Industry Results Transmission Systems Electric Utility Transmission System Costs & Performance MDB compares all utilities on an apples-to-apples basis. A breakthrough in utility benchmarking through the use of Multi-Dimensional Benchmarking (MDB) allows performance of all utilities to be compared on an apples-to-apples basis. MDB allows utility costs to be adjusted for a utility s specific characteristic (average voltage, types of structures, average line length, etc.). These adjustments are based on extensive and detailed research into the specific mathematical relationships that exist between costs and each characteristic. Common analytical techniques are used including iterative variance analysis and complex non-linear multiple regression. Our analysis covers the period 1994 through 2001 and includes 104 of the largest investor-owned utilities (IOUs). There are 17 functional areas of cost and system performance included in our report. Analyzed costs include Transmission System Operations and Maintenance (O&M), and Capital Additions. A listing of the cost models can be found on Page 5. Industry Highlights: There is no transmission cost economy of scale at US electric utilities. Doubling the miles doubles the costs. Industry Findings There is no economy of scale in relation to increased miles of transmission system lines. All other things being equal, doubling the miles doubles the costs. There is an obvious reduction in maintenance costs and, to some extent, operations costs moving from northeast to southwest across the US. The more miles of transmission lines at a utility, the higher the percentage cost of supervision and engineering to total O&M. FERC s significant orders for transmission system restructuring had a massive impact on utility capital expenditures across the US. There were particularly large reductions in 1997 and 1998. Relative to the rest of the US, total transmission costs at utilities in Ohio, Michigan, Indiana, Pennsylvania and the Virginias have fallen significantly over the past five years. This is more apparent with capital than with O&M costs. There has been a marked reduction in station operations costs across the US. Transmission line growth in the US over the past 6 years has been minimal, particularly in the Northeast.
Transmission System Results Page 2 of 6 The Data There are huge variations in costs and physical characteristics from one utility to the next. Our database is comprised of data from FERC Form 1 s. Our database includes the operating and capital costs of 104 of the largest investor-owned utilities (IOUs) for each of the eight years 1994 to 2001. There are huge variations in costs and physical characteristics from one utility to the next. The following bullets show these ranges: Total Costs range from $2M to $200M; Miles of Line range from 250 to 15,000; Total $/Mile range from $1,500 to $60,000; System average voltage (kv) ranges from 45 to 325; Average Line Length ranges from 6 to 132 miles; and Structure Type ranges from 100% wood to 100% non-wood. Cost Drivers There are six primary factors that drive transmission system O&M and capital costs. 3. Structure type 4. Average line length 5. Average system kv technique that allows us to see the impact from each of these individual cost drivers on its own. 1. Time 6. Regional impacts 2. Total system miles We use an analytical Cost Driver 1 - Time Benchmarking must be done on multiple years data in order to be useful. Like any other industry, costs change over time. For utilities, this is due to the combined impacts from general monetary inflation, customer growth, and changes in general management practice. It is extremely important to look at a utility s performance over more than a single year to determine the trend it is taking because there can be significant annual fluctuations. Transmission O&M costs increased significantly faster than general inflation at over 4% per year from 1994 to 2001. Transmission capital costs dropped by 30% between 1994 and 1998 before returning to approximately the 1994 level in the year 2001. Station Operations costs fell at 3% per year as compared to total O&M costs which rose at over 5%.
Page 3 of 6 Transmission System Results Cost Driver 2 Total System Miles Transmission costs increase as the number of transmission system miles increase, all other factors being the same. Pole miles are the best measure to use as the cost driver for miles of transmission system. There are no economies (or diseconomies) due to increased length of the total transmission system. We also tested total number of substations as a prime cost driver. It is strongly correlated to total miles but is not as precise a cost driver as pole miles. It does not make economic sense to merge two transmission systems based on system line miles and numbers of substations alone. The expected economy of scale savings is not there. There is essentially no economy of scale for merging two transmission systems based on system line miles and number of substations alone. Cost Driver 3 Structure Type Costs increase as the percentage of non-wood structures increase. The mix of structure types on which lines are supported (wood poles, steel towers, etc.) strongly impacts transmission costs. The form this cost driver takes is the system percentage above 120kV that is supported on non-wood structures (steel, aluminum, concrete, and underground). However, it is only as the percentage of non-wood structures rises above 30% that costs are impacted. Once the impact starts, costs increase very rapidly so that by the time one reaches systems that are 100% non-wood the costs have increased by a factor of 2.5. In other words, a system with no wooden structures requires 2½ times the annual capital of systems consisting of 70% to 100% wooden structures. A system with no wooden structures requires 2½ times the annual capital of systems consisting of 70% to 100% wood structures. Cost Driver 4 Average Line Length Systems with shorter average line lengths have higher than average costs, all other factors being the same. For O&M, reducing line lengths by a factor of three from 90 miles to 30 miles increases the cost by one third. However, to reduce it again by a factor of three from 30 miles to 10 miles almost doubles the cost. Over the range of 6 to 132 miles, the impact on costs due to line length ranges between a factor of three and a factor of five depending on the cost category studied. Systems with shorter average line lengths have higher-thanaverage costs.
Transmission System Results Page 4 of 6 Cost Driver 5 Average System kv Systems with all their lines above 120kV are approximately twice as expensive to operate and maintain as those with no lines above 120kV. Costs increase as the average kv of the transmission system increases. This cost driver comes in two forms. In relation to total costs and capital, the driver is average kv of the system for all lines greater than 40kV based on pole miles. For O&M related costs, the driver is pole miles of lines with kv's greater than 120kV calculated as a percentage of total pole miles for all lines greater than 40kV. It appears that capital costs are more directly driven by the total system average kv than O&M costs which are driven more by the percentage of higher voltage lines. Systems with all their lines above 120kV are approximately twice as expensive to operate and maintain as those with no lines above 120kV. Cost Driver 6 Regional Variances There are obvious quantifiable regional cost differences between major geographic areas. Regional differences can be due to a variety of both controllable and noncontrollable reasons such as climate, wage rates, labor practices, management philosophy, or customer requirements. One of the most intriguing regional differences is the marked reduction in maintenance costs as one progresses from northeast to southwest across the US.
Page 5 of 6 Transmission System Results Transmission System Cost Models Our MDB reports classify utility costs into functional areas that assist senior management in making informed strategic planning decisions. We developed 17 separate models as follows: 1. Total Transmission O&M and Capital Additions 2. Total Transmission O&M (Lines and Stations) 3. Total Transmission Operations 4. Lines Operations 5. Stations Operations 6. Load Dispatching 7. Operations Supervision & Engineering 8. Total Transmission Maintenance 9. Lines Maintenance 10. Stations Maintenance 11. Maintenance Supervision & Engineering 12. Lines O&M 13. Stations O&M 14. Total Transmission Capital Additions 15. Transmission Lines Capital Additions 16. Stations Capital Additions 17. Miscellaneous (Accounts 566 and 573) Benchmarking results from each of the above 17 models are illustrated in charts. Each chart depicts the utility s actual costs and the corresponding customized benchmark as shown below: $46 Model 2 - Utility Chart Transmission System Operations & Maintenance Costs Actual and Benchmark Costs $42 Millions $38 $34 $30 1994 1995 1996 1997 1998 1999 2000 2001 2002 Year Benchmark Actual
Page 6 of 5 Transmission System Results Page 6 of 6 Other MDB Products Analysis has been completed on data for the period 1994 to 2001 for: Distribution System Cost and Performance. Our database of hundreds of utilities includes 123 of the largest IOUs nationwide, as well as publicly-owned utilities and cooperatives in the WSCC, ERCOT, and Florida; J Lewis & Associates 2442 Alexander Avenue Richland, WA 99352 Transmission Line Construction Costs. Our database includes about 1,150 line construction projects nationwide; Nuclear Power Plants Costs and Performance. Our database includes all US operating plants; and Hydroelectric Plant Costs. Our database includes 110 Pacific Northwest facilities with more than 10MW s in installed capacity (1997 data only). PHONE: (509) 375-6211 E-MAIL: info@mdbenchmarking.com About Our Organization James Lewis has been the President of J Lewis and Associates since 1997. Previously, he was Director of the Bonneville Power Administration s Division of Acquired Generation. He has a BS in Electrical Engineering and an MBA. Jay Maidment has consulted with and worked for utilities using operations research to analyze the economic behavior of electric utilities for the past 20 years. He has a BS Degree in Physics and Applied Mathematics. Dr. Geoffrey Rothwell is a Senior Lecturer at Stanford University. He has consulted with utilities, government, and industry for 20 years. He has a Ph.D. in Economics. Ray Schwertner is President of Vision Energy Consultants, Inc. He has 32 years experience in utility management, power and natural gas risk management, retail electric aggregation, and consulting for electric cooperatives and publicly owned utilities. Winston Peterson is President of Peterson Consulting Group. He has over 30 years experience in management consulting and investment work for publicly owned utilities. Terry O Connor leads the strategic planning practice for Executive Insights. He has consulted with government, utilities, and marketdriven corporations since 1974. Daniel Reynolds has over 30 years of engineering experience and consults on numerical methods. He is a PE and has an MSCE degree