Perspective
Reliability: What Level and What Price?
November 1, 2001
By Ruth K. Kretschmer and Kenneth E. Hundrieser
Regulators will have to decide who pays
to upgrade the transmission system.
In the mid-1980's, many consumer advocates argued that while there
was serious discussion regarding the upgrading of the telecommunications
network, little consideration was given to the question, "Who should pay?" The
argument centered on whether a residential customer, who had only one or perhaps
two lines and would not need to transmit data, should be forced to pay for an
upgraded system designed primarily for business customers who needed the ability
to transmit both voice and data. Using digital versus analog service and fiber
optic versus copper wire for transmission also was discussed.
Today, we are facing similar questions in the electric
industry, what price and who should pay?
Because reliable sources of power
are essential for the seamless operation of numerous processes, commercial and
industrial customers are demanding a reliability standard of 6-nines and talking
about upgraded reliability to 9-nines (for more background, see sidebar "Energy
Requirements of a Digital Economy: A Brief History of Reliability). In order
to achieve these levels of reliability, massive upgrades to current transmission
and distribution infrastructures with duplication and redundancy are required.
This, obviously, will be extremely expensive.
Regulators should examine
current transmission requirements and developments to understand future reliability
and cost issues. Transmission and distribution systems currently require routine
maintenance, repair, and upgrades to maintain reliability at the current 3-nines
standard. In addition, the formation of regional transmission system operators
will require upgrades to transmission infrastructures in regional service territories
to overcome internal transmission constraints.
We are convinced that competition
cannot thrive in a system with chronic transmission constraints that prevent the
flow of power. We also believe that constraints inevitably lead to higher prices,
price volatility, and reduced reliability.
The release of the president's
proposed National Energy Policy indicates that discussions of these issues have
reached the White House.1 One proposal in the report directs Secretary
of Energy Abraham to work with the Federal Energy Regulatory Commission (FERC)
to improve the reliability of the interstate transmission system and develop legislation
to provide for enforcement by a self-regulatory organization subject to FERC oversight.
Another recommendation is to expand research and development of transmission
reliability and superconductivity as a means of increasing the carrying capacity
of transmission lines and reducing line loss. Transmission constraints can be
minimized or eliminated by upgrading transmission lines. This, of course, would
improve reliability but will cost billions of dollars. Transmission and distribution
system upgrades produced from routine maintenance, regionalization efforts, and
a strong national energy policy will result in higher levels of reliability, moving
regional territories beyond 3-nines and possibly to a new 6-nines standard.
But
again, there is a huge cost involved. This discussion brings us full circle to
the initial question. "Who should pay?" We believe that customers should have
the opportunity to choose the level of reliability required for their needs. Residential
customers may decide that 3-nines is sufficient and therefore, they should pay
only for that reliability level. Certainly, many commercial and industrial customers
may require 6-nines or even 9-nines reliability and those customers should pay
for an upgraded level of reliability. Regulators, utilities, end-users, and consumer
advocates have a small window of opportunity to examine the critical issue of
who pays and how much. Regulators must address the issues of cost versus reliability
demanded, now.
Regulating Reliability: A Delicate
Balance
The allocation of fixed costs in transmission and distribution
systems will increase in response to technological innovations, new capital and
depreciation requirements, and changing regulatory strategies. System upgrades
that are unnecessary for residential electric service may cost hundreds of billions
of dollars. The policy question is, who pays for system upgrades and how will
cost allocations be applied? Regulators have difficult questions to consider.
Will transmission and distribution upgrades result in stranded investments with
associated revenue requirement deficiencies? Reliability improvements may be implemented
for the commercial and industrial customers who may decide not to support general
system upgrades and invest in their own strategies. Will this leave residual revenue
requirements to be recovered from residential customers?
Shifting the cost
of the investment for upgraded service not needed by residential ratepayers will
threaten some residential customers' ability to afford electric service and will
be unfair. In this scenario, regulators will need to see evidence of any benefits
that will accrue to residential customers. However, in our judgment, evidence
of benefits to residential customers is unlikely since the benefits of an upgraded
system are inherently directed toward commercial and industrial customers.
Energy
Requirements of a Digital Economy:
A Brief History of Reliability |
Some call it power quality and others, reliability. Whatever it is termed, regulators
and customers are concerned about the frequency and duration of power outages.
It is common for electric utilities to assure customers that there is adequate
generation and that transmission and distribution systems are fully operational.
Today, existing transmission systems provide 4-nines (99.99 percent) reliability
while distribution systems provide 3-nines (99.9 percent) reliability. This means
that 99.9 percent of the time, power will not be interrupted. It's that 0.1 percent
of the time that that has some customers worried. An energy problem has
recently emerged for many customers. Computers have created a situation that was
not anticipated by the electric industry a few years ago. Today, many personal
computers are used continually to access the Internet. This type of computer use
requires power in ways not traditionally seen by the electric industry. Power
is required by servers, routers, and other trafficking infrastructure components
located many miles, cities, or even states away from the end-user. This infrastructure
is housed in huge, air-conditioned warehouses called server farms. It is common
knowledge that an unprotected microprocessor will malfunction if power is interrupted
for even a single AC cycle-one-sixtieth of a second. Presently, momentary
power surges and declines are common on grid systems. This is a reliability issue.
Power quality today isn't essential just for personal computers. Obviously, manufacturing
any product also requires quality power. Reliable power is needed for generating
pulp, producing paper, making plastic bags, weaving textiles, fabricating light
bulb filaments, manufacturing aluminum rails, molding plastics, and all other
manufacturing industries that require a continuous process. If power is interrupted,
all unfinished products must be reprocessed or disposed of and the machines cleaned.
Two examples easily illustrate this concept. Plate thickness at a steel-rolling
mill is controlled by microprocessors. A brief power interruption can cause rollers
to misalign, making it necessary to reheat and reprocess the product. Computer
failure at a paper mill can create clutter that requires two work shifts to clean
up. It is apparent from these examples that a power interruption may result in
an enormous amount of wasted product, employee time, and company resources. Computers
in the banking industry also require an uninterruptible power supply. Even a momentary
blackout can be disastrous and require days to get computers back on line, potentially
losing millions in sales and angering customers. The First National Bank of Omaha
calculated that a one-hour outage would cost $6 million. Because of the
need for a continuous flow of electricity, 3-nines electric reliability is no
longer acceptable to some customers. Incredible as it may seem, today some customers
are demanding 6-nines or even 9-nines (99.9999999 percent) electric reliability.
Demand is forcing development of new strategies for these customers. These strategies
will resolve the difference between the reliability of delivered power and the
reliability needed by the customer. One of the new strategies is distributed
generation. Distributed generation is the use of small, modular electric generation
units close to the point of consumption. The units can be located within an industrial
area, inside a building or within a community. Distributed generation technologies
are installed for the benefit of a specific customer or an electric system; therefore
their use can be stand-alone or they can be integrated with the grid. These technologies
are emerging as a result of three independent trends-utility industry restructuring,
increasing system capacity needs and technology advancements-that are concurrently
laying the groundwork for their widespread use. Distributed generation is drawing
interest because of the potential to increase system capacity cost-effectively,
while meeting the industry's restructuring objective of market-driven, customer-oriented
solutions. A wide variety of power generation technologies can be classified
as distributed generation. These technologies vary by size, application, and efficiency.
Reciprocating engines and gas turbines have been commercially successful for decades.
Fuel cells and microturbines are newer, evolving distributed generation technologies.
Fuel cells can deliver 6-nines reliability, which translates to approximately
thirty seconds of outage a year, and may be sufficient for technology centers
and the data processing needs of the banking industry. In 1997, the First National
Bank of Omaha switched from the grid to fuel cells after experiencing a costly
computer crash at its data processing center. The difference between 6-nines and
the 9-nines electric reliability required for an unprotected microprocessor also
can be supplied by distributed generation investments on the customer side, or
some form of storage capacity that can provide a few seconds of ride-through capability.
Distributed generation technologies also provide policymakers, regulators,
and the market with flexible options to address system capacity challenges. Long-term
demand is now expected to increase at an accelerated rate2 and there are
numerous examples where planned generating capacity is not keeping pace. There
also is a need for corrective action in certain capacity-constrained distribution
systems, typically in older, densely populated urban areas. Distributed generation
technologies could provide capacity-constrained utilities with an innovative and
inexpensive opportunity to simultaneously meet load growth and relieve transmission
constraints. -R.K.K. and K.E.H. |
Residential
customers will accrue benefits only as commercial and industrial customers are
able to produce higher quality products and services. However, this is not necessarily
a benefit to residential customers, since they already pay for the products and
services they require.
It may well be that most residential customers will
not be interested in a higher level of reliability, especially if their electric
bills are going to increase dramatically. As regulators, we have options. We can
decide to maintain the status quo and keep system reliability at the current standard
of 3-nines. Alternatively, we can promote an upgrade in system reliability from
the current standard of 3-nines to a new standard of 6-nines and let individual
customers invest their own resources to bring their level of reliability to 9-nines.
Whatever path we take, we are faced with a number of questions that must be considered.
How much to upgrade? A series of open questions
Are
transmission and distribution system upgrades needed? Given the effects of aging
transmission and distribution systems built to serve local generator monopolies,
what level of reliability is needed? Is there only a need for routine maintenance
to counter the effects of constraints due to market-based competition or must
systems be upgraded to a higher level of reliability in the process? If transmission
and distribution companies invest in system upgrades beyond the current 3-nines
standard, who should pay the cost for the higher standard of reliability? Can
we reasonably expect residential customers to pay for systems upgrades that will
primarily benefit commercial and industrial customers?
One strategy for
implementing the upgrade would be to have large commercial and industrial customers
purchase service, resulting in upgraded systems and the installation of necessary
facilities/equipment. Then, mid-size and small commercial and industrial customers
could be solicited based on the assumption that they too will need a higher level
of reliability and will be willing to pay for it. Regulators should establish
safeguards to ensure that basic monopoly service ratepayers are not required to
support, through higher rates, the initial improvements in transmission and distribution
reliability. Large commercial and industrial customers should bear these costs
since they will be the major benefactors of improved reliability. Wherever this
discussion leads, there are five relevant public policy objectives that must be
considered:
- Protect residential customers from cost-shifting
-
Encourage competition
- Maintain a healthy and sustainable utility
-
Safeguard the environment
- Ensure safety and grid reliability
When
discussion of a competitive electric industry first began, customers were told
that opening the electric market to competition would provide benefits. One benefit
would be the right to choose a supplier of electricity. Another benefit would
be that competition would lower the price of electricity. Today, residential customers
are questioning the "benefit" of choosing a supplier, and the "benefit" of lower
prices is rarely mentioned. In fact, many customers are concerned that a deregulated
electric industry will have a negative impact on the cost of electricity and its
reliability.
We know that a deregulated or restructured electric industry
will increase demand for transmission capacity and reliability. The North American
Electric Reliability Council's (NERC) General Counsel, David Cook, testified before
the Senate Governmental Affairs Committee that deregulation already has resulted
in a large increase in the number of transactions on the electricity grid.
Former
cooperating companies are now competitors and the responsibility for reliability
is divided, resulting in a grid that is stressed, congested, and open to the abuse
of reliability rules. The summer of 2000 evidenced a number of instances where
operators allowed facilities to remain loaded above their known security limits
for extended periods of time, which placed the grid at prolonged risk of major
failure. Current efforts to form interstate Regional Transmission System Operators,
alleviate transmission constraints and load pockets, and prevent the potential
exercise of market power in states actively engaged in deregulation, make the
dialogue concerning the level of reliability and who should pay essential to state
and federal regulators.
Customers in California currently are paying a
tiered rate for power based on usage. If regulators recommend upgrading the nation's
transmission and distribution systems to a higher reliability standard, should
structuring a tiered tariff be considered? Should commercial and industrial customers
that require and demand a higher level of system reliability pay a higher price
for that reliability? A motto that we believe has worked well for all customers
in any deregulation effort is, "Cost-causers should pay the costs they cause."
Ruth K. Kretschmer was appointed to the Illinois Commerce Commission
in 1983. She holds a degree from DePaul University in business administration
and economics. She also attended Harvard University's John F. Kennedy School of
Government and completed its Program for Senior Executives in State and Local
Government. She may be reached at (312) 814-4790, or by email at rkretsch@icc.state.il.us.
Kenneth E. Hundrieser, Ph.D. is an energy policy advisor to Commissioner
Kretschmer at the Illinois Commerce Commission. He earned a BS in engineering
from Northwestern University and an MS and Ph.D. from the University of Connecticut.
He may be reached at (312) 814-3363, or by email at khundrie@icc.state.il.us.
1 National Energy Policy Development Group, "Reliable, Affordable,
and Environmentally Sound Energy for America's Future," U.S. Government Printing
Office, May 2001.
2. Ibid
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