Innovation in Global Power - Parsons Brinckerhoff

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http://www.pbworld.com/news_events/publications/network/ 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
Planning and the Role of Regulators • Safety concerns, e.g., poorly performing switchgear, line fittings • Improved performance, e.g., increased functionality of a new asset • High operating costs, e.g., frequent repair and maintenance, energy losses and outages. Network Operator’s Asset Replacement Assessment Asset management systems incorporate a comprehensive database of network assets, including their characteristics and functions, details of their condition (reported and updated at appropriate intervals) and performance, and their repair and maintenance histories. From such a database an assessment of the expected remaining lives of the assets can be made, including identification of replacement candidates. This assessment is key to the planning and prioritizing process when preparing a programme and budget for asset replacement. Regulator’s Review: Asset Replacement Model PB acted as engineering consultant to OfGEM, the British energy regulator, for recent transmission and distribution price control reviews. In carrying out this task, we developed and applied the replacement profile model illustrated in Figure 2. The inputs are: • Asset age profiles • Asset retirement profiles • Unit replacement costs. Figure 2: Replacement Profile Model. (Example is for the asset type: 11 kV pole mounted transformers.) The asset age profile data for existing assets in the example were averaged over five-year periods due to the way the historic data was recorded, hence giving the stepped profile. In practice, most operators are able to provide age profiles http://www.pbworld.com/news_events/publications/network/ by year. It can be seen that most of these types of asset were installed between 20 and 35 years ago. The retirement percentage profile in the example is assumed to be a normal distribution with a mean of about 40 years and a standard deviation of 4 years. The model can, however, accept any shape of retirement profile provided the sum of the percentages to be retired in any one year does not exceed 100 percent. The quantity of assets for retirement in any year is the summation of the cross-multiplication of the retirement profile and the asset age profile (sumproduct function). For the next year the retirement profile is advanced by one year with respect to the age profile. The retirement profile in the example is relatively narrow, so there is a high quantity of assets to be replaced in the initial years, reflecting assets that are older than the retirement profile. Furthermore, the replacement assets tend to reflect the original age profile. A broader retirement profile would have the effect of smoothing out the year on year replacement. Due to the influence of assets introduced in later years, the smooth solid line representing the projected retirement profile of the existing asset base diverges from the dotted line, which represents quantities of replacement assets to be introduced in each year in future. This divergence begins at the point in the distant future at which replacement assets introduced in the near future begin to be replaced themselves in accordance with the same retirement profile being applied to the existing asset base. In practice the retirement profiles should reflect the actual ages at which assets are being replaced. The outputs of the model are the replacement quantities and expenditures by asset category and by year. The model also: • Allows users to undertake scenario analyses by examining the sensitivity of the modelled output to variations in asset lives • Provides a network-wide strategic view of the risk to be assessed in terms of percentage weighted average remaining life of an asset category. Although the model considers like-for-like replacement, the level of “betterment” due to, say, replacement with increased capacity or putting cables underground can be reviewed through consideration of cost differentials. Separately, account is also taken of assets replaced because of system development. Trends in Estimated Asset Lives The average lives of most of the principal British distribution assets show an increasing trend, as presented in Figure 3 on the following page. These new numbers also illustrate that the modelling of asset replacement is dependent on 83 PB Network #68 / August 2008
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