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When I served on NERC’s Blue Ribbon Panel on Electric Reliability, the engineers patiently explained to me why they needed all those rules. I insisted that the engineers should consider the cost of those rules to consumers, and that they should seek more efficient means to serve the customer. One system operator said, “You want me to push the system to the point of collapse.” No, I just wanted him to try harder. Somehow, commerce and customers seemed incidental to his functions. Remember the librarian who wanted to keep all the books neatly lined up on the shelves? No Financial Shortage
Capital spending on transmission has not kept up with growing demand for years. Now, it appears that distribution spending will fall off. That’s odd, nowadays, because investors disillusioned by disasters in risky ventures now seek low risk/low return investments. I calculate that the industry needs to spend $10 billion per year more than presently planned in order to replace old facilities as well as keep up with demand. Sounds like a big number? Putting that new plant on line would add approximately 1 percent per year to the average end user’s electric bill. Raising the money needed to maintain reliability would strain neither the financial markets nor the consumer’s pocket book. What is Reliability?
NERC defines reliability in terms of adequacy (ability to serve customer requirements at all times, despite scheduled and unscheduled outages) and operating reliability (ability to survive sudden disturbances). The engineers don’t ask (in the case of reliability) whether customers would accept a different level of reliability at a different price for service or whether the network is the most economic provider of the reliable service. Certainly, the network operator needs the tools and authority to deal with sudden disturbances, but I do not believe that the operator has a duty to assure service, no matter what the cost, to customers who do not believe that the service is worth the cost. Consumers make decisions about value of service and of reliability all the time. Why do we conflate individual consumer decisions with engineering survival requirements? We Don’t Know What We Need
Remember stranded costs? Utilities built expensive facilities, then discovered that the consumers did not want the expensive electricity produced by them. Less reliable service comes about, at times, because of the inability of the network to handle a surge in demand caused by the fact that so many customers want the same service at the same time. With a different pattern of pricing or with incentives, that pattern of demand might change. The network then has to price its product, and let customers decide what they want. Reliability would become a commercial decision for the customer, rather than an engineering decision for the network. Without that customer input, the network operator may put a higher value network reliability than the customer. Firms that price their products higher than customers want to pay eventually run into trouble. Substitute Operating Savvy for Capital
In the United States, running the utility more efficiently (as opposed to investing more money) rarely leads to a long-term increase in profits. That tradition has carried into the new organization of the system operator, to an extreme. We don’t want the operator to make any profit. We neither reward the operator for running the network in a way that reduces costs to consumers nor penalizes the operator for inefficiency or inability to maintain reliability. As a result, we have no way of knowing whether the system operator could change the way it operates in order to enhance reliability. Pretend you are the CEO of a manufacturer. The shop manager comes in to request the purchase of a new machine. You know that the existing machinery runs only 75 percent of the time. Would you buy the new machine? Or, would you tell the shop manager to fix the old equipment first, rearrange the production schedule, and if all that costs less than a new machine, he gets a bonus? Conclusion
With minimal cooperation from regulators, the electricity industry could easily raise the money to replace old infrastructure and put in necessary new equipment. Consumers would barely notice the price increases needed to pay for the equipment. They might even reap offsetting benefits from more competitive markets and improved reliability. That conclusion, however, ignores the real questions: what level of reliability do customers want, what level do they deem worth paying for, and how does the electric industry or the customers achieve that desired level at the lowest cost to the customer? Can consumers make those decisions? They do everyday. When a family goes on a car trip, it doesn’t bring along an extra car in case the first one breaks down. That’s a reliability judgment, too.