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Transmission or Distribution? Reengineering Cost-of-Service Studies for the Emerging Competitive Market

Fortnightly Magazine - February 1 1996

Why will cost-of-service studies continue to prove useful in a competitive market?

Cost is one of more than a dozen factors to consider in setting prices, whether in a regulated environment or a competitive regime. However, the relative significance of these factors will change under competition, when understanding the true cost of an individual service will actually become more important than under regulation.

In a competitive environment, more accurate cost estimates should improve management's effectiveness by enabling them to:

s Dedicate resources more effectively

s Find sounder bases for "make-or-buy" decisions

s Select the most effective mix of services to provide

s Identify the controllable functions most critical to financial performance

s Make more knowledgeable pricing decisions.

The move from regulation to competition holds significance for cost-of-service studies in part

because it can change the apparent diversity of customer load. As a rule, loads are the least diversified at the meter; diversity increases as measurements move away from the meter and toward the power-supply system. Regulation focused on the overall system, where fully diversified loads tend to make all customers look similar. Competition moves the focus back to the meter, where diversity is less obvious and customer distinctions become paramount.

Two significant inaccuracies arise under regulation that assigns functions to transmission and distribution line investment and allocates associated costs to customers based on cost causation. These inaccuracies involve 1) identification of line investment used to supply primary and secondary voltages, and 2) classification of such investment as a cost caused either by size of demand or number of customers.

Segregating Line Investment:

Voltage vs. Function

Costs tend to follow investment. Cost differences tend to reflect how customers are served, and so are sensitive to voltage level and to the physical configuration of service facilities.

Cost-of-service studies under regulation typically segregate distribution lines between primary and secondary voltages, but this segregation does not accurately reflect their actual use. Voltage is significant, but voltage level does not provide the functional distinction. Instead, lines carrying primary voltage actually perform two distinct functions (em to interconnect distribution substations and to feed line transformers (em that are best identified by the use of either (a) three-phase lines or (b) single- and dual-phase lines.

Substations are connected by

three-phase feeders, or "primary main feeders." However, under the design philosophy of the American distribution system, a significant portion of primary line investment is actually made up of single-phase (and perhaps two-phase) lines that feed the secondary system through line transformers (even though customer location may dictate that line transformers are served by primary main feeders). This latter combination of single- and dual-phase primary and secondary lines that feed line transformers, can be termed "local distribution lines."

If these functional distinctions are recognized in reengineered cost-of-service studies by segregating primary voltage lines as either primary line feeders or local distribution lines, the allocation of costs to customers served at primary voltage levels would change.

For example, all or nearly all customer load served at primary voltages will typically be connected to primary main feeders. In fact, three-phase service is sometimes

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