Uncertainties Spoil Itron’s Party Deregulation Jitters Paralyze Utilities, Slow Orders

Itron Inc. has primped for a party, but finds itself at the window searching for the guests.

The Spokane maker of automated meter-reading systems for utility companies has developed state-of-the-art products.

Manufacturing lines at its Sullivan Road plant, already upgraded with millions of dollars in new equipment, are being expanded still more.

Alliances have been struck with major companies in utility metering.

And analysts inside and outside the company, which employs 500 in Spokane, agree utility deregulation will boost the potential market for Itron’s systems into the billions of dollars.

Yet Itron’s production lines were operating at only a fraction of their capacity last week. The company told shareholders last month to expect a third-quarter loss, with fourth-quarter results still in doubt.

And Itron stock, a meteor in the spring, has turned to stone, disappointing investors and analysts who had expected a continuation of solid quarterly financial performance.

Stock that opened 1996 at $33.50 per share zoomed to $60 in April before falling back into the low $20 range in recent weeks.

So what happened to the party most everyone predicted?

Turns out deregulation, cause of much celebration, also has become a party pooper.

A year ago, says Itron Treasurer Mima Scarpelli, most executives expected utilities would be well into programs for automating their meter reading by now.

There are 268 million electric, gas and water meters in North America alone, and only about 5 percent are read electronically.

Deregulation will force utilities to automate meter reading not only as a cost-cutting measure, but also as a way of increasing the variety of services they offer their customers.

But, Scarpelli said, the uncertainties created by deregulation have paralyzed decision-makers confronted with the likelihood of competition for utility customers.

“A lot of eyes are on California,” noted Senior Vice President Robert Neilson, because in that largest of U.S. markets, regulators are close to adopting the most sweeping deregulatory measures.

Also, he said, the industry is distracted by mergers that many managers are undertaking to cut costs.

Many of those deals may eventually work to the advantage of Itron, Neilson said.

Several of the pending deals would combine electricity and natural gas utilities. Itron, with readers that serve both types of utilities, as well as water providers, can be a one-stop source for managers who don’t want to deal with multiple suppliers, he said.

That could be important for Itron as more companies introduce meter-reading equipment into the market. The Spokane company has been the dominant player, with an overall market share of better than 70 percent. But several new entrants have equally sophisticated technology and good reputations in other businesses.

Among the real and potential competitors are corporate icons like General Electric, Motorola and Lucent Technology, which recently was spun off by AT&T. Some, like Schlumberger, are testing their own products even as they continue to work with Itron on others.

Neilson calls the phenomenon “coopertition” touched off when potential vendors for a new product want to offer as many technological and marketing options as possible.

One hard charger is CellNet Data Systems Inc., the only company other than Itron with installed radio networks that enable utilities to read meters without leaving the company’s building. The networks beam meter readings back to a central location.

Last month, Itron sued CellNet, alleging the California company infringed on the patents protecting its network architecture. CellNet denies the charge.

The president of CellNet is John Seidl, chairman of Kaiser Aluminum Corp. from 1990 to 1992. Prior to that, he had been president of Enron Corp., a leading supplier of electricity and natural gas.

Vice President Jim Jennings said CellNet, unlike Itron, offers remote readers only as a contractor that provides meter-reading services at a fixed rate per meter per month.

Letting a contractor handle meter reading allows a utility to avoid the upfront cost of new equipment, he said, and forces CellNet to continually update its technology and operator expertise.

“We kind of let the utility focus on its core business, which is delivering power to its customers,” Jennings said.

To keep its own costs down, CellNet contracts out all manufacturing, he added.

Neilson and Scarpelli called the CellNet approach one-dimensional. Many utilities do not want another company between them and their customers, they said.

Others, particularly foreign buyers, don’t want to jump into a large network. Neilson said they can start with one of the hand-held receiver/ readers that Itron has sold for years, or try a system that uses readers mounted in vans cruising through neighborhoods.

If they choose to go to networks later, the modules that transmit readings are already in place on the meters, he said.

And, Neilson said, with Itron’s capacity to produce several million modules and thousands of other system components per year, the company does not have to worry about its ability to install several major systems in a year.

Such a landslide of orders could occur in 1997, according to analysts and officials at Connext, a Seattle company that is testing Itron and CellNet systems for Puget Sound Power & Light Co.

“It’s like a herd mentality,” said Connext President Maura O’Neill, who predicted an onslaught in the second half of the year.

She said some of the regulatory distractions and merger concerns will have eased by then, and more applications of a network-based reading system will be on the market.

Connext, for example, plans to launch a product that will alert utility customers when power goes out at a second home or their place of business. Another will help businesses lower charges imposed when their energy demand is especially high.

“The technology is not cheap, but the benefits are tremendous,” O’Neill said.

Connext consultant John Skog said the technological differences between Itron and CellNet are not significant, although CellNet’s may be less expensive.

CellNet has a little more experience with network-based systems, he said, but Itron has a reputation for maintaining excellent relationships with its customers.

“Both of these companies are excellent companies,” Skog said. “They are going to be like Ford and General Motors.”

Neilson said Itron wants to maintain its market share, but not by adopting a cutthroat pricing strategy that compromises earnings.

“We are unique,” he said.

Charles Pluckhahn, an analyst with Dain Bosworth, downplayed the threat CellNet poses to Itron’s market share.

“The market wants the type of systems that Itron makes,” he said. “Great company. Great market. This too shall pass.”

, DataTimes