Electric Retail Choice. The Arkansas Public Service Commission has issued its final report on electric restructuring, citing a "broad" consensus favoring competition. It...
economic and decision analysis techniques that recognize the uncertainties that affect T D systems.
Prudent T D Asset Management
As a regulatory concept, prudence has focused primarily on generating assets. In part, this is because generation accounts for one-half to two-thirds of electric utilities' total costs. Looking only at capital expenditures, however, T D spending accounts for 40 to 50 percent of costs. Thus, T D asset decisions should not be ignored or made as an afterthought to generation assets decisions.
Of course, gauging the prudence of a generating asset investment decision also is relatively straightforward, since the most common outputs, electric energy and capacity, are easily measured. 3 This is not to say that decisions regarding the prudence of generation asset investments have not been controversial; they have. But most of those controversies have focused on measurable issues: Does future load growth justify an acquisition? Are the costs too high relative to other alternatives? Has there been malfeasance or fraud involved?
Determining the prudence of T D asset management decisions is more difficult. Utilities invest in T D assets to ensure a reliable power supply for their customers. But unlike generation, a reliable T D system behaves much more like a public good because changes in reliability tend to affect all customers; it is usually difficult to provide individual customers with customized reliability levels, except in very specialized circumstances.
If one doesn't consider the value of reliable service to customers, then the prudent strategy, from a least-expected cost basis, would be to do nothing to improve, or even maintain, reliability levels. Of course, this is not the case; customers clearly do value reliable power service and, as was amply demonstrated in the Aug. 14, 2003, blackout, an unreliable T D system can impose staggering economic costs. However, different customers can value the attributes that define reliability very differently.
Since no utility's T D system can ever be perfectly reliable, prudence should focus on several critical issues. First, utilities should manage T D assets so as to reduce the likelihood of extreme events, rare and otherwise. And, utilities must be able to determine which events are rare and which are not by recognizing and addressing the interconnected nature of some multiple contingency events. Reducing the likelihood of catastrophic events may include more maintenance and tree trimming expenditures, accelerated replacement of aging assets, or lower utilization levels for key equipment.
How low a likelihood of a catastrophic event is reasonable and prudent? Although a zero likelihood is clearly unreasonable, there is no unique answer. Therefore, utilities and regulators, both state and federal, first need to establish clear reliability standards, including a definition of catastrophic events. Moreover, standards should also encompass maintaining general system reliability so as to minimize nuisance events to reasonable levels, and prevent nuisances from becoming catastrophes. Prudence also must recognize differences among utility systems. Requiring a utility whose customers are primarily rural to meet the same nuisance standards as a utility whose customers are primarily urban is unreasonable.
Second, working together regulators and utilities should establish clear planning methodology guidelines. These guidelines should require sound decision-making approaches that minimize expected