IssueAlert Emerging Technologies ~ March, 2003

Alliance Data Systems Corp. signed a multi-year agreement with American Electric Power Co. To Provide billing and customer care service for certain deregulated residential customers in Texas. Alliance Data also will provide similar services to CPL Retail Energy L.P. and WTU Retail Energy L.P., two units of Centrica PLC (U.CTR) that together serve more than 800,000 accounts.

Analysis: The services that Alliance Data Systems (NYSE: ADS) will provide include billing, call center support, statement generation and remittance processing. As part of the deal Alliance Data Systems (ADS) is purchasing the customer relationship and bill management operations that AEP (NYSE: AEP) established in 2001 to serve retail customers in Texas as well as the remainder of a contract that AEP has to Provide back-office customer service for Centrica's retail customer accounts at CPL Retail Energy and WTU Retail Energy. Centrica purchased these companies from AEP in late December 2002 for $185 million.

ADS bought the customer care operations for $30 million. AEP expects to record a $9 million gain on the sale of the customer care operations.

"The transaction will be seamless for customers since nothing will change from their perspective. The wires carrying electricity to the customers will still be owned and maintained by AEP. We will continue to be responsive to our customers' needs for service connections and restoration after outages. The electricity supplier, price-to-beat rates and responsibilities also remain the same," said Holly Koeppel, AEP's executive vice president - Energy Services.

"We are pleased that CPL Retail Energy and WTU Retail Energy have provided Alliance Data the opportunity to Provide the business-critical services that are necessary for operational efficiency, reliability and solid customer care," said Mike Beltz, president of Transaction Services, Alliance Data Systems. "Alliance Data continues to focus on increasing its presence in the developing market for outsourced utility services, and is looking forward to working with CPL Retail Energy, WTU Retail Energy and AEP."

An interesting aspect of this agreement is that ADS will now be managing a customer information system (CIS) that in some ways has been a competitor in the past. For background, ADS has established acquisitions or alliances with a diverse range of CIS providers, including Excelergy, UtiliPro (using SCT Banner), ConneXt, and Enlogix. As such, ADS has marketed these systems to potential clients.

With the acquisition of AEP's back-office, ADS will now be utilizing the CIS of Peace Software. Peace Software's Energy™ suite is marketed as an integrated e-Business solution at the core of customer and commodity management for retail energy companies. Last year with its implementation at AEP, Peace Software became the first CIS provider to Bill approximately one million customers in a deregulated environment that allows user access to an Oracle database via an Internet browser.

Outsourced CIS Acquisitions
ADS's acquisition of the AEP back-office is just the latest in a long line of acquisitions for the company. Most of these acquisitions have been in the outsourced CIS sector. In 2001, ADS acquired the operating assets of Utilipro, Inc., a subsidiary of AGL Resources, Inc. Utilipro provides account processing and servicing to the de-regulated utility sector. Utilipro provides these services to three clients serving approximately 500,000 utility customers, utilizing the SCT Banner application, which was recently acquired by Indus International.

In 2001, ADS also entered into a strategic relationship under which the company provides data processing and billing services for Puget Sound Energy. As part of the strategic relationship, ADS acquired the assets of ConneXt, Inc., including use of the company's ConsumerLinX software.

Prior to the AEP announcement, ADS' most recent purchase occurred in September of 2002 when the company acquired Enlogix Group, formerly wholly owned subsidiaries of Duke Energy Corporation. Enlogix provides customer information services to utilities in Canada. The purchase price for the acquisition was $13.5 million. ADS expects the acquisition of the billing and customer information service provider to add revenue of at least $10 million annually from the existing core client base. With the acquisition, ADS began providing customer information system hosting for five utilities, including Duke Energy units Union Gas and Pacific Northern Gas.

These acquisitions provide ADS with a diversified portfolio of CIS applications to Offer to potential clients.

Outsourcing Trend
ADS' acquisition of the AEP back-office is the latest sign that the outsourcing trend has begun to take hold and gain some momentum in the utility industry. Like ADS, some companies are focusing on providing the services to serve as the complete back office function for the utility industry. One such example is CustomerWorks. CustomerWorks, LP was formed in 2001 by Enbridge and BC Gas to serve the customer-care functions of the two utilities that serve 3.5 million Canadians. Last year Accenture and CustomerWorks, LP signed an agreement that created a new company known as CustomerWorks, Inc. The new company offers customer management solutions for North American utilities. These solutions include call handling, billing, meter services, credit and collections, and payment processing.

CustomerWorks is currently in the process of finalizing an outsourcing deal with ENMAX Corporation, an Alberta, Canada utility serving over 400,000 customers. Under the outsourcing arrangement CustomerWorks will provide current and new customer services to ENMAX under a 10-year contract. Services would be expanded to support a wider range of products, enhanced service options, and increased choice in methods of accessing these services.

Ironically, CustomerWorks has licensed Peace Software's Energy suite as the preferred CIS platform for its Business Process Outsourcing services targeted at utilities, the same system that ADS is inheriting at AEP. The version of Peace Energy that ADS will be hosting is also the same version currently being run by Direct Energy (a Centrica company) in Toronto.

Another example of this business model is Orcom. The company has been in the business of providing customer care to utilities for 25 years. In one of its most recent deals, Orcom had Sierra Pacific Power Company sign on for a five-year extension of their existing outsourcing contract. The California service area of Sierra Pacific Power Company relies on ORCOM for a number of outsourced customer and business process needs, including the hosting of ORCOM's E-CIS application, bill print and bill process management.

Another business model that exists is to focus on a specific niche of related outsourcing services. For example, First Contact is a firm that concentrates exclusively on call center services. These services include customer care and retention, payment center management, and receivable management. As David Steele, VP of Business Development—Utility Sector at First Contact, recently stated in an interview with UtiliPoint International, "At First Contact, we see the call center aspect of a utility's customer service operations as being very different from the other aspects of customer service. As such, from our standpoint it would be difficult to Provide best in class service to all facets of a utility's customer service organization. That is why First Contact focuses exclusively on call center related-services."

There can be some trepidation from utilities regarding outsourcing. "We find that many utilities feel that customer service is an integral part of their mission, and historically have been hesitant to outsource such services," said Steele. "In these instances, we offer to outsource an aspect of their call center, such as revenue management, and demonstrate through the application of customer satisfaction and financial performance metrics, how outsourcing can add value to their operations. Once you have demonstrated the business case, we believe utilities are much more receptive to additional outsourcing services."

It is clear that outsourcing is getting a second look by utilities, and we can expect to see more of it in the near future. There is a new factor at play that could expedite outsourcing even further. Many investor-owned utilities in North America have credit worthiness issues, and selling the back office provides an avenue to improve the balance sheet.