Unlike the majority of performance-based regulation plans, alternative design paradigms require less data, by instead allowing firms to reveal performance potential. In an asymmetric environment,...
Opening the Black Box
A new approach to utility asset management.
Natural gas and electric utilities have always been concerned about reliability and safety, and each year spend billions of dollars repairing and replacing transmission and distribution assets. However, unlike the commodities they sell, there are no markets to value safety and reliability. Utilities can’t purchase these attributes directly, but instead must determine the best targets for each, while constrained by available resources. There are no guarantees. No system is 100 percent safe or reliable. No amount of planning or investment can completely eliminate sudden, unplanned equipment failures.
In fact, reliability and safety share characteristics of public goods. Customers along a specific distribution line, for example, can’t choose different levels of reliability; it’s the same for all of them. Thus, utilities must somehow determine how best to provide needed safety and reliability at the lowest possible cost. And state utility regulators must be able to evaluate those determinations accurately and independently.
Many utilities have developed their own methods to address the inevitability of equipment failure and evaluate the tradeoffs between replacing and repairing aging assets. Others rely on methods developed by consultants. Some of these methods are simply ad hoc – e.g., “replace utility poles that are 30 years old” or “test underground distribution lines every five years.” And these ad hoc rules can, in some cases, appear to work well. Yet they aren’t based on sound engineering and economic principles. Utilities that employ such rules can’t know whether they provide a least-cost strategy. Furthermore, such rules are less likely to pass the heightened regulatory scrutiny that comes when budgets are stretched. In other cases, utilities rely on flawed analytical tools. These tools, while not ad hoc , can lead to worse decisions, if flaws appear in underlying assumptions or analytical approaches.
Although the comprehensiveness of these methods varies, they all lead to inefficient or, worse, incorrect, decisions. In other words, utilities can end up spending more money than needed to achieve desired levels of safety and reliability. Or, they obtain less reliability and safety than their methodologies claim to provide. In either case, both ratepayers and utility shareholders lose: with ratepayers paying more and investors seeing lower returns if certain investments are disallowed by regulators.
With natural gas and electric utilities spending billions each year on transmission and distribution systems, both for new equipment and repairs to the old, even small improvements in asset management strategies can yield significant savings for consumers, while maintaining or improving overall reliability and safety. Here we introduce an approach that avoids errors common to other asset management approaches. Our methodology combines advanced statistical and mathematical optimization techniques. It recognizes the interdependence between asset management strategies and testing regimes. It also recognizes interdependencies among assets themselves and avoids the errors common to other asset management approaches.
For utilities and