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InSITE

American Electric Power (NYSE: AEP) has awarded InSITE Services an exclusive five-year contract to provide comprehensive billing services for its unregulated retail businesses. As the competitive energy market opens in Texas, InSITE will process bills for an anticipated one million AEP customers. AEP will provide energy services to residential, commercial and industrial customers in deregulating electricity markets, beginning with Texas and Ohio. InSITE will use its EnerBill™ billing service and EnerEDI™ system to process AEP's customer bills and manage transactions between AEP, the Electric Reliability Council of Texas (ERCOT) and local distribution companies in open-access markets.

Analysis: As full competition comes to deregulated markets (as it will to both Ohio and Texas in January 2002), comprehensive billing software system is becoming a high priority, and often an essential element of growth, for competitive energy companies for several reasons. First, utilities that remain active in the retail side of the energy business are aiming to provide customers with online energy usage and billing data on a 24/7 basis. Second, state-by-state differences regarding how bills are processed and how information is exchanged between utilities and their competitive marketers can become very complex, and billing software can offer a comprehensive solution. And third, as competitive companies penetrate various regions and states, cost reduction is sought through the elimination of multiple automated and manual processes that are typically associated with legacy systems. In real terms, companies potentially can save millions of dollars annually by eliminating some back-office functions (areas of the call center that have typically handled final meter reads or address changes on the retail side), all of which can now be automated into a one billing system.

Such is the need and market opportunity that has enabled a company like InSITE Services to secure such a lucrative contract as this one with AEP. For a utility like AEP that wants to concentrate on acquiring customers and establishing a unique brand identity in the competitive market, outsourcing complex billing operations to a company like InSITE can be a real time- and cost-saver when compared to revamping an existing billing system. For InSITE, landing a contract with AEP—one of the top five energy companies in the United States—is a major coup.

Based on data averaged for the outsourcing of customer care in the energy industry, AEP's type of arrangement with InSITE is most likely priced in the $1.25 - $1.50 per customer per month range. That would put the value of this deal at an approximate $15 - 18 million per year or $75 - 90 million for the five-year contract assuming that AEP's one million customers in Texas remain intact and that none of those customers chooses other suppliers. When comparing these costs to an estimated expense of operating its own billing system, AEP is probably making a sold investment by partnering with InSITE.

As noted, AEP will be incorporating InSITE's EnerBill service and EnerEDI system to process customer bills. The fully Web-enabled EnerBill service, which was designed specifically for deregulated energy markets, takes over the entire back office billing functions of a company, interfacing with existing marketing, scheduling, nominating, reporting, and processing systems. The EnerBill service will also offer AEP 24-hour Internet access to standard reports outlining how the utility's business is changing, and facilitate customer offerings such as online energy audits. EnerEDI is an application service that, according to InSITE, is gaining recognition as the de facto standard for information exchange within the energy industry. Considering that managing electronic data interchange (EDI) between distribution companies and retail energy providers is a business imperative, InSITE's EnerEDI claims to have "cracked the EDI code."

It is important to understand that InSITE owns the billing software of Peace Software, a provider of comprehensive e-business solutions to the global retail energy market. A company looking for billing solutions can purchase the billing software directly from Peace and manage its own billing needs, or outsource its billing services to InSITE. AEP is taking the latter approach, and turning over the management of its billing operations in deregulated markets to InSITE. AEP signed a contract with Peace Software back in early December, but at that time it was unclear if AEP would manage its own billing operations.

Although InSITE has branded its own use of EnerBill and EnerEDI, InSITE's offerings are operating off of Peace's Energy Version 6 software, which is billed as the first e-business solution to integrate customer and commodity management. According to Peace Software, updated features of Energy Version 6, which was just released in December, are extended B2C e-commerce functions, an advanced third-generation browser user interface (BUI), enhanced billing capabilities and expanded industry-standard support for the Oracle 8i database system. The result of these technical improvements is a "capability to exploit the latest Web browser technologies to support and streamline large scale, mission-critical customer service operations." Further, the Energy software is centered around the UNIX operating system and thus can be moved and upgraded from one hardware platform to another. The Energy software can accommodate billing services around natural gas, electricity, water, home security, and home mortgaging.

On its own, Peace Software has become a dominant player in the energy billing software market, offering its "one-stop-shop" billing tool to a variety of utilities and energy companies. Peace boasts customers such as MidAmerican Energy, Enron, BC Gas, Dominion Retail, Nordic Electric, Exelon Energy, and Pepco Services. The company is based in Atlanta and maintains a large presence in its country of origin, New Zealand, the first country to deregulate its electric utility market.

As noted, Texas will be the first market in which AEP will outsource its billing services for approximately one million customers to InSITE (followed by Ohio). Yet, AEP has not registered as a retail electric provider (REP) in Texas. Under Texas restructuring law, an electric utility operating in the state must separate its business activities in the following units: power generation company, REP and T&D company. The REP must become certified with the Public Utility Commission of Texas (PUCT) before it can sell commodities to end-users. If AEP is to remain in the retail market in the state, by law those customers must be served by an unregulated affiliate of the company. However, at least as of today, no such affiliate has filed an application with the PUCT. Previous comments from Linn Draper, AEP's CEO, have implied that the company may not stay in the retail business. I suppose if the company wants to leave the door open with regard to selling its one million Texas customers, this would be easier to accomplish if the billing services to those customers were outsourced to a company like InSITE (rather than making a major investment in such systems at this point).

Although InSITE Services is emerging as a leader in the outsourced billing market, it does face stiff competition as the field of both software providers and billing services management firms is becoming saturated. I would offer that InSITE Services' top two competitors are Alliance Data Systems (ADS) and Enlogix. ADS is the outsource company for Excelergy's software, and Enlogix is the outsource company for SCT software.

Excelergy just announced that it finished what it is calling "the best quarter in its history." Reportedly, in the fourth quarter of 2000, Excelergy closed nine North American agreements and launched a new European office that quickly landed the company its first client in continental Europe. Excelergy's primary offerings are customer billing and information system product called ABP™ 3000 and data transaction management product called Excelergy eXACT™. ABP 3000, which competes with InSITE's EnerBill) is focused on retail service providers doing business-to-consumer services such as allowing potential customers to select new retail service providers over the Internet, or actually billing customers once they have signed up. EXACT™, which competes with InSITE's EnerEDI, Excelergy's B-to-B offering. It is a software product that sits between a company's core billing system and the outside world and, in this case, other businesses with which the retailer or distributor is interacting.

Enlogix CIS (Customer Information Services) provides software product development and management, project implementation and software interface development, and data center operations. The company engages in consultative sales, client relationship management, and alliance relationship management, and brings knowledge of the business economics of consumption data gathering and analysis to provide automatic meter reading (AMR) systems planning, project implementation, and operating services. Enlogix is a subsidiary of WestCoast Energy, Inc. and as noted is a licensed re-seller of SCT, a leading provider of industry immersed e-solutions for the energy, utility and communications industries. Enlogix uses the SCT Banner system to support multi-services across its client base including gas, financing, ancillary products, electricity, water, and solid waste. Enlogix and SCT Banner have made great strides recently in making the necessary modifications to "open" their system for the deregulating marketplace in the United States.

Moreover, AEP's partnership with InSITE is a bold step and to the best of my knowledge represents the largest outsourcing contract for energy billing to date. Traditionally, utilities have held a very tight grip over their billing services, so AEP is taking a leap of faith in this partnership with InSITE, especially with regard to InSITE's ability to manage the complexities related to one million customers. How AEP intends to run its retail business in Texas (or anywhere else, for that matter) remains to be seen, but it will be interesting to see if this partnership with InSITE achieves AEP's goals of lower costs and enhanced customer service.

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