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Linking asset strategies with rate cases.

As utilities go before regulators in upcoming rate cases, asset management and smart grid efforts will overlap – and sometimes compete. While it makes sense to replace an aging infrastructure with more intelligent equipment that builds out the smart grid, companies must also decide if they will spend investment dollars to replace aging assets or implement the smart grid in areas where assets are not yet approaching end-of-life conditions.

KEMA’s Tom Myers presented a strategic viewpoint on asset management as a speaker at EPRI’s 5th Power Delivery Asset Management Conference held November 4-6, 2009 in Dallas, TX. This post provides an overview of Tom’s discussion.

Current asset situation and challenges
Large numbers of utility assets that were installed during the past 50 to 75 years are reaching end-of-life conditions. As these assets age, the rate of failures is not anticipated to increase in a linear manner (i.e., creating “asset walls”). One of the challenges utilities have faced is that failure forecasting capabilities have historically been weak and data has been limited. Emerging under-investment problems are typically not well recognized or accepted; and disconnects between engineering and finance functions often impede long term investment solutions.

Regulatory rate case issues and challenges
From a regulatory perspective, rate cases are often approached on a historical context—with rate increases justified based on past trends. As capital programs are subjected to case-by-case analysis, there is a trend towards increased scrutiny of detailed activities and practices. Decisions and allowances can also be based on subjective assessments, and influenced by strong political and social forces – making rate case outcomes somewhat of a gamble.

Approach to delivering rate-case positions
If a step change in investment is needed to avoid an aging infrastructure “asset wall,” the current rate case approach won’t solve the problem. Case-by-case scrutiny doesn’t address strategic level problems; and after-the-fact reactive (and subjective) approaches are not effective. Ultimately, the reality of asset condition and performance must be addressed, since infrastructure failures will demand action.

A proactive asset management approach to dealing with aging infrastructure issues in rate case proceedings requires realistic forward-looking projections versus historical trending of performance and spending. Current data and modeling capabilities will enable a more objective, analytical approach; and positions can now be based more on data and facts instead of “gut feel” instincts and intuition. A move to more strategic investment programs and higher level regulatory oversight is needed to meet current investment challenges.

There are three key aspects involved in aligning asset plans with rate case positions:

  • Communication – Timing of communications with regulators is critical, since a company needs to identify and resolve issues prior to formal proceedings. The sequence of communication is also important, and should work from internal to external to enable employees to become the spokespeople for the company’s position.  Communications methods should be aligned with the audience – from meetings and workshops to electronic events and mass media advertisements. Consistency is key for internal and external communications, so an integrated strategic communications plan is needed to ensure effective deployment.
  • Education – Successful rate cases must gain support from key stakeholders (i.e., employees, investors, customers, regulators), which requires these stakeholder to understand the justification and value of necessary investments. Since stakeholders ultimately serve as change agents, education goals should also be addressed as part of the communications plan.
  • Justification – Large investments will result in increased regulatory and intervener scrutiny. Projections must be based on sound analytics, historical data and valid assumptions. Plans need to support “witness grade” testimony by objective third party experts.

Experiences and lessons-learned
Strong analysis and support for asset plans to deal with aging infrastructures puts regulators in a position where they must address the consequences of denied investments. In these situations, quantitative analysis is much easier to debate than subjective judgments.  Credibility is crucial, so it is important to avoid surprises or inconsistencies in the analysis results.  While this approach requires more diligence and effort, the stakes are high – especially when the financial impacts of regulatory mandates and penalties can be dramatic.

A preferred direction is for regulators to oversee asset management decisions at a higher, more strategic level, rather than get involved with tactical intervention into detailed work practices.  Industry frameworks such as the PAS-55 specification provide regulators with a means to monitor asset management processes based on high level controls.  PAS-55 certified companies should be subject to less regulatory scrutiny, since they have demonstrated effective asset management processes.  As superior asset managers, they should also be entitled to higher returns, as would be gained in financial markets.

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