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Plugging Revenue Leakage in the Utility Industry

Pradeep Roy's picture
Senior Consultant, Energy & Utilities Infosys Technologies Ltd

Pradeep has nine years of consulting experience in the Energy and Utilities sector. He has worked in a variety of consulting engagements covering areas such as business strategy, regulatory &...

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  • May 12, 2006
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Utilities are continuously under intense pressure from stakeholders to show improved corporate performance despite increasing costs, regulatory pressures and enhanced customer expectations. The need to supplement the existing cash flows by plugging revenue leakage as a low risk, low investment and high impact option has never been more critical. The need of the hour is to make improvements using technology across the utility revenue chain to plug revenue leakage.

Challenges for Utilities

As energy prices are hovering at all time historical highs, utilities are under increasing pressure to pass on their increase in fuel and other input costs to their consumers through an increase in rates. Stakeholders also expect utilities to improve service quality and enhance security of supply, which are likely to require increased investment. Also, due to the increasing risks in the business environment, utilities across the world have been facing downgrades from credit rating agencies in recent years. The ratings have stabilized now but they are not moving back towards their earlier levels. As a result, the cost of raising capital for any new expenditure is on the rise, which would further add to the financial woes of the utilities.

From historical rate case regulatory orders, one has observed that regulators typically don’t pass down all the cost increases requested by utilities that operate in a regulated market. As numerous stakeholders (e.g. customers, utilities, regulators, media, other interest groups, etc.) participate in any rate case proceedings the regulated utility is under the full glare of intense public scrutiny and the regulator tends to take a balanced view of things which may not always be favorable from the point of view of the utility. While the regulator may allow pass through of some of the increases in utility costs to consumers, the remaining increases in utility costs will have to be recovered by the utility through efficiency improvements or by taking a hit on its profitability.

According to economic theory, competition drives prices to marginal costs if there are several producers and consumers. For utilities that operate in a competitive market, increasing customer expectation and competitive pressures prevent the utility from increasing rates. In response to competitive pressures, such utilities will be always be under pressure to reduce costs and improve operating efficiencies.

Need to Plug Revenue Leakage

Given the present scenario, many utilities are under tremendous pressure to manage their finances and need to use all possible avenues to harness capital from alternative channels. Hence it is imperative for utilities to identify activities in their operations where improvements can bring about additional revenues without having to undertake substantial expenditure. There are two activity areas on which the utility needs to focus, one being the network management related activities and the other being commercial activities

In this article we are specifically looking into the commercial activities only and will be discussing how to go about detecting leakage in the utility revenue chain, which could be plugged or reduced without substantial expenditure. Various areas of the utility’s commercial activities may be contributing to loss of revenue, apart from theft, such as deficiencies in the internal commercial processes e.g. faulty metering, inadequate billing processes, etc. Studies reveal that revenue leakage in utilities in developed countries accounts for 1 to 5% of their revenue whereas in some developing countries it can be as high as 20%.

Approach to tackle Revenue Leakage

A typical utility revenue chain is comprised of various processes. Figure 1 provides a snapshot of the key revenue chain processes.

As there is a possibility of revenue leakage all through the revenue chain, savings from plugging leakage can be realized for all revenue chain processes. The approach towards addressing the revenue leakage problem should begin with the formation of a dedicated cross-functional Revenue Assurance team at the corporate level whose mandate would be to detect and plug revenue leakage in the utility revenue chain in a consistent and systematic manner.

I believe that a utility should adopt a four-stage approach, which I call the A4 approach (Figure 2), to attack the problem of revenue leakage. The stages are:

  • Activity-wise process mapping of the revenue chain activities suspected for revenue leakage
  • Analyze the processes in the revenue chain and identify the revenue leakage points and ascertain the reasons for it
  • Assess by measuring the amount of revenue utility may be losing in the said activity and the cost of solving the same
  • Actionize by prioritizing the measures after finding an implementable solution, keeping in view the cost and benefits to plug the revenue leakage

A generic list of the leakage areas in a typical utility for each of the revenue chain activities is provided in Table 1.

Table 1: Revenue Leakage Areas

The Revenue Assurance team of the utility would thus need to map the processes, detect the leakage points and measure the leakage. The performance metrics of this team should be measurable in terms of savings to the utility.

IT as an Enabler

Today, application of appropriate technologies can help tackle revenue leakage much more efficiently than ever before. This new drive to plug leakage also overlaps with stringent regulatory compliance guidelines of federal, state and local regulatory agencies in the form of practice directions, standards, codes, rules and regulations, and also to enable compliance to the Sarbanes-Oxley Act. Utilities are now vigorously looking out for the right Information Technology (IT) based solutions which will offer them superior control, tracking, reporting, minimize human interface, automate manual processes, improve billing accuracy, reduce billing related disputes with customers and provide security to curb revenue leakage in the revenue chain. But before installing robust IT based systems it is essential for utilities to design, develop and implement robust processes. Let us examine some of the IT enabling issues more closely.

Application Integration

Billing, metering and customer care systems are the backbone of the revenue chain. Effective control over the utility operations comes from implementing “best of breed” billing, metering and customer care applications that are robust and reliable. There is also a need for seamless integration of the various IT platforms to allow communication between the metering systems, billing systems, and customer care systems so that all aspects of the revenue chain could be closely monitored thereby reducing the possibility of leakage.

Analytics

It is necessary for a customer analytics system to sit on a CIS / Billing System to undertake customer analytics as a tool to acquire new customers, retain existing customers, serve the customers better and to minimize revenue leakage. The consumption data of customers in the CIS / Billing System of the utility should be analyzed and exception reports should be generated based on certain predefined parameters such as sudden drop in consumption compared to past average consumption, default history of customer, history of irregularities pertaining to customer meter or connected load, etc. The CIS / Billing System data analytics should enable flagging suspect behavior by customers and subsequently checks should be carried out on such customer premises to determine if there is a possibility of revenue leakage or theft.

Metering and Meter Data Management

Accurate metering is a key ingredient for plugging revenue leakage. In the case of utilities, electronic metering is a significant enhancement over electromechanical meters, and it helps in reducing leakage, which in turn enhances cash flow. Increased usage of Meter Reading Instruments (MRI) and other handheld devices for the collection of electronic meter data has reduced the possibility of leakage, but still leaves some avenues open for leakage. It is therefore essential that the entire meter data chain starting from the meter to the Customer Information System (CIS) / Billing System is insulated entirely against any change whether intentional or accidental.

With electronic metering merged with automatic meter reading (AMR) devices and Real Time Energy Meters (RTEM), there has been a quantum jump in terms of addressing the problem of leakage. RTEMs are designed to undertake remote meter reading making use of communication technology and also automatically detect meter tampering in real time. With the advent of remote meter reading, utilities have a potent tool to help ensure that customers are invoiced accurately for the energy delivered and theft is more easily detected and thereby discouraged.

Dashboard for Performance Management

Given the cost pressures, utilities are committed to continuous performance improvement and the critical enabler behind the successful performance improvement is a comprehensive reporting system that we call a Dashboard. This Dashboard will provide a view to the "Key Performance Indicators" (KPIs) of the commercial operations. The dashboard shall collate data in a consistent manner from many diverse sources across the various commercial functions of the utility and then present it across all parties, from the members of the field staff up to the senior management. From the dashboard, users can drill down to study the performance data in detail and take necessary corrective measures if necessary.

Conclusion

At a time when fuel costs and cost of capital are on the rise, investors are expecting higher returns, and with lesser chances to recover revenue loss in the rate case, it is imperative for all utilities to maximize revenue through a well planned approach towards revenue assurance. We are well aware that the use and integration of a variety of IT based tools as an enabler to better manage the utilities processes, to improve operational efficiency as well as meet regulatory compliance requirements is increasing. Regulated utilities have to realize that they must adopt innovative strategies to prevent revenue leakage and implementing this change for them is no longer a choice but a necessity.

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Thank Pradeep for the Post!
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manish ahuja's picture
manish ahuja on May 14, 2006
it is right that utilities are under presuure to perform better with subjet to condtions of thier poorest financial health but i think there is a need a consulatncy organisation who can provide a guidence to these poor financial health utilities how to perfrom better with less expenditute and high effciency to meet the customer requirements either in terms of billing ,metering and revenue collection issues . i think this initiative should be taken by power ministry sothat all utilities can take benfit from this. manish ahuja National Power Training Institute
David Habr's picture
David Habr on May 16, 2006
A couple of comments on the "economic theory." First, in economic theory, price is only driven to average cost in highly competitive markets, i.e., markets with numerous buyers and sellers. Second, in the "perfectly competitive" version of the highly competitive market, price being driven to average cost also results in price equaling marginal cost. Howver, if the sellers have any pricing power, we then have a situaltion that may be more reflective of Chamberlin's monopolistic competition where price is driven of average cost only. If there are only "several" producers and customers, it's unlikely that there would be sufficient competition to obtain the Chamberlin result. David Habr
Jim Stack's picture
Jim Stack on May 16, 2006
Revenue leaks come from inside utilities also. They lose a lot of power on overloded transformers and transmission lines. Also the rela cost of Nuclear and Coal power are very high. To help improve all ofd these losses they need to encourage and use renewable energy in the form of distributed generation at homes. When they give net-metering incentives like Germany paying 10 times the selling rate for returned clean solar power the grid load is droppped, new power plants are avoided and transmission and transformer loss is reduced. Even equal net-metering can be a big boost. Everyone wins with reduced costs for all. The enviromental savings are priceless.

Jim Grid tied Solar since 2001

Sidharth Das's picture
Sidharth Das on May 16, 2006
Dear Pradeep,

First my accolades on writing such a good article. But some things to be taken into consideration is the outlay of the electrical network over the whole country.. Its huge and very cumbersome in the sense that with the amount of houses coming up even where there were barren fields and then the utilities face the problem if they had underground cables laid in that region.

Secondly, you talked about plugging leakage say by wrong address entry or faulty billing, wrong metering and stuff like that. Agreed it does happen around in our country india a lot but It can only help if the address so entered r correct, for example when Delhi was privatized, many addresses taken over from the state board didnt exist at all or the person against the address didnt exist at all... so unless the right data is entered how do u suppose IT would help? What you are talking over here gives me the overview that you have considered an ideal situation, again considering deeply into the scenario of the prigvatization, many private organizations have installed the CIS system that you have talked about... You have made a comparision of a fault free system in your article my dear friend

With CERC going in for a 2A for jhuggi (slum) areas, how do you expect that collection efficiency would be high, earlier these tasks were outsourced as SPDs but there r now arbitration cases runnin in various high courts claimin that these SPDs ran away withe the consumers' money and then franchise system was introduced and there is no place left out to erect a grid catering to the geometric rise of the population.

There has to be some way but given the considerations above, it caters to an ideal economy. For example, u said we operate in a regulated environment, so tell me have u read the escrow agreements of privatization?? 80% of the revenue goes to Transco in case of old arrears, and again as you might be aware of, there are more than 2 lakhs consumers per area given to these private companies who r unregistered and again there are huge amount of NTA (NOt to be added) amounts in the bills of consumers which amount to crores and as u know these go on accumulating over the years... How is IT gonna help get bck these arrears???

Again, u have spoken about RTEM, please go through my article - AMR - How relaible is it in march issue of Powerline and you would know the defects... Many of my articles are based on the discrepancies still existing with suggestions Pradeep.

Last but not the least, I would congratulate you on your article. It does describe how IT can be utilized to bridge the low level equilibrium trap that the electricity industry is still facing.... but then the task is humongous and time taking, not IT alone would be sufficient.

Sidharth Officer (Corp Commercial & Strategy) North Delhi Power Limited 9818977123

Franca Petrocelli's picture
Franca Petrocelli on May 17, 2006
First off, I commend you for putting together such a great article. You provided a thorough diagnostic of potential revenue leakage hot spots and a methodology for action. One area that deserves some attention is how a regulated environment increases the potential for revenue leakage. A regulated environment introduces the utility to compliance measures which may take form by way of system enhancements, or, systems interfacing. Systems demands increase in response to an increase in regulatory requirements. This evolution of requirements does not lend itself to an efficient model for IT development where systems can be planned and data can be mapped accordingly. Data is often exchanged between consumers through flat files where manual entries increase both the potential for delays in customer registration, and, can compromise the integrity of the data itself. In addition, their challenges for keeping prices down are coupled with the costs incurred by meeting regulatory demands. Franca Petrocelli
Pradeep Murthy's picture
Pradeep Murthy on May 23, 2006
Pradeep - nice article. My only comment is technology (AMR, software, dashboards...whatever) is only part of the answer. Internal processes, the external environment, regulatory/political compulsions all have a significant role to play in how effectively revenue leakage can be addressed. Knowing the problem doesnt mean that you can always do something about it.
Pradeep Murthy's picture
Pradeep Murthy on May 23, 2006
Pradeep - nice article. My only comment is technology (AMR, software, dashboards...whatever) is only part of the answer. Internal processes, the external environment, regulatory/political compulsions all have a significant role to play in how effectively revenue leakage can be addressed. Knowing the problem doesnt mean that you can always do something about it.

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