Systems Engineering Group
The Economics of
Distribution System
Reliability
by Martin T. Bishop, Supervisor Reliability Improvement Studies,
Cooper Power Systems
Chris A. McCarthy, Power Systems Engineer, Cooper Power Systems
Virgil G. Rose, Rose Consulting
I
ntroduction
In the era of electric utility
deregulation and competition,
reliability of service to the customer
has become a critical issue. Cost
control is also an important element in
the competitive mix. In addition to
customers demanding better service
at lower cost, regulators are entering
the picture in some situations with rate
decisions tied to service reliability.
The challenge for utility engineers and
managers is deciding how resources
should be spent on reliability to provide the customer the service that they
demand, at a price that the customer is
willing to pay.
Historically, electric utilities
defined service reliability based upon
recorded system data. The feasibility
of new expenditures on the system was
based on the measured service reliability data, ignoring momentary outages
and other short duration events. The
values for reliability were reported as
system average values, which may say
nothing about an individual customer’s
experiences. Some short term events,
which may be very important to the
performance of loads in the customer
facilities, were not even counted in the
measurement index.
The perception of adequate reliability varies among customers served
by the electric utility. Customers have
a variety of needs, and demand different levels of service. As a result, some
electric utilities are trying to develop a
more customer-focused definition of
reliability. The economic question can
be considered through three different
perspectives: the electric utility’s viewpoint, the customer’s viewpoint, and
the regulator’s viewpoint. Each will
yield a different set of conclusions
regarding expenditures on system
reliability.
Electric Utility’s View
From the electric utility’s point
of view, the economics includes an
expenditure of resources to improve
reliability in order to generate
increased kWh sales or customer
loyalty, which translates into increased
profits. However, there may or may
not be a difference in the rate paid by
the customer for service with higher
reliability. In addition to the quantitative measures there are additional
benefits such as decreased customer
complaints, better public relations,
and decreased pressure from the local
regulators.
The problem with the economic
analysis considering the added revenue from improved reliability is the
fact that the benefit is small. For a
typical customer consuming an average of 1kW of power, the utility gets
less than $1 of extra revenues from
each customer by increasing the
availability of electrical service from
0.999 to 1.000. To make matters worse,
increased revenue does not equal
increased profit. A generous estimate
of the additional profit would be about
10% of increased revenues. Thus, the
additional capital available to improve
the system from 0.999 availability to
1.000 without reducing profits is only
about $0.10 per customer each year.
The task of increasing the service availability to 1.000, even if possible, would
certainly require a large expenditure
for little return, hardly a formula for
keeping a business healthy.
Another utility point of view might
include an economic analysis of reliability improvement expense versus the
total revenue stream to the utility from
an important customer. This could be
justified if the reliability improvement
expenditures are needed in order to
keep the customer from purchasing
power from a competitor. Although one
could make the argument that the competitor would still use the same electric
transmission and distribution system,
customers will still be persuaded to
switch energy suppliers when current
reliability is poor. By comparison, the
automobile manufacturers in the U.S.
over the past decade have improved
the reliability of their products in order
to retain existing customers, maintain
revenues, attract new customers, etc.
Utilities may be in a very similar
situation, forced by the marketplace
to expend resources on reliability
improvement in the face of new
competition.
Customer’s View
From a customer’s point of view,
the cost of an outage may be far greater
than the utility’s cost. Service interruptions, either momentary or sustained,
can disturb industrial client processes
resulting in lost production, scrapped
material, and perhaps additional equipment cleanup and repairs. A recent
IEEE IAS paper titled, “Power
Interruption Costs to Industrial and
Commercial Consumers of Electricity”,
summarized the costs in the following
table based on a survey of 210 large
commercial and industrial customers:
Outage Scenario Cost
4 Hr Outage With No Notice $74,835
1Hr Outage With No Notice $39,459
1Hr Outage With Notice
10-20% Voltage Sag
2 Sec. Momentary Outage
$22,973
$7,694
$11,027
Table 1 Outage Costs
The table gives some indication
that there is a significant cost to an
industrial customer when power is
disturbed or interrupted. Although a
momentary outage is indicated as a
lesser cost per incident, momentary
outages may occur 10-20 times in a
year. Similar cost estimates can be
developed for smaller commercial and
even residential classes of customers.
Regulator’s View
Performance Based Ratemaking
(PBR) seeks to establish an environment that stimulates the monopoly
service provider to improve efficiency
and keep prices in line with inflation
or less. Unfortunately, this can provide an environment where maintenance and other costs can be slashed
in order to make money. In the distribution environment customers are
captive. They cannot leave the supplier and connect to another provider.
An alternative is to include measurements of reliability in a Service
Quality Index (SQI) for a distribution
company subject to a PBR. The SQI
will impose significant penalties on
revenues if service quality deteriorates from a preset baseline performance level. The idea is to mimic the
loss of revenue to the company that
happens in a free market if customers
leave a poor service provider to go to
one with better performance.
In order to create a PBR service
quality index, definitions must be created for evaluation of ongoing performance. Performance levels can be
utility-specific to allow for different situations. If multiple items are included
in the measurement process, an SQI
specific for a utility and its history can
be developed. One suggested
approach would establish a rule that
requires all utilities to measure certain
service quality indices and report the
data annually. With this data, a utilityspecific SQI can be part of the rate
plan that compares annual performance to baseline performance
standards. The typical reliability measurements that are being adopted are
SAIFI, SAIDI, and MAIFI. Pennsylvania,
New York, and California have adopted these indices.
Penalties are included as part
of the PBR for reliability reviews to
discourage deterioration in service
with cuts in the budget. California
and New York will be incorporating
penalties in their rate plans. Rewards
(higher rates) are not generally part of
the plans since it is not fair to assign
higher costs to customers that receive
better reliability than they want.
Rewards and penalties might create
a situation where poor performance
in one area is balanced by good
performance in another area. This
might remove the incentive to improve
the service to the poorly performing
part of the system.
Reliability Improvement Initiatives
An unplanned customer outage is
generally caused by a fault on the
utility system. Although the number of
faults that occur on the system directly
impacts the resulting reliability indices,
the response of the overcurrent protection system can also have a large
impact on the number of customers
out of service and the total outage
time. Figure 1 shows the relationship
of both factors to the development of
the reliability indices. Many utilities
are focusing reliability improvement
initiatives around prevention aimed at
reducing the number of faults. It can
be shown that investments in response
initiatives, such as the design of overcurrent protection systems that sectionalize the system after a fault event,
also have a major impact on reliability
results.
Circuit
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
Total
Reclosers
exisnew
ting
1
0
0
1
2
0
0
0
2
1
1
0
2
1
1
0
0
2
0
14
2
0
2
4
6
1
0
2
2
4
3
4
1
0
2
2
1
5
2
43
Benefit
savings
per year
$29,877
—
$18,594
$102,980
$75,125
$10,839
—
$28,644
$19,714
$105,225
$48,988
$43,615
$6,224
—
$63,147
$14,231
$5,111
$51,568
$21,913
$645,795
Storms
Animals
Equipment
Failures
Tree
Trimming
System
Faults
Prevention
Initiatives
Response
Initiatives
OCP
Response
SAIFI
SAIDI
MAIFI
Figure 1 Prevention and Response Initiative
Impact Reliability
Especially when considering the
value of service to the customer, expenditures in the overcurrent protection
system for reliability improvement can
generate reasonable payback periods
and rates of return. One reliability
improvement study for an oil production company resulted in economic
justification for installing reclosers
on the primary distribution circuits
Cost
new/relocated
reclosers
$64,300
—
$60,000
$124,300
$180,000
$30,000
—
$60,000
$68,600
$124,300
$90,000
$120,000
$30,000
—
$90,000
$60,000
$30,000
$150,000
$60,000
$1,341,500
Table 2 Recloser Placement, Economic Summary for Study
Total Circuit
Pay back Rate of
(years)
Return
2.2
—
3.2
1.4
2.4
2.8
—
2.1
3.5
1.2
1.8
2.8
4.8
—
1.4
4.2
5.9
2.9
2.7
2.1
46.3%
—
30.4%
82.8%
41.5%
35.8%
—
47.6%
28.0%
84.6%
54.3%
36.0%
19.3%
—
70.1%
22.6%
15.0%
33.9%
36.2%
48.0%
Economics of
Reliability
serving the pump loads. Table 2 (see
page 6) displays the recloser placement
and economic summaries for the 19 circuits investigated in the system reliability study.
The results in the table demonstrate that for the majority of the
circuits studied, reliability expenditures
generate a very favorable rate of return,
an average of over 50% annual return
over a 15 year period. The only dilemma for the utility with this approach is
that it bears the expense and the customer reaps the benefits. However, the
competitive market may force electric
utilities to make the system investments to maintain their present
customer base.
Conclusions
What is the motivation for improving distribution system reliability even
if it cannot be economically justified on
increased kilowatt hour sales? One
possibility is that the regulatory commissions will establish a minimum value
for various performance indices, such
as SAIDI, SAIFI, MAIFI, ASAI, etc.
Penalties will be based on comparison
to the performance indices. Avoiding
penalty costs is one incentive to
improve service reliability.
Another motivation is the avoidance of negative public relations. A
utility with a reputation for unreliable
service cannot attract major industrial
customers to its service area.
Customer satisfaction may become
even more critical in the future. If
customers can pick their electric energy
supplier, a utility with a poor reliability
record will lose customers to its competitors. If a utility fails to provide
highly reliable service it risks losing
customers, lack of growth in kWh sold,
and increasing political pressure from
state regulatory agencies. THE LINE
Virgil G. Rose is a former senior vicepresident with Pacific Gas and Electric.
©1998 COOPER POWER SYSTEMS • BULLETIN 03035