Towards Smart Grids: eMeter CEO Cree Edwards (Part 3)

SM: Once you had developed the cellular network, did you try to operate it yourself or sell it to utility companies?

CE: We tried to sell it to utilities, but the difficulty in the utility marketplace is that the way utilities are compensated is a percentage of assets in the ground. If a power plant is built they make 12.5% after tax. If they buy an office chair they make 12.5% after tax. There is no incentive for electric utilities outside of regulatory oversight to be efficient.

SM: I am assuming this comes from when the industry was originally regulated?

CE: Yes. When electric utilities were first established, somebody would build a power plant and run a wire across town to a commercial or industrial site. The result was a mesh of wires. In old pictures of New York or Chicago, you can see this very clearly.

It was quickly recognized that it was not an effective model. The result was the creation of regional monopolies for utilities such as the City of Palo Alto and Pacific Gas and Electric. The first goal was to obtain highly reliable power, which meant utilities had to cover the peak. The second goal was to get energy to everybody, not just the wealthy.

Back in those days, a utility would not just run poles out to farmer John’s farm. It would never be cost effective. Utilities were told if they built the infrastructure, they would then be allowed to rate base it, and they could earn money from that. In essence, their risk was covered for them.

SM: That created the incentive for infrastructure to be rolled out. Is that where the 12.5% is coming from?

CE: Yes, although it varies based on the relations between the local utilities and the commissions.

SM: Which means there is no tie between how efficiently you run your company and related compensation.

CE: Correct. We were trying to sell technology that would allow utilities to operate more efficiently, but for the CEOs of these utilities, the investment in our product was not in the best interest of shareholders because of the way that market was structured.

SM: Fundamentally, however, that is exactly what needs to happen. What happened in terms of selling your product in the late 1980s?

CE: There was no incentive for utilities to take the risk and purchase the product. They liked to reduce O&M, and shift from O&M to capital investment because they earn on capital. We had a hard time selling it because we were trying to replace meter readers and trying to cut peak. We morphed the CellNet business model into a services model wherein we would install, own, and operate the entire network.

SM: That must have been an expensive venture to build.

CE: It was. We had to go out and find the funding based on 15-year contracts we signed with utilities. We would have a level of service we had to provide which was captured in a foot-thick service agreement document. We would then take that contract out and fund it. We built everything: the hardware, software, integration and communication. Ultimately we rolled out 10 million points throughout the US.

SM: When you finally cracked that formula, what switch flicked in the minds of utility CEOs?

CE: It was risk mitigation. They were not taking shareholder risk because if we could not make it work they did not have to pay. A bunch of operational benefits made it worth the $1 a meter a month to fund the installation.

The business model at the time was to branch out into other telemetry businesses. We would monitor vending machines, parking meters, and an overall meter monitoring business. Our model was based on building the infrastructure and then being able to sell other services under the umbrella because we owned and operated the network.

We took the company public in the late 1990s. The model we used for financing was very similar to what the cellular companies were doing to finance infrastructure. That was back when high-yield debt was a popular instrument. Banks were financing the contracts based on revenue growth over time.

Ultimately, deregulation fell apart. CellNet ended up going bankrupt in 1999 or 2000 because the capital markets had changed and they could not refinance the debt.

This segment is part 3 in the series : Towards Smart Grids: eMeter CEO Cree Edwards
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