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
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
power from a competitor. Although one
could make the argument that the com-
petitor would still use the same electric
transmission and distribution system,
customers will still be persuaded to
control is also an important element in increased kWh sales or customer switch energy suppliers when current
the competitive mix. In addition to loyalty, which translates into increased reliability is poor. By comparison, the
customers demanding better service profits. However, there may or may automobile manufacturers in the U.S.
at lower cost, regulators are entering not be a difference in the rate paid by over the past decade have improved
the picture in some situations with rate the customer for service with higher the reliability of their products in order
decisions tied to service reliability. reliability. In addition to the quantita- to retain existing customers, maintain
The challenge for utility engineers and tive measures there are additional revenues, attract new customers, etc.
managers is deciding how resources benefits such as decreased customer Utilities may be in a very similar
should be spent on reliability to pro- complaints, better public relations, situation, forced by the marketplace
vide the customer the service that they and decreased pressure from the local to expend resources on reliability
demand, at a price that the customer is regulators. improvement in the face of new
willing to pay. competition.
The problem with the economic
Historically, electric utilities analysis considering the added rev- Customer’s View
defined service reliability based upon enue from improved reliability is the From a customer’s point of view,
recorded system data. The feasibility fact that the benefit is small. For a the cost of an outage may be far greater
of new expenditures on the system was typical customer consuming an aver- than the utility’s cost. Service interrup-
based on the measured service reliabil- age of 1kW of power, the utility gets tions, either momentary or sustained,
ity data, ignoring momentary outages less than $1 of extra revenues from can disturb industrial client processes
and other short duration events. The each customer by increasing the resulting in lost production, scrapped
values for reliability were reported as availability of electrical service from material, and perhaps additional equip-
system average values, which may say 0.999 to 1.000. To make matters worse, ment cleanup and repairs. A recent
nothing about an individual customer’s increased revenue does not equal IEEE IAS paper titled, “Power
experiences. Some short term events, increased profit. A generous estimate Interruption Costs to Industrial and
which may be very important to the of the additional profit would be about Commercial Consumers of Electricity”,
performance of loads in the customer 10% of increased revenues. Thus, the summarized the costs in the following
facilities, were not even counted in the additional capital available to improve table based on a survey of 210 large
measurement index. the system from 0.999 availability to commercial and industrial customers:
1.000 without reducing profits is only
Outage Scenario Cost
The perception of adequate relia- about $0.10 per customer each year.
bility varies among customers served The task of increasing the service avail-
4 Hr Outage With No Notice $74,835
by the electric utility. Customers have ability to 1.000, even if possible, would
a variety of needs, and demand differ- certainly require a large expenditure 1Hr Outage With No Notice $39,459
ent levels of service. As a result, some for little return, hardly a formula for 1Hr Outage With Notice $22,973
electric utilities are trying to develop a keeping a business healthy.
more customer-focused definition of 10-20% Voltage Sag $7,694
reliability. The economic question can Another utility point of view might 2 Sec. Momentary Outage $11,027
be considered through three different include an economic analysis of relia-
perspectives: the electric utility’s view- bility improvement expense versus the
point, the customer’s viewpoint, and total revenue stream to the utility from Table 1 Outage Costs
the regulator’s viewpoint. Each will an important customer. This could be
yield a different set of conclusions justified if the reliability improvement The table gives some indication
regarding expenditures on system expenditures are needed in order to that there is a significant cost to an
reliability. keep the customer from purchasing industrial customer when power is
disturbed or interrupted. Although a (higher rates) are not generally part of
momentary outage is indicated as a the plans since it is not fair to assign Storms Animals
lesser cost per incident, momentary higher costs to customers that receive Tree Equipment
outages may occur 10-20 times in a better reliability than they want. Trimming Failures
year. Similar cost estimates can be Rewards and penalties might create
developed for smaller commercial and a situation where poor performance System
even residential classes of customers. in one area is balanced by good Faults
performance in another area. This
Regulator’s View might remove the incentive to improve Prevention Initiatives
Performance Based Ratemaking the service to the poorly performing Response Initiatives
(PBR) seeks to establish an environ- part of the system.
OCP
ment that stimulates the monopoly
Response
service provider to improve efficiency Reliability Improvement Initiatives
and keep prices in line with inflation An unplanned customer outage is
or less. Unfortunately, this can pro- generally caused by a fault on the
vide an environment where mainte- utility system. Although the number of
nance and other costs can be slashed faults that occur on the system directly SAIFI SAIDI MAIFI
in order to make money. In the distri- impacts the resulting reliability indices,
bution environment customers are the response of the overcurrent protec-
captive. They cannot leave the suppli- tion system can also have a large Figure 1 Prevention and Response Initiative
er and connect to another provider. impact on the number of customers Impact Reliability
out of service and the total outage
An alternative is to include mea- time. Figure 1 shows the relationship Especially when considering the
surements of reliability in a Service of both factors to the development of value of service to the customer, expen-
Quality Index (SQI) for a distribution the reliability indices. Many utilities ditures in the overcurrent protection
company subject to a PBR. The SQI are focusing reliability improvement system for reliability improvement can
will impose significant penalties on initiatives around prevention aimed at generate reasonable payback periods
revenues if service quality deterio- reducing the number of faults. It can and rates of return. One reliability
rates from a preset baseline perfor- be shown that investments in response improvement study for an oil produc-
mance level. The idea is to mimic the initiatives, such as the design of over- tion company resulted in economic
loss of revenue to the company that current protection systems that sec- justification for installing reclosers
happens in a free market if customers tionalize the system after a fault event, on the primary distribution circuits
leave a poor service provider to go to also have a major impact on reliability
one with better performance. results.

In order to create a PBR service

quality index, definitions must be cre- Reclosers Benefit Cost Total Circuit
ated for evaluation of ongoing perfor- Circuit exis- new savings new/relocated Pay back Rate of
mance. Performance levels can be ting per year reclosers (years) Return
utility-specific to allow for different sit-
uations. If multiple items are included 1 1 2 $29,877 $64,300 2.2 46.3%
in the measurement process, an SQI 2 0 0 — — — —
specific for a utility and its history can 3 0 2 $18,594 $60,000 3.2 30.4%
be developed. One suggested 4 1 4 $102,980 $124,300 1.4 82.8%
approach would establish a rule that 5 2 6 $75,125 $180,000 2.4 41.5%
requires all utilities to measure certain 6 0 1 $10,839 $30,000 2.8 35.8%
service quality indices and report the 7 0 0 — — — —
data annually. With this data, a utility- 8 0 2 $28,644 $60,000 2.1 47.6%
specific SQI can be part of the rate 9 2 2 $19,714 $68,600 3.5 28.0%
plan that compares annual perfor-
10 1 4 $105,225 $124,300 1.2 84.6%
mance to baseline performance
11 1 3 $48,988 $90,000 1.8 54.3%
standards. The typical reliability mea-
surements that are being adopted are 12 0 4 $43,615 $120,000 2.8 36.0%
SAIFI, SAIDI, and MAIFI. Pennsylvania, 13 2 1 $6,224 $30,000 4.8 19.3%
New York, and California have adopt- 14 1 0 — — — —
ed these indices. 15 1 2 $63,147 $90,000 1.4 70.1%
16 0 2 $14,231 $60,000 4.2 22.6%
Penalties are included as part 17 0 1 $5,111 $30,000 5.9 15.0%
of the PBR for reliability reviews to 18 2 5 $51,568 $150,000 2.9 33.9%
discourage deterioration in service 19 0 2 $21,913 $60,000 2.7 36.2%
with cuts in the budget. California Total 14 43 $645,795 $1,341,500 2.1 48.0%
and New York will be incorporating
penalties in their rate plans. Rewards Table 2 Recloser Placement, Economic Summary for Study
Economics of
Reliability
serving the pump loads. Table 2 (see
page 6) displays the recloser placement
and economic summaries for the 19 cir-
cuits investigated in the system reliabil-
ity study.

The results in the table demon-

strate 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 dilem-
ma for the utility with this approach is
that it bears the expense and the cus-
tomer reaps the benefits. However, the
competitive market may force electric
utilities to make the system invest-
ments to maintain their present
customer base.

Conclusions
What is the motivation for improv-
ing distribution system reliability even
if it cannot be economically justified on
increased kilowatt hour sales? One
possibility is that the regulatory com-
missions 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 avoid-

ance 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 com-
petitors. 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 vice-

president with Pacific Gas and Electric.

©1998 COOPER POWER SYSTEMS • BULLETIN 03035