Security Concerns Behind Slowdown in Itron Rollout?

San Diego Gas & Electric is scaling back on its plans to install Itron Inc. (NSDQ: ITRI) smart meters this year. Concerns over the company's networking security could be the reason, one analyst says – a theory the company says isn't true.

Still, the report could underscore an ongoing debate over whether open or proprietary standards offer better security for an industry that's expected to see big growth this year.

The San Diego utility previously had expected to install about 700,000 of Itron's OpenWay meters by year's end, starting in February. But now SDG&E has scaled back to installing 50,000 meters between March and August and about 200,000 meters by the end of 2009, according to a presentation by parent company Sempra Energy at the DistribuTech conference in San Diego last week.

The key change seems to involve a test of the Liberty Lake, Wash.-based smart meter maker's security vulnerabilities, said Ben Schuman, an analyst with Pacific Crest Securities.

"We believe that at least part of delay of the SDG&E deployment could be related to results of security vulnerability testing scheduled between November 2008 and 1Q09," Schuman wrote in a Monday research note.

Last week Sempra said it would pick up the pace of installing Itron smart meters in August after a "software release to enhance security functionality" – something that wasn't mentioned in December updates, Schuman said.

"While technical challenges are common in this type of deployment, we think it's important to note that the deployment was previously scheduled to start after the vulnerability testing, and is now scheduled to start later in the year following a new security software release," Schuman wrote.

The same issue also may be slowing plans by utility Southern California Edison to deploy Itron meters, Schuman said. He now expects Itron to ship SCE about 500,000 meters this year, 100,000 less than previously projected. The utility has said it plans to install smart meters to serve its 4.8 million electric customers through 2012 (see SCE Preps $1.63B Smart-Meter Program).

"The connection I have there is, I know security is of the utmost concern to Southern California Edison as well, as it should be for any AMI [advanced metering infrastructure] deployment, where you're talking about remotely disconnecting people's electricity," Schuman said in a Monday interview.

Itron declined to specifically discuss the matter of security in relation to projects with the two utilities, Deloris Duquette, company vice president of investor relations and corporate communications, said in an email.

But Arun Sehgal, product line manager for Itron's OpenWay platform, said it was "the world leader in supplying security for AMI systems" in a telephone interview Monday, noting that the company works with cybersecurity provider Certicom on its smart meter security efforts.

Duquette added that a host of factors could play into a utility pushing back its deployment schedule, noting that Sempra had cited the need to get IT systems ready for smart meter deployment as part of its delayed schedule during its presentation at DistribuTech last week.

"To us, that is business as usual and the nature of project deployments," she said. "Unfortunately sometimes people take things out of context."

Still, Schuman said that the slowdown of smart meter deployments by the two California utilities could mean that Itron will ship about 1 million OpenWay meters this year, down from previous estimates of 1.4 million meters. That could cut the company's revenue by $50 million this year and by $10 million in 2010, he said.

That's not a huge hit to a company that said last month it expected its full year 2008 earnings to be in line with previous estimates of $1.91 billion to $1.93 billion when it reports them on Feb. 18.

"At the end of the day, these guys are still a leader," Schuman said of Itron. "In 2010, it should work for them. It's just taken a bit longer than expected."