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

Fortnightly Magazine - February 1 1996

specified as a qualification for primary voltage tariffs. If cost studies are reengineered to segregate primary voltage lines by function (interconnecting to a substation vs. feeding-line transformers), some primary line costs would be reassigned to single- and dual-phase local distribution lines, so one would expect less primary line cost allocated to customers served at primary voltages and more allocated to customers served at secondary voltages. The reengineered study may also draw a distinction based on whether these single- and dual-phase local distribution lines serve any primary voltage load. The extent to which primary load is served from local distribution lines would dictate whether a distinction is made between primary voltage local distribution lines and secondary voltage lines.

For gas operations, pressure serves as the equivalent of voltage, but the type of functionalization described above may be best accomplished for gas mains through size distinctions rather than pressure.

Classifying Line Investment: Demand vs. System Size

In the traditional cost-of-service study performed under regulation, both primary and secondary distribution lines are often classified between demand and customer costs (e.g., as related either to the level of level of demand or capacity, or to the size of the system as expressed by the number of customers). This classification is carried out through assumptions or through formula methods such as the zero intercept or minimum system.

Under competition, however, a reengineering of cost-of-service studies would segregate primary voltage lines as three-phase primary main feeders, or single- and dual-phase primary and secondary voltage local distribution lines. This reengineering would reveal that the allocation methods used to calculate demand-related costs for distribution substations (or gas-measuring and -regulation stations) are also suitable for primary main feeders, because the degree of load diversity is nearly identical. Therefore, reengineering would lead to elimination of any customer cost category for three-phase primary main feeders.

As for local distribution lines, a segregation between demand- and customer-related costs remains justified. Nevertheless, the zero intercept and minimum system methods lead to a misclassification.

The investment in local distribution lines in residential service areas is typically much larger relative to load (or demand) than in commercial or industrial service areas. Further, the relationship between residential and commercial and industrial load will vary by size of community. This relationship can lead to a reflection of customer costs through the use of demand allocation factors suitably weighted to reflect investment differences. Such factors would reflect less load diversity than the factors used for primary main feeders; diversity differences might suggest segregation of primary local distribution lines from secondary local distribution lines. Therefore, reengineering could more accurately reflect cost differences imposed by service area characteristics. Similar service territory differences may exist for gas operations.

Similarly, the investment in line transformers in residential service areas is also typically larger relative to load than in commercial or industrial service areas, and varies by size of community. However, the residential area ratios for line transformers are much lower than the ratios for local distribution lines. The gas equivalent of line transformers (house regulators) are inexpensive and located at the meter, so they