Innovation in Global Power - Parsons Brinckerhoff

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Planning and the Role of Regulators
Asset Replacement: The Regulator’s View
By John Douglas, Newcastle upon Tyne, UK, +44 191 226 2252, douglasJak@pbworld.com
The expenditure required to
replace ageing assets for
a mature electricity
transmission or distribution
network can represent half
of the network operator’s
capital budget, and these
costs continue to rise. In a
regulated power supply
industry such as exists in
the UK, the regulator often
has limited resources to
perform a budgetary review
in comparison with those
available to the network
operators who prepare the
budget, but must ensure
that an appropriate level of
network performance is
achieved at an efficient
level of cost. PB has developed
an asset replacement
model that is helping
provide regulators with the
information they need to
make their decision. The
author describes the model
and recent changes in views
on asset lives and changes
to the regulatory review
process.
Setting the level of revenue a network operator can charge to fund operations and/or
replacement of assets is generally the responsibility of the utility regulator, who acts in the
interests of the customers. The regulator has to balance the expenditures required, particularly
for long-term reliable performance of the network, against the corresponding allowed revenue,
the level of which is based on a regulatory price control review generally conducted every
four to five years. As part that process, regulators can apply three tests:
• Is there a justifiable need for the expenditure?
• Have efficient design and life-cycle costs been taken into consideration?
• Is the timing of the expenditure appropriate?
At the same time, some recent developments among network operators are that they:
• Are increasing the attention they give to managing their aging transmission and distribution
assets, including monitoring the condition of their assets more extensively
• Are adopting risk-based planning methods
• Have introduced annual expenditure and activity reporting to regulators
• Have a limitation of resources available for asset replacement programmes.
The level of asset replacement activity depends considerably on judging when an asset is “life
expired.” There is generally a tendency for network operators to forecast high. If an unreasonably
high expenditure was allowed under incentive-based price control regulation as in the UK, the
network operator might readily achieve efficiency savings to the detriment of the customer.
A key distinction between a network operator and the regulator in the regulatory review
process is that more information and time are available to the former. A regulator views
the network at a high level, so requires a means of modelling proposed asset replacement.
Accordingly, PB has developed an asset replacement model that has been used to review
corresponding expenditure for a number of regulators in different countries.
Review of Replacement of Assets
Network assets are generally judged to have average lives of about 40 to 60 years, or even
longer for some cable types. The asset age situation in the UK is illustrated in Figure 1, which
shows the percentage of value of existing transmission and primary (33 kV+) distribution
assets that was installed each year over an 80-year span. Installation activity reached a peak
in the mid 1960s, some 40
years ago, and the network
operators are presently forecasting
rapidly rising replacement
quantities and
expenditures. On its own,
Figure 1 may be regarded as
evidence of age, but not as
need for replacement.
The principal drivers for
replacement of assets include:
• Poor condition, e.g., reliability,
failure, obsolescence
• High environmental
impact, e.g., oil-filled
apparatus, overhead lines
Figure 1: Comparison of transmission and
distribution asset values by age in the UK.
PB Network #68 / August 2008 82