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The Rush To Modernize: An Editorital on Distribution Planning and Performance Measurement (published in Public Utilities Fortnightly July 8)

Members of the Utility Management Community:

I am pleased to provide you with this link to an article I co-authored with my Wired Group colleagues appearing this week in Public Utilities Fortnightly.  Using publicly-available FERC Form 1, EIA Form 861, and JD Power and Associates data analyzed by Utility Evaluator software, the article documents poor results from recent grid investment increases by US Investor-Owned Utilities (IOUs).  Nationwide data indicates that neither reliability improvements nor cost savings have materialized despite a dramatic increase in grid investment.  The article describes emerging best practices in distribution planning and performance measurement, and cites their promise as potential cures.  The article also incorporates the release of the Utility Evaluator's 3rd annual Customer Value Ranking of US IOUs.  The annual ranking compares outcomes, as measured by reliability and customer satisfaction, to inputs, as measured by rate base and O&M spending per customer, for each of 104 US IOUs with all four data points.  Full rankings for multiple years can be accessed at www.utilityevaluator.com.

I look forward to your feedback.

Sincerely,

Paul Alvarez

Paul Alvarez's picture

Thank Paul for the Post!

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Matt Chester's picture
Matt Chester on July 10, 2019

Thanks for sharing Paul. Based on this quote:

Nationwide data indicates that neither reliability improvements nor cost savings have materialized despite a dramatic increase in grid investment. 

I'm curious if you'd say that those IOUs who have invested without great results know themselves that their results have been lackluster, or are you using metrics they may not be using and thus revealing even to them where they're falling short?

Paul Alvarez's picture
Paul Alvarez on July 11, 2019

Thank you for your question Matt.  While it is difficult for me to say precisely what the IOUs know and don't know about their performance, my greater concern is that they do not care.  They are rewarded through the authorized rate of return for making investments in the grid, and so that is what they do.  The cost-effectiveness of those investments does not concern them, as there is no consequence for making investments which are not cost-effective.  This can be seen in investments in smart meters (which are not used for time-varying rates or energy efficiency); automated Volt-VAr control (which is not used to reduce customer energy consumption); and undergrounding (for which reliability improvements are tiny if not absent altogether, despite costs of $500,000 per mile).

The situation is getting worse, not better.  Due to excess generation capacity, and transmission which takes 10 years to get into rate base, distribution is the last remaining frontier for IOU investment.  And falling natural gas and electricity (the commodity) prices have masked distribution rate increases, so that the total bills have not yet caused alarm.  IOUs are seizing on legislator and regulator interest in reliability and distributed energy resources as opportunities to invest.  But if it costs an IOU $100 million to improve its reliability from 95 minutes out a year to 90 minutes out a year, is it worth it?  No one ever demands a performance improvement committment in exchange, or even asks the utility to quantify the performance improvements it estimates.  We must do better.    

Matt Chester's picture
Matt Chester on July 11, 2019

Thanks for the reply, Paul.

They are rewarded through the authorized rate of return for making investments in the grid, and so that is what they do.  The cost-effectiveness of those investments does not concern them, as there is no consequence for making investments which are not cost-effective.

This is an issue I've definitely see pointed out in other places-- especially in regards to the desire to throw money into hardware investments but not into software investments (which are 'operations' and not infrastructure so they don't count towards that money total). 

Interesting to hear the type of downstream effects this issue might have

Paul Alvarez's picture
Paul Alvarez on July 17, 2019

The downstream effects of IOUs capital bias can be felt all over.  It can be felt in software, where IOUs are very to happy to invest if installed (capitalized), but not so much if software is subscribed to as a service (expensed).  It can be felt in owned communications networks, in which IOUs are investing in spades (capitalized) rather than making use of Verizon and AT&T networks already in place.  It can be felt in how IOUs upgrade their grids for large solar developers, in which they charge as little to the developer (at cost with no profit in most states) for interconnection, while charging as much of related upgrades to the general customer base as possible (capitalized, with profit).  In vertically integrated states, it can be felt in generation, which the IOUs have over-built (leading to excess generation capacity).  And it can be felt in distribution, via the choices IOUs make to invest in capabilities and upgrades with little or no reliability value.  The regulatory and ratemaking model under which IOUs operate must be changed.  I like revenue-cap ratemaking with performance metrics (RIIO in the UK).

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