04 Apr The Last Hurdle Utilities Must Jump for Cloud CIS
Utilities want to provide the best experience for their customer base. As the internet-enabled customer comes of age, the ability to deliver information quickly, accurately and in the customer’s preferred platform is vital.
It’s not just millennials that drive this quest for information. Even the “Boomers” look to digital data requests in increasing numbers. They demand customer service on both home computers and mobile devices as well.
The aging mainframe infrastructures just can’t keep up with the technology required to gather, interpret, and provide answers from the mountains of data collected. In fact, older systems—often over 20 years old—are incapable of upgrading software and hardware to meet the demand.
Innovations in Cloud CIS give utilities the agility, scalability and security to meet customers’ demands for quick, accurate information, when and how they want it. Moving to the cloud keep costs minimized. But, more importantly, it ensures that the costs are necessary. Because you pay as you go, so to speak, a utility saves by needing fewer IT resources and physical facility assets to accomplish efficient customer service.
So, what is the biggest hurdle that keep many utilities from jumping to the cloud? It’s not technological, but financial. For the most part, it’s a change in mindset from using physical assets as the base for capital expenditures to focusing on Software as a Service (SaaS) to determine rate bases for ROI and utility fees.
Even though regulatory compliance issues are evolving to include non-physical assets, utility company executives still have trouble making the change. Because of the way the old systems were capitalized—based mainly on physical assets—it appears that the rate base doesn’t allow sufficient capitalization to secure a profitable rate-of-return.
Many accounting departments fear that OpEx will overtake any potential capital expenditures, making it difficult to monetize and justify switching to the cloud. Part of this is due to incomplete or misunderstood ruling from the FASB. Utilities feel that they are losing valuable capital expenditures and trading them for operating expenses that don’t add to the rate base.
However, there are many major expenses that can be figured into the rate base for capitalization:
- Permanent software licenses (although, not all cloud providers offer this)
- Consulting and implementation expenses
- System upgrades (software modules) that increase functionality when needed.
In fact, perhaps the only part of cloud computing that can’t be capitalized is hardware provided by the cloud host. However, it’s impact is minimal as on-premise hardware costs only total about 3 percent of the five-year total cost of ownership.
One of the key factors in ensuring that cloud CIS can be capitalized is scrutinizing the agreements between the utility and the hosting company. Some cloud hosts do not treat the software licensing as an ongoing and permanent agreement. When treated as a service, not a product, the license becomes an operating expense instead of CapEx.
As FASB and state regulatory commissions make changes to include more cloud computing expenses, the utility companies themselves must change the old mindset on CapEx.