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

Fortnightly Magazine - February 1 1996

are not significant.

Community size distinctions (em particularly the urban or rural character (em once were typical in cost-of-service studies. A more thorough understanding of how distribution systems actually function might identify a need for reengineering to reflect community size distinctions as well.

It might also reveal how the largest customers are connected, leading to a realization that cost-of-service studies should handle certain large customers in a special manner. The result could well be significantly different costs for certain classes of customers. This situation is equally applicable to gas operations.

Accepting What is Politically Incorrect

At one time, some analysts regularly related costs to actual distribution system usage in their electric cost-of-service studies. However, such approaches were abandoned for regulatory purposes, because they required additional effort and produced politically incorrect results. Therefore, the reengineering discussed here is probably not possible under regulation. But this reengineering will prove absolutely necessary for successful operation in a competitive marketplace, because it will lead to the elimination of subsidies provided by primary voltage customers to secondary voltage customers.

The extra effort needed to accurately estimate costs to serve is now justified, and should be undertaken. t

John S. Ferguson recently retired as a principal of Deloitte & Touche, remaining as a contract consultant to the firm. He is a frequent contributor to PUBLIC UTILITIES FORTNIGHTLY. His most recent contribution, "Fossil Plant Decommissioning: Tracking Deferred Costs in a Competitive Market," appeared in the June 15, 1995, issue.

The Traditional Cost Study

A traditional cost-of-service study entails three steps-functionalization. These steps identify costs by function (generation, transmission, distribution), causation (demand, energy, customer, other), and responsibility (assignment to customer class).

The traditional study is complex (because of its many components), but not complicated. Reengineering will likely prove necessary for each of these cost-study components.


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