Articles
The Business Case for Automated Metering
Cash Flow Benefits
AMRA News, Note: this article was originally published in AMRA News in 1995. As of 2006, the analysis remains the same, though costs have increased significantly – an estimated 50%.
Cash is king. Beginning in the 1980’s and growing in the 1990’s, U.S. business is increasingly driven by cash flow. In many cases, Wall Street values companies not by profitability, but by cash flow. AT&T paid $12 billion for McCaw Communications — which had not made a profit for many years. What McCaw did do – and this is why AT&T bought McCaw – is generate a lot of cash. What does all this have to do with automatic meter reading? Plenty. As utilities face greater competition, there is pressure to conserve cash and to find better places to invest cash. Many utilities are avoiding investing capital in their regulated business, because the return on investment is limited on the upside. At the same time, with competition, there is greater risk on the downside.
The reason automated metering is important in this picture is that automation offers utilities opportunities to improve cash flow and save potentially several hundred million dollars in interest expenses. According to the U.S. Department of Energy’s Energy Information Administration, in 1993, investor owned electric utilities — which serve 76.4% of U.S. customers — paid an average cost of capital of 9.55% on $14.13 billion in outstanding accounts receivable from customers. The result is annual expenses of $1.35 billion! This works out to an average of $1.35 per month, on average, for every electric utility customer.
Savings through Advanced Metering
Automated metering can reduce this annual expenditure, potentially significantly, by shortening the time between meter reading and bill issuance. Before we get to the savings, let’s review how this works in a little bit more detail. When a utility reads a meter, it, in essence, has completed delivery of a service called “one-month’s worth of electricity.” Since delivery is completed, the utility is now entitled to record the value of that service as revenues on its books. However, the cash payment is not received at the same time, as it would be if you were buying milk at the grocery store.
Because the utility does not receive the cash right away, it cannot use the customer’s dollar to pay for something else that the utility must pay for right away — for example, salaries of utility employees. To bridge the gap until the customer’s dollar is received, the utility borrows money in the form of debt, from banks or others, or equity, through selling stock. This creates the need to pay interest, or stock dividends, on the amount borrowed. The result, to summarize, is that the customer’s delay in paying the utility (measured from the time the meter is read to the time the cash or check is received by the utility) results in the interest expense referred to above. The utility records the amount of money financed for this purpose on its balance sheet in a category called Accounts Receivable. This is the $14.13 billion amount mentioned earlier. If there were no delay between meter reading and cash collection, utilities would immediately have $14.13 billion in cash to pay for salaries and other costs, thus avoiding the need to borrow that amount.
The average delay between meter reading and cash receipt can be calculated from a utility’s balance sheet by dividing the Accounts Receivable amount by total annual revenues and multiplying by 365. Since U.S. investor-owned utilities had $175 billion in revenues in 1993, the average delay, also called “Days Receivables Outstanding,” was 29.5 days.
Many utilities have 22 or 23 days receivables outstanding, while at least one major utility has 46 days. The effect of the number of days receivables outstanding is dramatic. The chart below shows the difference between the 46-day utility and the potential for, say, a 15-day utility in dollars per customer per month, for a customer with a $100 monthly bill.
Interest Cost of Different Delay Periods between Reading Meters and Receiving Cash
Source: Energy Information Administration, U.S. Department of Energy
Through advanced metering — sometimes called “fixed-network” automatic meter reading — utilities have a number of ways that the number of days receivables outstanding can be reduced. The first way to speed up cash collection is by shortening the period between meter reading and bill mailing. The best way to do this is to read the meter automatically right after midnight and immediately deliver the data to the billing system. The billing system can then calculate and print bills that morning. By afternoon, the bills can be mailed to customers.
This approach would speed bill issuance for most utilities by about three days. This is for a couple of reasons. The first is that manual reads are delivered to the billing system late in the day, so the best case is to process and mail bills by the next day. Moreover, most utilities wait until full meter reading routes are completed, including up to three days after the scheduled read date to allow meter readers flexibility or a second chanced to pick up missed reads. Only after the full routes are delivered are the reads sent to billing.
The second way to speed cash collection is by offering additional services to customers in the form of electronic funds transfer from a bank account. Some utilities do this already. However, most customers do not sign up, because they want to pick the day of the month that the funds are transferred. Since meter reads must be on the scheduled date, utilities have great difficulty allowing customers the day of the month they can have funds transferred. With automated metering, the meter can be read any day of the month. So, by combining the ability to select the day of the month with the service of electronic funds transfer — which saves the customer having to write a check and pay for a stamp — utilities are likely to have many more customers sign up for electronic funds transfer.
The result can be dramatic. Let’s use the average days receivable of 29.5 days as the starting point. For electronic funds transfer customers, the delay between the day of the meter read and the cash receipt drops to one day (to allow for processing). If only 20 percent of customers sign up for electronic funds transfer, the savings is (29.5 days - 1 day) x 20 percent, which equals 5.7 days, a 19.3 percent reduction in the average days receivables outstanding. Using the Energy Information Administration average cost of $1.35 per customer per month, the savings in this example totals a sizable $0.26 per customer per month. And that’s for only 20 percent participation.
The third way to speed cash collection is electronic funds transfer using an in-home or in-building communications device. The customer would use this device to receive their bill from the utility electronically and then, using a Personal Identification Number, would electronically authorize payment of the bill. This would further increase market acceptance of electronic funds transfer, because other energy services and information would be available to the customer: energy rates, monthly bill to date, outage notices, weather data, and other value-added information. If these many benefits increased market acceptance of electronic funds transfer by another 30 percent, the total savings — when combined with the 20 percent acceptance above — reaches $0.67 per customer per month.
Conclusion
During the 1990’s and beyond, cash flow is a major driver for utilities and other businesses. Through a variety of mechanisms, automated metering offers a powerful tool to improve cash flow and speed receipt of cash from customers. The magnitude of the savings can exceed even the savings realized by replacing manual meter readers. Though just one example of many savings opportunities, cash flow illustrates the powerful, strategic benefits of automated metering. Reading meters is just the start. The real benefits, like cash flow, go far beyond.
