Increasing Sensitivity: Who is responsible for incremental reliability?

1. The views expressed in this document represent only those of Timothy R. Caister; prepared only for educational purposes at the Chicago-Kent College of Law. Various citations contained in the notes section. Increasing Sensitivity: Who is responsible for incremental reliability? Timothy R. Caister [tcaister@yahoo.com] Chicago-Kent College of Law Energy Law April 14, 2004 Professor Bosselman

2. Outline • Question • Current Dilemma • Structure of Current Electric Industry • Information/Communication Age • Issues • Current Statutes • Current Decisions • Recommendations

3. Question • How might the reliability of the United States electrical system be improved? • “Gold-plated” system that includes… • All underground distribution and transmission facilities • 3x-, 4x-, 5x-contingency electric system design • Every customer installs distributed generation back-up • Weather-controlling technology • Etc… • However, the costs would be prohibitive… • Furthermore, the balance between perceived value and cost would be skewed…

4. Current Dilemma of the Balance • 1) New Energy Trends for a Digital Economy • Changing structure of the current electric industry • Shift to the information/communications age • 2) Value (Cost) of Reliability Improvements • 3, 6 or 9 nines? • 99.9% = 8.76 hours/year • 99.9999% = 31.53 seconds/year • 99.9999999% = .032 seconds/year • Electric Industry needs to balance the 2 factors

5. Structure of the Current Electric Industry • Generating Station • Transmission Lines • Substation • Distribution Lines • Home/Business • Transformer • Service Drop • Meter • What about the customer side of the meter?

6. Information/Communications Age • Information Industry • Increasing computer usage • Internet infrastructure • Manufacturing Industry • Just-in-time inventory • Continuous processes (e.g., rolling mills) • Electronic drives and microprocessor controls • Electric demands have shifted from light bulbs to precise operations • This represents the increasing sensitivity • Increasing incompatibility between demand/supply patterns

7. Information/Communication Age (cont.) • Jeff Byron, former energy director, Oracle Corp. • “What’s the self-sufficiency worth to us? Millions of dollars per hour. It is so important, you almost can’t calculate the value to us and our customers… The digital economy depends on uninterrupted supplies of the highest quality electricity.”

8. Issues • What is the base level of service? • Must establish baseline in order to judge upgrades • Shifting definition of adequate utility service • New information age deems traditional service inadequate • Traditional utility operations operate at 3 – 4 nines • Service has been reasonable and adequate for light bulbs • Network solutions vs. customer-specific solutions • Network solutions – upgrade to increase baseline service • Customer-specific – upgrade to meet individual needs

9. Issues (cont.) • Who pays for the necessary upgrades? • All customers; or • Are the system upgrades for the benefit of all customers? • Individual customers • Are the system upgrades for the benefit of an individual customer that recognizes the value?

10. Current Statutes • Illinois • “Every public utility…shall provide service and facilities which are in all respects adequate, efficient, reliable and environmentally safe and which, consistent with these obligations, constitute the least-cost means of meeting the utility’s service obligations.” • Indiana • “Every public utility is required to furnish reasonably adequate service and facilities.” • Ohio • “Every public utility shall furnish necessary adequate service and facilities, and every public utility shall furnish and provide with respect to its business such instrumentalities and facilities, as are adequate and in all respects just and reasonable.”

11. Current Decisions • Ohio (PUCO) – Case No. 02-2162-EL-CSS • Miami Wabash Paper LLC v. CG&E • Miami Wabash alleged, among other charges: • (a) legally inadequate electric service from CG&E, due in part to 40 outages and voltage sags; and • (b) inadequate electric service due to poor design of facilities and CG&E’s failure to identify and fix • CG&E argued the appropriate standard was its compliance with the SAIFI • Since SAIFI measures number of outages per year, and it met its SAIFI target for each year, CG&E has a rebuttable presumption of adequate service • Miami Wabash disagreed and PUCO also disagreed – SAIFI is a system-wide average, and not relevant to a specific customer

12. Current Decisions (cont.) • Miami Wabash Paper LLC v. CG&E (cont.) • Issue: what is then adequate service? • Factors: • 1) Were the outages within the control of the utility? • 2) Was the response by the utility to the outages reasonable? • Findings (among others) • Equipment failure is within the utility’s control, but 5 incidents of equipment failure over 3.5 years does not give rise, on its own, to a finding of inadequate service • Footnote #4 • After August 22, 2002 (complaint date), Miami Wabash stated that its outages essentially ceased after that date, due to a number of repairs and alterations to the system having been made. • A symbol of the possible shortcomings of the traditional ratemaking model…

13. Current Decisions (cont.) • Miami Wabash Paper LLC v. CG&E (cont.) • Sensitive Customer • Miami Wabash concurred in testimony that its paper coating process is “more susceptible to the effects of electrical outages…” • PUCO chose not to address the issue of whether an unusually sensitive customer, faced with inadequate service, is required to mitigate its damages to the extent possible • This is distinguished from the perspective of providing adequate service; thus, the issues of sensitivity and mitigation are moot • 2 Significant Points • 1) System-wide performance standards are not relevant to the adequacy of service to an individual customer • 2) Increasing customer sensitivity is moot from the utility’s perspective when adequate service has been deemed

14. Recommendations for a New Balance • 1) Service Reliability Incentive Mechanisms • Public Utility Commissions should foster new, alternative ratemaking models • Provide risk/reward models • Australia • Encourage most efficient allocation of resources to service reliability improvements to the benefit of all customers • UK recognized greater utility efficiency with PBR for returns • Productivity gains & technology improvements (e.g., OMS) • Mechanisms could build on top of and improve traditional ratemaking models • EX: Otter Tail Power Company & Ontario framework • Increases objectivity of assessing the baseline for adequate service • Not all customers require 9-nines of reliability

15. Recommendations for a New Balance (cont.) 2) Incremental, Individual Improvements • Tailor made solutions for individual customers should be allocated to the specific customers • Promote system improvements only when necessary for individuals • Each customer values reliability differently • Avoid cross-subsidization issues among customer classes • Applies for all customers – from residential to industrial • Prevent inefficient application of capital • Promote “premium parks”