To the Editor:
In “Rate-Base Cleansings: Rolling Over Ratepayers” (November 2005, p.58), Michael Majoros urges state public utility commissions to recognize a refundable regulatory...
T D costs over much longer planning horizons, much as least-cost planning requirements often address generating resources. These decision-making approaches should incorporate uncertainty robustly, recognizing the interactions between reliability decisions. Regulators also must recognize the difference between good decisions and good outcomes, since the unexpected will always occur, regardless of how comprehensive a utility plans for unlikely outcomes.
Third, regulators must ensure that utilities have sufficient access to capital markets. Utilities cannot be expected to provide high-quality service if regulators do not provide sufficient returns and rates that recover T D capital and maintenance expenses. At the same time, utilities must demonstrate to regulators that their T D asset management programs are well-reasoned, neither spending too much nor too little. Utilities should be able to demonstrate they are taking a long-term view to make their capital budgeting decisions.
A New Approach
Ideally, a T D asset management strategy will address the following questions: (1) how best to maintain and replace existing assets; (2) how best to expand the system to meet future needs; (3) how best to provide system performance from the perspective of customers (which requires that reliability, among other system attributes, be measured and valued); and (4) how best to specify and allocate capital budgets over time, given the utility's long-term financial planning goals and requirements. The relationship between these four questions is shown in Figure 1.
Repair or Replace?
Managing existing T D assets, including underground cables, transformers, poles and breakers, requires identifying the lowest life-cycle cost repair/replace policies. To do that, a utility must be able to forecast asset performance, which will usually depend on factors such as age and past behavior. In some cases, the analysis must take into account the information provided by equipment diagnostics and testing. 4
Local Distribution Investment Planning
In developing asset strategies for expanding the electric infrastructure of local distribution areas, the most critical issues will be the volatility and uncertainty of local load growth, the area customers' reliability and power quality requirements, and the impacts of alternative system expansion options-including emerging technologies such as local generation-on overall system reliability
Reliability planning actually encompasses two distinct reliability issues. The first concerns normal or expected variations in reliability and how these variations impact customer satisfaction. Design, maintenance, and investment decisions affect average reliability and power quality. Thus, what is really needed is to determine how alternate levels of expected or average reliability affect customer satisfaction. This will depend on local customer needs and the nature of the local infrastructure. System-wide averages do not provide a sound basis for reliability planning. 5
Second, how do we evaluate the likelihood and appropriate design or operational responses to low probability but catastrophic failures? 6 The results of this type of strategic risk analysis will differ for every utility. However, such analyses will share the same components: identify and assess the potential for catastrophic events; describe the consequences of those events; and develop strategies for mitigating the risk of catastrophic events. 7
The Bottom Line: Capital Budgeting and Project Prioritization
Implementing repair-replace policies, expanding local area distribution capacity, and creating