New York utility Con Edison is celebrating the successful rollout of a new customer billing platform. But five years after the project was first proposed, costs ballooned $123 million or 32%.
In 2017, the New York State Department of Public Service, which regulates the state’s utilities, created an avenue for Con Edison to upgrade its customer billing system. Three years later, the board approved Con Edison’s plan with sister company Orange & Rockland Utilities to implement a solution provided by Oracle.
Regulators capped costs for the project at $455 million, which included $35 million for contingencies. Con Edison would cover $421 million of the costs, or 93%, with Orange & Rockland footing the rest of the bill.
As the platform rollout took shape, costs rose sharply. Con Edison encountered $123 million in unexpected expenses driven by increased project complexity, the implementation of risk mitigation measures, and the remediation of billing exceptions. The utility said additional external labor costs totaled $86 million.
Con Edison, the fourth largest investor-owned utility in the U.S., asked regulators to approve the capitalization of an additional $88.2 million more than its $421 million cost cap, bringing the total cost to $509 million. If approved, the utility could pass additional expenses on to customers.
As part of its petition, Con Edison said it needed to customize the baseline Oracle customer billing system and develop new tools to integrate it with existing operating systems, which required “numerous” change requests not included in the fixed-fee contract with Oracle. Despite the roadblocks, Con Edison said the changes improved upon its original proposal.
In May, the NYSPSC rejected Con Edison’s request and maintained the initial cap at $421 million for the utility’s share of project costs.
A cautionary tale
NYSPSC commissioners said cost caps are necessary to protect ratepayers and are based on prior experience with utilities struggling to implement major software projects.
National Grid New York’s attempt to implement an SAP enterprise resource planning system is a notorious example. Launched in 2010, the project aimed to unify disparate systems, and was estimated to cost $393 million.
But “pervasive management issues” contributed to the bill increasing to nearly $1 billion, an audit found. NorthStar Consulting Group, which performed the audit on behalf of NYSPSC said National Grid didn’t use vendors with strong utility experience to implement the SAP platform and issues with the software to expedite deployment.
National Grid ultimately assumed responsibility for the cost overrun and did not pass it to customers. While NYSPSC supported that action, the board demanded further accountability and organizational changes.
Commissioners used this cautionary tale to justify their ruling against Con Edison’s cost recovery attempt and the use of cost caps to protect customers.
“Project implementation cost caps (were) developed from experience with some utilities’ financial and operational struggles with (the) implementation of major information technology projects,” commissioners wrote in the Con Edison ruling. “While National Grid’s experience was not unique, it highlighted the importance of proper planning for the implementation of major information technology programs for the Commission and the utilities subject to our jurisdiction, including Con Edison.”
NYSPSC noted that Con Edison was already granted $35 million to account for potential overruns. Commissioners chastised the utility further for failing to share challenges and cost concerns with the board during the pending rate case.
“Con Edison clearly knew of changes in scope and cost,” the commissioners said. “Failure of a utility to bring forward information in rate cases regarding all aspects of the utility’s need for incremental revenue places the intervenors, ratepayers, and the Commission at a disadvantage.”
Charging ahead
Con Edison recorded a net loss of $37 million in the second quarter of 2024 due to the NYSPSC decision. The utility traded higher on Friday after beating investor profit expectations.
Kirk Andrews, Con Edison’s vice president and chief financial officer, said the company continues to “deliver strong financial results, notwithstanding the impact of the denial of our request to capitalize incremental costs for the successful implementation of our new customer billing and information system.”
In its filing with the Securities and Exchange Commission, Con Edison maintained its position that the incremental costs associated with its customer billing system rollout were “both prudent and necessary” to ensure the system’s success. Con Edison expensed $51 million of previously-capitalized costs for the new system in May in addition to a $38 million reserve established by the utility in 2023.
Con Edison filed a rehearing petition with the NYSPSC in June but said it’s “unable to predict” how the board will respond.
