Deregulation: The Challenge Lies in the Transition

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Electric utilities today face many concerns, not the least of which is the national march toward deregulation. As industry experts monitor the deregulation process, many are becoming concerned about its short- and intermediate-term impact on distribution and service reliability.

Under regulation, utilities spent much time and effort developing and deploying appropriate design standards, operating procedures and maintenance programs for maintaining or enhancing service reliability. Under the traditional rate structures, state regulators encouraged procedures and investments designed to increase distribution system performance.

Through the years, most utilities even collaborated on research through organizations such as EPRI (formerly the Electric Power Research Institute) to develop new technology across all segments of the business. The traditional rate structure encouraged cooperative development and implementation of new technologies, such as substation and distribution system automation technologies and outage management systems.

The Old Standards Change, Replaced by ellipse

More recently, increased competition has led to various forms of cost-cutting. One recent deregulation trend likely to impact both technological innovation and reliability in the short term is an increasing focus on rates. In an effort to keep rates low and new entrants at bay, many utilities are cutting costs and trying to do the same amount of work with less resources. As a result, they are deferring some system upgrades and performing low-priority maintenance less frequently. If continued over time, this trend will inevitably lead to reduced performance, certainly not an intended goal of deregulation.

In some cases, the issue is simple asset allocation. With limited resources forced by deregulation and a more competitive environment, electric companies must shift their service model toward their most profitable customers. In some cases, 80 percent of an electric company’s revenue is generated from as few as 20 percent of its key customers. Because getting and retaining large commercial clients will be the core of any successful business strategy, service to residential customers may suffer in the short term. In the long term, however, deregulation (or re-regulation) likely will focus more attention on service reliability, leading to enhanced service quality and additional premium service offerings for all customers.

Increased Consolidations

Another result of deregulation and competition is consolidation. While utilities see mergers as a way to achieve additional cost savings, public utility commissions (PUCs) are increasingly wary of service degradation that could result from overly aggressive streamlining of operations. To ease the transition, many utilities are offering service performance guarantees tied to penalties for not meeting specified performance standards.

Profitability & Performance Metrics

For several decades now, PUCs have been strict in reporting distribution performance in various storm conditions. The regulators review procedures for handling storms and require annual reporting of standard indices including:

  • Customer Average Interruption Dura-tion Index (CAIDI)-Total number of customer interruption minutes/Total number of customer interruptions;
  • System Average Interruption Frequency Index (SAIFI)-Total number of customer interruptions/ Total number of customers served;
  • System Average Interruption Duration Index (SAIDI)-Total number of customer interruption minutes/Total number of customers served.

Recently, more aggressive regulatory commissions have started to impose penalties for not meeting performance objectives for service reliability during normal operating conditions, as well as storm situations. Utility commissions are encouraging utilities to either maintain or improve service levels by linking profitability to service quality performance metrics. This approach by utility commissions has led to the creation of a new term-performance-based regulation (PBR).

Role for Incentives

With performance tied to rate-of-return, utilities will step up efforts to improve service reliability, avoid costly penalties and maximize their profits. To maximize their rate-of-return, utilities are investing resources in advanced technology that will help them meet or exceed performance targets.

One such promising technology being deployed to address power quality issues is subsecond switching equipment. These systems are tied to advanced energy storage devices like superconducting magnetic energy storage (SMES). Additionally, IT investments that enable more timely access to facility and service status data likely will lead to the development of more advanced outage management systems. Improved outage management systems will result in shortened service outages and better maintenance and repair resource utilization, improving distribution service reliability.

Based on the most recent observations, the transition to a deregulated environment initially will have a negative impact on service reliability in some areas. However, in the long term, competition and rate-of-return performance incentives will improve service distribution reliability for all users, including residential customers.

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