Utility spending on distribution systems is increasing, but reliability at risk, report states

HAUPPAUGE, N.Y., June 26, 2002 — Based on research and analysis completed recently, the reliability of the nation’s electric distribution systems is likely to be put to the test in the future.

Further, expenditures to close the reliability gap will place upward pressure on distribution rates, and attract closer regulatory scrutiny.

Research firm R.J. Rudden Associates’ conclusions are based on a combination of “field analyses,” interviews with distribution engineers and managers, analysis of data from major utilities nationwide, and secondary research that relied on reports and analyses performed by some of the country’s leading research, academic and industry institutions.

“Our research demonstrates that, in recent years, the pace of utility spending on electric distribution operations and maintenance, as well as capital, has exceeded the rate of growth in load and numbers of customers served by a significant degree,” stated Michael Mount, one of the three co-authors of the report.

“This would normally be good news, and it certainly is not bad. Yet, this leaves the impression that everything is OK with the nation’s distribution system. In fact, we feel that a number of factors might be masking true trends in reliability. Further, a number of interviewees suggested that much of the acceleration in expenditures on distribution was much-needed ‘catch up’ investment to compensate for a previous period of severe under-investment.”

Kevin Harper, another co-author, pointed out that transmission problems have been receiving most of the press recently, and for good reason. “A sound transmission system is the backbone of cost-effective, competitive markets, and the nation needs to get its priorities straight on this matter. However, reliability and power quality…two essential ingredients to a healthy digital economy…are overwhelmingly related to distribution.”

With over 90% of power outages caused by distribution, Harper points to the nation’s distribution system as “more critical to future reliability than either lack of generation reserves or congested transmission systems.” The annual cost of outages has been estimated to be anywhere between approximately $40 billion to $400 billion per year…staggering amounts whichever estimate one uses.”

The report identifies a number of reasons why recent trends in the traditional measures of reliability may not be telling the whole story. “First, as our research shows, while national average trends in reliability measures appear acceptable, the averages mask some challenging conditions in certain parts of the U.S.,” according to Mount.

“In many parts of the country, the lack of severe weather has not stressed the integrity of many systems. Further, reliability statistics themselves do not necessarily reflect the underlying condition and age of a system. However, we do know that the distribution infrastructure is aging rapidly on many systems, especially in many central cities, and that without significant replacements and upgrades, reliability problems could begin to arise. Couple this with transmission and generation related `load pockets’ and the problem could become acute.”

The report also suggests that the reliability indices themselves are not adequate indicators of the essential quality of power required by the digital economy.

Harper also indicated that customer dissatisfaction with reliability and power quality is rapidly approaching, if it is not already at, unacceptable levels.

“Aside from the anecdotes we have all heard about frustrating momentary outages, there is a body of research that suggests that customers are becoming very concerned over the issue, and are making physical plant decisions accordingly. One survey of national account customers, conducted by the Edison Electric Institute, indicated that about 22% of customers could tolerate outages of no more than five seconds, 39% said they were beginning to make new facility site selection based on reliability, and fully 49% said they were planning future expenditures at their facilities to assure reliability.”

Finally, the authors expressed concern over the implications that their findings have for utility financial performance and regulation.

Richard Rudden, President and CEO of Rudden, observed “With all of the pent up need for improved reliability and power quality, and the accelerating pace of distribution capital expenditures, as well as operating and maintenance expenses, there will be inevitable upward pressure on the rates of ‘wires company’ …or downward pressure on earnings at a time when utilities can ill afford negative analyst coverage. Couple that with customer concerns, and it is no surprise that regulators are placing distribution reliability under increasing scrutiny, and that these issues are finding their way into performance-based rate designs and other regulatory policies and practices.”

The complete article can be accessed from the web site at www.rjrudden.com. From this home page click on “Profiles” then click on “Papers” after filling out a brief registration.

R.J. Rudden Associates, Inc. is a strategic, economic and management consulting firm specializing in energy matters.

Rudden has offices in New York; Washington, D.C.; Houston; Atlanta; Augusta, Maine; and San Francisco. Additional information about the firm is available on Rudden’s web site at www.rjrudden.com.


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