services and the NII information services. It will enable new and innovative supporting hardware, software, systems, and services that will not only drive the energy supply and consumption applications arena but also feed the further development of the NII. The electric utilities will need to deploy telecommunications infrastructure to support the energy management services, but they should also provide generic NII and Internet access. The technologies involved must be capable of interoperating with and using the services of the other service providers.

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Page 131 Appropriate security mechanisms are required for the delivery of adaptive energy services and for interutility as well as utility-to-consumer business activities. An issue that needs to be addressed is the need for consumer privacy. Industry, commercial concerns, and homeowners will all want to control who collects and who has access to the information collected regarding their use of electricity. Regulatory and Legislative Issues Deregulation in progress or being considered in both the electric utility and the telecommunications arenas will affect how the utilities will or will not be involved in the NII. The 103rd Congress considered telecommunications reform legislation but failed to pass the proposed bills. The 104th Congress is likewise considering such reform. The question of how that should be structured should be framed with the ultimate interests of the public as the strongest driver. Is the "two-wire" model the appropriate scenario, and is it truly competitive? Although it is agreed that everyone should be able to compete, the problem lies with the details of how and when that can be accomplished. Another factor not often discussed is the cost of deploying the NII. If the cost for deploying to one residence is about $1,000, deployment to 100 million homes would cost $100 billion—clearly not pocket change. The consequences of the two-wire model effectively double this cost. What markets will be there to recover such costs? Can the United States afford to spend twice as much as is needed? There is general agreement between both political parties that the electric utilities should be allowed to enter the marketplace the same as any other "entity." As such the utilities could go head-to-head with the other service providers. But is this the best approach for all parties? The Anderson study
18R has a theme of dissuading the utilities from building the networks themselves—the two-way broadband communications that are projected to create benefits of $700 million a year. Instead, Anderson suggests that the electric utilities should partner with the cable TV companies and invest in upgrading the conventional video networks. This may make sense if the utilities are to own equity in the resulting network. This would allow the utilities to finance the investment through ratable contributions since the justification is energy management applications. The electric utilities, however, also have the opportunity to partner with the local telephone companies. These companies are struggling under the burden of regulation that prevents them from entering two competitive information services—video and long distance. Should another entity such as the electric utility build and manage the infrastructure, the telephone companies would be in a more advantageous position for competition. Regardless of how the legislation proceeds, the electric utilities should be positioning themselves for the future. Someone who has considerable experience in dealing with telecommunications issues has this to say about what utilities should be doing today 24R: • Start building "common infrastructure"—switched broadband telecommunications networks that the utility will use itself to deliver energy information services to consumers. • Work with regulators, where applicable, to ensure that they accept such facilities in the utility's electric rate bases. This should be premised on the utility's undertaking to deliver energy information services via its infrastructure to all its electric customers in a negotiated time frame. • Lease "excess capacity" to cable operators, telephone companies, and others on a nondiscriminatory basis—subject to regulation-sanctioned protections of incumbents to guarantee their continuity of service and recovery of investment. • Voluntarily avoid competing with service providers to encourage amicable differentiation of market segments and to safeguard an open market in services. References [1] "Business Opportunities and Risks for Electric Utilities in the National Information Infrastructure," EPRI TR-104539, Electric Power Research Institute, October 1994. [2] "The Energy Daily," Vol. 23, No. 61, p. 1, Thursday, March 30, 1995. [3] Statistical Abstract of the United States—1993, pp. 561, 563, 589, 728.

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Page 132 [4] Pocketbook of Electric Utility Industry Statistics, Edison Electric Institute, p. 119. [5] "Orders Instituting Rulemaking and Investigation of the Commission's Proposed Policy Governing Restructuring of California's Electric Services Industry and Reforming Regulation," California Public Utilities Commission, R.94-04-031 and I.94-04-032, April 20, 1994. [6] "Positioning the Electric Utility to Build Information Infrastructure," DOE/ER-0638, November 1994. [7] The PowerView System: Two-Way Communications for Electric Utility Applications, Edison Electric Institute, 1994. [8] Cohen, Robert. 1992. The Impact of Broadband Communications on the U.S. Economy and on Competitiveness. Economic Strategy Institute, p. 1. [9] Cronin, Francis, et al., Telecommunications Network Modernization and the California Economy. DRI/McGraw Hill, May 1993. [10] Cronin, Francis, et al., Pennsylvania Telecommunications Infrastructure Study, Vol. V, pp. XIII–28, 29, DRI/McGraw Hill, May 1993. [11] Cronin, Francis, et al., "Telecommunications Technology, Sectoral Prices, and International Competitiveness," Telecommunications Policy, September/October 1992. [12] The Role of Electric Companies in the Information Economy, Mesa Research, Redondo Beach, Calif., August 1994. [13] Glasgow's Fully Interactive Communications & Control System, Glasgow Electric Plant Board, Glasgow, Ky. [14] "News from AT&T," press release, January 23, 1995. [15] "Surfing the Energy Channel," Frontlines, Bruce W. Radford, ed., May 15, 1995. [16] Press release from TECO Energy and IBM, April 1995; contact Mike Mahoney, TECO; and John Boudreaux, IBM. [17] Press release, January 23, 1995; contact Steve Becker, Cox Communications; Doug Durran, Continental Cablevision; Joe Waz, Comcast Corporation; and Lela Cocoros, Tele-Communications Inc. [18] The Role of Broadband Communications in the Utility of the Future, Anderson Consulting, San Francisco, Calif., 1994. [19] Kagan, Paul, Marketing New Media, December 14, 1992, p. 4. [20] "Supply and Demand of Electric Power and the NII," The Information Infrastructure: Reaching Society's Goals, Report of the Information Infrastructure Task Force Committee on Applications and Technology, NIST Special Publication 868, U.S. Government Printing Office, September 1994. [21] San Diego: City of the Future, The Role of Telecommunications, International Center for Communications, San Diego State University, March 1994. [22] Aiken, R.J., and J.S. Cavallini, "Standards: Too Much of a Good Thing?," Connexions: The Interoperability Report 8(8), and ACM StandardView 2(2), 1994. [23] Computer Science and Telecommunications Board, National Research Council, Evolving the High Performance Computing and Communications Initiative to Support the Nation's Information Infrastructure. National Academy Press, Washington, D.C., 1995. [24] Private communication, Steven R. Rivkin, Washington, D.C.