Electric Retail Choice. The Arkansas Public Service Commission has issued its final report on electric restructuring, citing a "broad" consensus favoring competition. It...
a T D system that provides the best level of reliability (least-cost as defined by utility and customer costs over and appropriate planning horizon) will ultimately be limited by the utility's financial condition. Today, most electric utilities operate in a world of greater perceived financial risks, which can limit their access to capital. Gold-plating a T D system is unlikely in today's financial markets. More likely is the utility that adopts a penny-wise but pound-foolish capital budgeting approach, so restricting spending as to create significant additional financial and system performance risks in the long run.
The realities of financial constraints mean that capital budgeting for T D asset management has become increasingly important. This capital budgeting problem has two overall components. The first is project analysis-determining the priority of different projects. That priority will depend on the utility's overall corporate objectives, including improved reliability, maintaining or improving safety standards, better environmental performance, and so forth. This requires that different objectives, including risk, be traded off of one another in a consistent manner.
The second component of capital budgeting is portfolio development. The utility must decide which projects will be undertaken over the next budget period and which projects will be deferred. Deferral saves money, and increases system performance risks. One way to solve the problem is to maximize the present value of the timed portfolio of projects selected and to assess and measure the risk of deferral associated with that portfolio. The planner is then able to choose among efficient portfolios, each with different risk and value levels. 8
It is critical to examine multi-year portfolios of projects, rather than focusing solely on this year's budget cycle. Just as it's better to plan for retirement by evaluating financial asset strategies over many years, rather than planning one year at a time, a multi-year capital budgeting approach allows utilities to reduce their costs. The reason is that investments today affect system performance and the future cost of ensuring acceptable performance levels tomorrow.
As the Aug. 14, 2003, blackout starkly demonstrated, managing T D assets can be a life-or-death matter. The management system we have discussed here is a comprehensive and, more importantly, coordinated approach that can help utilities provide the reliability their customers require, while controlling costs and achieving important financial performance targets.
- Earlier events in Chicago and New York City raised similar questions about the prudence of reduced infrastructure spending.
- The magnitude of this underestimation problem has been demonstrated in recent work by Peter Morris Charles Feinstein and Stephen Chapel. See, Strategic Reliability Analysis, Presentation at EUCI, "Using Analytical Tools To Improve Asset Management For T D," October 2003. Copies of this briefing can be obtained from the authors.
- We recognize that many generation units also can provide reactive power for system support and voltage stability. However, we are aware of few regulatory decisions where the prudence of a generating asset investment was decided primarily on reactive power.
- This is not the same as an increasingly popular approach called reliability centered maintenance (RCM). The objective of RCM is to maintain functionality and extend the life of