By Alberto Ruocco, AEP VP & CIO, American Electric Power
The Evolution of IT Investments
The Evolution of IT Investments
Utilities historically have been considered late adopters of information technology (IT). Because our companies are largely regulated, utilities can earn a return for capital investments that create new assets but not for investments in maintaining current IT platforms. Utilities also earn no return for early-stage research and development related to IT innovation. This financial dynamic can drive the IT organization into a permanent cost-control mindset.
"For many utilities, management of IT and OT has evolved in an unexpected fashion, resulting in inconsistent practices across traditional IT and business operations"
Nonetheless, many examples exist in which utilities were the early adopters of new technologies while maintaining cost-control objectives. Utilities have built solutions that required significant investment in tools and skill-sets, and yet reduced overall operational costs, ultimately resulting in lower rates for customers. A few examples include automation of manual processes, extending technology to engineering and field activities, and enabling self-service for utility customers. Today, more utilities are emphasizing the importance of using IT innovation to maximize efficiencies and control costs.
Successful early adoptions
A few examples of technologies that utilities adopted early and successfully include:
• Utilities were early adopters of computer-aided design (CAD). CAD has been used for generation plant, transmission tower, and distribution systems engineering for decades.
• Automated metering infrastructure (AMI) has required investments in several new technologies and systems. In fact, the AMI technologies represent an early implementation of today’s Internet-of-Things (IoT) concept. IoT refers to devices – often called “smart” devices – that enable the monitoring, control, and optimization of a system.
• Utilities have taken advantage of analytics solutions. Much of this has been powered by new capabilities to manage and visually represent large volumes of data to enable operational insights and further efficiencies.
Many emerging technologies may prove useful for utilities. Here are a few examples of technologies that show great promise for the industry:
• Unmanned aerial vehicles (UAVs or “drones”) offer the potential for more cost-effective data collection and equipment inspection while decreasing physical risks to workers.
• Advancements in surveying and geospatial/global positioning satellite (GPS) technology could improve accuracy and efficiency for engineering design, engineering construction, and other field activities.
• The “Internet of Things” concept could have future implications for utility operations. For example, sensors eventually could be embedded into more devices across the electric grid where they previously were not economically viable. These sensors will provide data to control, monitor, and improve grid operations and customer experiences.
What does the CIO have to do differently?
The rapid evolution and convergence of information and operational technologies (IT and OT) are forcing utilities to adjust management practices.
As long as the economic model for regulated utilities is based on judicious capital investments, CIOs will need to continue renovating older platforms when opportunities arise to introduce new IT and OT assets. Today, a significant discrepancy exists between the capital planning cycles linked to regulatory approvals and the pace of technological innovations between cycles. CIOs have to “raise their game” to proactively align business requirements, vendor innovations, and funding mechanisms. A long-term plan is necessary to guide many decisions; however, IT, finance, internal business partners, and vendors all have to collaborate continuously to be prepared to implement solutions quickly to get the most out of IT and OT innovations.
Concurrently, CIOs need to help evolve IT and OT funding models by contributing to the design of legal, accounting, and regulatory policies that promote investments in innovation. This can be a challenge, of course, if you operate in many territories across many states where federal, state, and municipal agencies all claim some jurisdiction.
One example of this challenge concerns the changes required in accounting to enable capitalization of software-as-a-service (SaaS), which refers to software solutions hosted by a third party. Historically, companies acquired software and installed the new asset on premise and, accordingly, capitalized the cost. Accounting rules now require SaaS fees to be expensed annually unless the company makes a long-term commitment (e.g., five years) to the vendor’s solution. This dynamic constrains IT and OT solution flexibility at the speed of technology innovation – after all, five years is a lifetime in the technology domain.
Convergence of IT and OT requires deliberate, explicit governance and a clear understanding of roles and responsibilities. For many utilities, management of IT and OT has evolved in an unexpected fashion, resulting in inconsistent practices across traditional IT and business operations. CIOs have the opportunity to drive clarity and consistency into the design, implementation, and management of IT and OT. Utilities will benefit especially from new governance and execution models with lower procurement and maintenance costs.
Realizing future success
Utilities have many opportunities to leverage IT and OT innovations, both now and in the future. CIOs will have to expand their view, scope of influence, and pace of management to realize all the benefits available through the creativity of technology engineers. At AEP, we look forward to the challenge and the opportunities emerging—nearly daily— from innovation around the world.