Evaluating ERP systems in an evolving utility industry

Enterprise resource planning (ERP) systems typically provide support for an organization’s finance, human resources, work order management, purchasing and payroll functions. Finding ERP system solutions for utilities that also incorporate more energy industry-specific functions can be challenging. Depending on the type of utility (i.e., electric, natural gas) and whether a utility owns and operates generation units or is involved in intra-state wholesale transactions and settlements, certain processes, operations and workflows cannot be easily performed in most integrated ERP systems.

Best-of-breed (BoB) applications often fill this void as a means to provide deeper and industry-specific system functionalities that allow utility companies to perform their various operating functions. Despite these capabilities, integration of BoB applications to ERP systems can often require more resources and upgrades that have to be individually synchronized to ensure seamless integration. To help ease the integration of certain industry-specific functions to various ERP system modules, establishing system requirements will allow for determination of the best software solutions. Further, examining end-to-end processes for both regulatory requirements and/or business decisions-making purposes across the overall electric utility business can help determine areas of system enhancements and potential process efficiencies.

Identifying industry-specific functions and processes

Unlike most shared service functions within a utility that may already fall under an existing department (e.g., finance, human resources and purchasing), certain energy utility functions and processes may be comprised of several departments or divisions. For example, the following operational functions of an electric utility with generation assets may include several departments or divisions:

• Fuel inventory
  – Generation – Responsible for day-to-day operations of generating facilities, including planned or force outages
  – Resource inventory and management – Managing both resource inventory (e.g., coal pile inventory) and warehouse inventory
  – Fuel and power procurement – Procuring resources and managing transport of resources.
• Utility billing
  – Customer care and billing – Overseeing the utility billing process from meter-to-cash.
  – Key accounts management – Managing specific contract or tariff agreements with key large non-residential customers.
  – Finance and rates – Managing rate tariffs to be charged to customers.
• Energy trading and risk management
  – Front office – Resource planning and procuring resources to meet physical, financial, contractual and regulatory requirements in the most cost-effective manner.
  – Middle office – Providing risk oversight and controls and performing quantitative analysis, market analysis, compliance review, credit administration and management reporting.
  – Back office – Energy accounting and settlements, regulatory compliance, settlement of bills, contract management and compliance.

Identifying these functions and also identifying key players, whether they be subject matter experts or core users, will help define the specific system needs of the utility. Having documented policies and controls manuals also help define these roles and business requirements. For example, utilities with established energy risk management policies will likely have already established key workflow procedures and responsibilities of different end-users that correspond to their systems.

Performing an ERP needs assessment

Once the various functional areas have been defined, the next step of the overall system selection process involves conducting an ERP needs assessment. The overarching steps in this process include:

• Identifying subject matter experts for understanding operations and processes of the functional area from a global level; and identifying core users to understand their specific responsibilities within a broader functional area
• Conducting needs assessment interviews to understand core-user needs, strengths and weaknesses of the current system(s) and potential process improvements.
• Documenting the existing system inventory to identify the information architectures and the systems in place to supporting business processes.
• Developing and documenting systems requirements (both technical, functional) for determining whether any future system can support, partially support, support through customization or cannot support these requirements.
• Documenting key functions performed by BoB systems that will need to have integration points with the ERP system.

Performing these steps will help a utility set the stage for soliciting and procuring an ERP system or BoB software with a prospective software vendor.

Anticipating operational changes and regulatory requirements

The activities of utility companies have expanded in the last few years, whether in response to an evolving business model and/or a changing regulatory landscape. As such, utilities must be flexible in their operations and discern whether their existing systems and processes can handle these external challenges.

Any new business activities may require utilities to re-assess their business processes to comply with any existing reporting requirements. For instance, governmental utilities that are newly engaging in derivative contracts (i.e., swaps, swap options, rate caps, futures contracts) must comply with annual financial reporting requirements as outlined in the Governmental Accounting Standards Board (GASB) Statement No. 53 – Accounting and Financial Reporting for Derivative Instruments; further, any derivative instruments that are tested as ineffective are required to be shown as gains or losses on a utility’s statement of revenues, expenses and changes in net position in accordance with GASB Statement No. 62 – Regulated Operations. While the accounting reporting requirements might be well outlined in these GASB statements, the processes of activities of specific functional areas (i.e., front office, middle office and back office) and users must be well-defined to comply with these requirements. Additionally, these utilities would need to examine whether their existing software systems have the appropriate functionalities to evaluate the effectiveness of the different derivative instruments employed.

Other more industry-specific operational changes will likely require enhancements or modifications to existing systems for end-users to perform the necessary analysis and generate proper reporting. For example, with approximately 76 percent of electric utilities indicating an increase in demand response and demand-side management activities according to Utility DIVE’s 2018 State of the Electric Utility Survey, many of these utilities may be required to develop procedures for load data collection to meet the requirements of North American Electric Reliability Corporation’s (NERC) Demand Response Availability Data System (DADS) program. In these situations, utilities may already have existing software that can perform these requirements or perhaps seek BoB applications to handle evolving business operational needs.

In order for utilities to find suitable ERP or BoB solutions for their energy industry-specific operating functions, they must identify specific functions and business processes that will allow for establishing enterprise system needs. As these specific system requirements are being defined, utilities have to also consider any potential business changes and corollary existing regulatory requirements that would impact various system requirements and needs.

Taking a more holistic approach to identifying industry-specific functions and processes and understanding the impacts of business changes and regulatory requirements will better help utilities determine whether their system’s full capabilities are being met or to identify the best BoB software solution.

For more information on this topic, or to learn how Baker Tilly energy and utility specialists can help, contact our team.