[pagebreak: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."

[pagebreak:Itron Rollout: Continued]

Itron has publicly announced four smart meter contracts - the two in California, as well as one with Texas utility CenterPoint Energy and one with Michigan utility DTE Energy – and said last month that some may see delays while others may move faster than first expected. Those AMI, or advanced metering infrastructure, meters stand in contrast to AMR, or automatic meter reading, meters that involve an older technology that allows them to be read automatically but doesn't involve two-way communication.

This isn't the first time Itron has seen analysts concerned over lags in utility smart meter deployments (see Itron Reports Strong Third Quarter). Utilities can be slow to adopt new technologies and must get approval from regulators for major investments like smart meter networks.

But the large-scale growth in utility smart meter deployments (see Smart Meter Installations Grow Nearly Fivefold) is bringing to the fore issues of security for these networks, which allow utilities to remotely shut off and restart meters, send and receive power usage data from them and use them for potential future applications like linking to energy monitoring and saving devices in customers' homes.

Silver Spring Networks, which makes smart meter communications and networking gear based on Internet protocol (IP), says that some smart meter makers use proprietary networking technology that, if installed en masse, could stall the industry's growth by stifling competition and the development of new technology.

Itron and other smart meter makers like Sensus say their technology is based on open standards, and other smart grid-related companies have different interpretations of what constitutes open standards (see Smart Grid: A Matter of Standards).

But the issue doesn't extend only to competition. Proprietary networking standards also could be more open to security threats, Eric Dresselhuys, vice president of markets at Silver Spring, said last week at DistribuTech.

"Security threats to the [utility] industry are real," Dresselhuys said. "That's why we feel we need the most secure, reliable set of security protocols around – which are based on IP."

The issue arose last week when Itron and fellow smart meter makers Landis+Gyr and Aclara sent a letter to U.S. Senators asking that language in the stimulus bill now making its way through Congress drop language that would tie the use of open standards -- specifically, IP – to receiving part of $4.5 billion in grants now aimed at smart grid deployments (see Traditional Meter Makers Say Stimulus Favors New Smart Grid Companies).

Schuman said he generally supports open standards in smart meter deployments, but added that defining the term is difficult for an industry in its infancy.

"It's probably better for everybody if we do move to open standards. It allows for more robust application development," he said. As for security, "I'm in the boat that open standards are better for security, because you open it to development by guys who really know what they're doing."

On the other hand, "In a lot of ways, I don't like the federal government using language in the stimulus to pick winners and losers this early in the game," he said. "I think they should leave that to the industry and the customers."

"Where I'm having difficulty is seeing who actually has open standards," he added. "Even if you use IP for your communications protocol, you can be all proprietary at the application level."

The issue is further complicated when it comes to whether the means of physically transmitting data from and between smart meters to utilities is based on open standards –something that rival smart meter communications networking companies Trilliant and SmartSynch have noted may apply to Silver Spring's technology.

Still, the push for open standards appears to be picking up steam in the industry.

"We prefer smart grid technology companies that take a page out of the playbook of telecom, focusing on open standards software leveraging IP and other open protocols," Thomas Weisel Partners analyst Jeff Osborne wrote in a research note last week. 

Companies at DistribuTech told the firm that "it could cost upwards of $1 million just to write applications to some of the quasi open software systems out there that metering vendors have developed in an attempt to be partner agnostic," Osborne wrote.