HYDRO ONE DISTRIBUTION UNIT COST BENCHMARKING POLE REPLACEMENT AND SUBSTATION REFURBISHMENT STAKEHOLDER PRESENTATION OCTOBER 5, 2016 1
AGENDA SECTION 1: SECTION 2: SECTION 3: SECTION 4: INTRODUCTION BENCHMARKING PROCESS POLE REPLACEMENT RESULTS SUBSTATION REFURBISHMENT RESULTS 2
INTRODUCTION 3
INTRODUCTION PROJECT OBJECTIVES In the Ontario Energy Board s decision in EB-2013-0416/EB-2014-0247 on Hydro One s distribution rates for 2015 to 2019, the OEB directed Hydro One to to conduct an external benchmarking study on the unit cost of its pole replacement and station refurbishment programs against other utilities as well as carry out an internal trend analysis to show the variability of these unit costs over time (year over year). Hydro One was also directed to report on the results of this work with the corresponding analysis as part of its next rates application. Hydro One engaged Navigant and First Quartile Consulting to design and implement a robust and replicable benchmarking study of Hydro One s distribution costs The benchmarking study was designed to: - Include an appropriate group of utilities to use as comparators to Hydro One, taking into account a number of characteristics, including asset demographics, geography, customer characteristics, etc.; - Quantify and evaluate Hydro One s practices and unit costs for distribution pole replacement and distribution substation refurbishments and replacements relative to the comparison group, taking into account cost drivers and differentiating characteristics; - Ensure a common understanding of the comparison criteria through the use of clear definitions; - Make recommendations on practices that could be augmented or adopted to improve efficiency; - Engage stakeholders in regards to the peer group selection criteria, comparison metrics, and preliminary findings and recommendations 4
INTRODUCTION APPROACH Benchmarking is the process of comparing one's business processes and performance metrics to industry bests or best practices from other industries. WE ARE HERE 5
BENCHMARKING PROCESS 6
BENCHMARKING PROCESS COMPARISON GROUP RECRUITING North American Utilities were approached to participate in these studies - 8 Canadian Utilities Large provincial utilities from across Canada Mix of local distribution companies in Ontario - 21 US Utilities Large utilities Previous willingness to participate in similar studies Responses were received from 20 organizations Those not responding cited various reasons for not participating: - Lack of interest - Insufficient resources - Competing priorities 7
BENCHMARKING PROCESS COMPARISON GROUP COMPANIES 3 Ontario Local Distribution Companies: PowerStream Veridian Essex PowerLines * B.C. Hydro Hydro One Hydro-Québec * Notes: * Poles study only ** Substations study only We Energies PECO ** Southern California Edison Westar Energy * KCP&L * ComEd PSE&G ACE Tucson Electric Power ** Delmarva PEPCO Oncor Electric Delivery * CenterPoint Energy Austin Energy CPS Energy * 8
BENCHMARKING PROCESS COMPARISON GROUP STATISTICS The comparison group is a good cross section of the North American electric utility industry Company Number of Distribution Customers Service Territory (sq. km) Number of Distribution Poles Number of Distribution Substations Atlantic City Electric 547,145 7,166 226,111 61 Austin Energy 439,402 1,131 153,375 190 BC Hydro 1,970,950 68,201 907,000 208 CenterPoint Energy 2,348,517 12,950 924,275 216 Commonwealth Edison 3,927,204,598 1,523,715 746 CPS Energy 786,442 3,924 320,476 92 Delmarva Power 514,942 14,030 164,037 149 Essex Powerlines 28,000 105 6,251 0 Hydro One Networks 1,300,000 650,000 1,571,384 1,000 Hydro-Québec 4,038.114 1,365,128 2,642,700 Kansas City Power & Light 910,155 46,420 549,728 265 Oncor Electric Delivery 3,358,0 138,484 1,840,087 735 Note: Figures were current as of the date that companies responded to the survey, which ranged from Jan to Jun of 2016 9
BENCHMARKING PROCESS COMPARISON GROUP STATISTICS (CONT.) Company Number of Distribution Customers Service Territory (sq. km) Number of Distribution Poles Number of Distribution Substations PECO Energy 1,590,478 5,439 390,000 409 PEPCO 842,335 1,658 146,597 110 Public Service Electric & Gas 2,510,7 3,237 842,922 151 PowerStream 380,000 825 39,330 65 Southern California Edison 4,967,691 1,500 1,414,720 655 Tucson Electric Power 417,140 2,603 77,585 88 Veridian 119,000 640 31,010 53 We Energies 1,148,805 25,845 656,422 364 Westar Energy 699,390 26,159 545,616 518 Note: Figures were current as of the date that companies responded to the survey, which ranged from Jan to Jun of 2016 10
BENCHMARKING PROCESS INFORMATION COLLECTED POLE REPLACEMENT The following information was collected from the comparator companies to support the pole replacement benchmarking study Demographic Information Service territory square miles/km Number of in-service poles by material type and age profile Pole footing conditions (soil vs. rock vs. swamp) Pole accessibility (on-road vs. off road) Pole framing (single phase vs. multi-phase/circuits) Average crew travel time to pole work sites Practice Information Planned Service Life for different pole types Inspection methods, trigger ages and time cycles Average months to complete non-urgent pole inspection recommendations Refurbishment methods used Replacement process information (# trips, crew sizes, equipment complements, person-hours required) Cost categorization (O&M vs. Capital) for different work activities Regulatory requirements Agreements with joint-use utilities regarding pole removals Cost Performance Data 2012 to 2014 pole inspection volumes, costs and hours 2012 to 2014 results of inspections 2012 to 2014 pole refurbishment volumes, costs and hours 2012 to 2014 program pole replacement volumes, costs and hours 2012 to 2014 emergency pole replacement volumes, costs and hours Breakdowns of 2012 to 2014 labor costs for inspection, refurbishment and replacement by type (company vs. contractor) 11
BENCHMARKING PROCESS INFORMATION COLLECTED SUBSTATION REFURBISHMENT The following information was collected from the comparator companies to support the distribution substation benchmarking study Demographic Information Service territory square miles/km Number of distribution substations by size (# power transformers) and service territory density served (urban vs. suburban vs. rural) Number of distribution power transformers by high side and low side voltage Current in-service age profiles of major substation components Average power transformer loading at non-coincident peak % for past 12 months Practice Information Planned Service Life for major substation components Criteria for using different substation refurbishment approaches (component-focused vs, station-centric vs. full station rebuild) 2010 to 2019 number of actual and planned refurbishment projects by approach Component evaluation processes to determine need for replacement or repair/reconditioning Component replace vs. repair/recondition criteria Use of integrated (multicomponent) modules Regulatory support for refurbishment program funding Cost Performance Data Data on recently completed distribution substation refurbishments including: Refurbished substation demographics Refurbishment project type (component-focused vs. stationcentric vs. full station rebuild) and high level work scope Detail on major components replaced/installed Total project costs and costs associated with major component installations Year when majority of work was performed Breakdowns of labor resource costs by function (engineering & design vs. construction vs. commissioning) and type (company vs. contractor) 12
BENCHMARKING PROCESS CURRENCY CONVERSIONS All cost comparison charts were developed based on Canadian dollars No annual inflation rate was applied to the dollar values The conversion rate used for data submitted by US companies was the average currency exchange rate in effect during the year in which the work was performed - Conversion rates in the last two years make the Canadian companies look more cost effective regardless of any change in their behavior 2010 2011 2012 2013 2014 2015 CAD:USD 0.9700 0.9987 0.9995 1.0300 1.1043 1.2791 Source: http://www.federalreserve.gov/releases/g5a/current/ 13
POLE REPLACEMENT RESULTS 14
SUMMARY FINDINGS & RECOMMENDATIONS 15
POLE REPLACEMENT RESULTS SUMMARY FINDINGS Hydro One s costs are inline with the average of the comparison group, with low unit costs for inspections and average costs for replacement of poles Hydro One inspects its poles more frequently than most utilities, using mostly visual inspections, while the others typically do more rigorous physical inspections The replacement rate has been slower, with the result that Hydro One s pole inventory is the oldest, and on average, eight years older than the rest of the utilities in the comparison group This matches the planned life of poles, which is also about 10 years longer for Hydro One than for the comparison group Hydro One does not employ a formal pole refurbishment program, whereas 13 of 17 companies in the comparison group do in an effort to postpone replacement of poles, and reduce lifecycle costs 16
POLE REPLACEMENT RESULTS SUMMARY RECOMMENDATIONS Consider modifying the pole replacement program to include a more complete pole inspections (sound, bore, excavation) and a longer (approximately 10-year) inspection cycle - The OEB would need to approve the change in inspection cycle Expand the existing centralized program management and pole selection approach to cover 90-95% of the replacement / refurbishment work on poles in a given year, leaving the remainder to be guided by the local staff while still meeting the centralized strategy and replacement criteria Where geography and/or pole density permit, consider the use of dedicated pole replacement crews Consider modifying the program to include a rigorous pole refurbishment option, when appropriate 17
DETAILED FINDINGS 18
POLE REPLACEMENT RESULTS DEMOGRAPHICS Hydro One has the oldest wood pole profile in the comparison group Hydro One also is amongst the longest in planned life for poles 51 52 61 25 64 38 28 60 23 62 16 Age Profile Wood Poles Before 1960 1960s 1970s 1980s 1990s Since 2000 Unknown Average Age vs Planned End Of Life 0% 50% 100% % Of Pole Population Installed (time) Source: Question D2 Source: Question E6, E7, F6, F7, D2 19
POLE REPLACEMENT RESULTS LIFE CYCLE COST Hydro One demonstrates average life cycle costs relative to the comparison group Installation cost is the most significant driver Actual Annualized Life Cycle Costs 62 38 64 60 25 23 39 61 52 51 $167 $0 $50 $100 $150 $200 $250 Cost per Year per Pole 20
POLE REPLACEMENT RESULTS TOTAL PROGRAM COSTS Comparison Group Mean = $338 per pole Hydro One = $322 $16 or 5% lower compared to the mean Pole Program Costs Grouped By Company Pole Program Costs Ranked By Annual Spend 62 39 24 25 38 64 51 61 60 52 2012 2013 2014 2012 2013 2014 $0 $1,000 $2,000 $3,000 Costs per Pole Touched Source: Question E6, E7, F6, F7 $0 $1,000 $2,000 $3,000 Costs per Pole Touched 21
POLE REPLACEMENT RESULTS INSPECTION COSTS Comparison Group Mean = $39 Hydro One = $27.60 $12 or % lower than the mean Pole Inspection Costs Grouped By Company Pole Inspection Costs Ranked By Annual Spend 62 60 61 38 25 51 23 64 21 31 52 39 24 2012 2013 2014 2012 2013 2014 $0 $50 $100 Costs per Pole Touched Source: Question E6, E7 $0 $50 $100 Costs per Pole Touched 22
POLE REPLACEMENT RESULTS INSPECTION COSTS Outsourcing the inspection process is common practice Pole Inspection Costs Grouped By Company Pole Inspection Costs by Category 62 60 61 38 25 51 23 64 21 31 52 39 24 $0 $50 $100 Costs per Pole Touched 2012 2013 2014 62 60 61 64 38 25 51 21 31 52 24 39 $0 $50 $100 Costs per Pole Touched Company Direct Labor ($) Company Direct Labor Overheads ($) Equipment Costs ($) Material Costs ($) Contract Labor and Services Costs ($) Source: Question E6, E7 23
POLE REPLACEMENT RESULTS VISUAL INSPECTION CYCLE TIME 17 of 18 respondents perform visual inspections on their distribution poles 11 of that group of 17 perform visual inspections every 10 years Hydro One performs visual inspections at 3 or 6 years, with the majority at 6 years The duration between inspections does not have an apparent impact on costs in aggregate (although clearly it would for a single company) Visual Inspection Cycle Frequency Note: when multiple inspection cycle times were submitted the lowest value was shown on the chart Source: Question E3 24
POLE REPLACEMENT RESULTS PHYSICAL INSPECTION CYCLE TIME 11 of 14 respondents perform physical inspections starting at 7 years or greater Hydro One is the only company that does not use bore, excavation or ultrasonic methods on a dedicated schedule (ranging from 7 to 20 years) The duration between inspections does not have an apparent impact on costs Physical Inspection Cycle Frequency Note: when multiple inspection cycle times were submitted the lowest value was shown on the chart Source: Question E3 25
POLE REPLACEMENT RESULTS REFURBISHMENT COSTS Comparison Group Mean = $947 Hydro One = Not Applicable Pole Refurbishment Costs Grouped By Company Pole Refurbishment Costs Ranked By Annual Spend 38 25 51 24 61 31 60 $0 $1,000 $2,000 $3,000 Costs per Pole Touched Source: Question F6, F7 2012 2013 2014 38 38 61 24 25 25 25 51 31 61 24 31 24 31 61 38 60 $0 $1,000 $2,000 $3,000 Costs per Pole Touched 2012 2013 2014 26
POLE REPLACEMENT RESULTS REPLACEMENT COSTS Comparison Group Mean = $7,105 Hydro One = $8,266 $1,161 or 16% higher compared to the mean Pole Replacement Costs Grouped By Company Pole Replacement Costs Ranked By Annual Spend 39 62 38 64 60 25 52 61 24 51 2012 2013 2014 2012 2013 2014 $0 $10,000 $20,000 $30,000 Costs per Pole Touched Source: Question F3, F6 $0 $10,000 $20,000 $30,000 Costs per Pole Touched 27
POLE REPLACEMENT RESULTS REFURBISHMENT V. REPLACEMENT COSTS The mean cost to refurbish a pole is $947 The mean cost to replace a pole is $7,105 Refurbishment costs are $6,158 or 86% less than replacement costs Pole Refurbishment Costs Grouped By Company 38 25 51 24 61 2012 2013 2014 31 60 Source: Question F6, F7 $0 $1,000 $2,000 $3,000 Costs per Pole Touched 28
SUBSTATION REFURBISHMENT
SUMMARY FINDINGS & RECOMMENDATIONS 30
STATION REFURBISHMENT RESULTS SUMMARY FINDINGS Hydro One s costs for substation refurbishment fall within a reasonable range within the comparison panel As with most utilities, instances are found with costs ranging from first to fourth quartile for different circumstances Hydro One s station-centric approach is appropriate, given the system configuration and density within the service territory - Highest percentage of single transformer substations, higher than average transformer loadings, older age profile for in-service transformers, rural locations Use of testing results and maintenance history records could be improved in making replace versus repair decisions for certain substation equipment Use of performance measures for tracking success could be enhanced 31
STATION REFURBISHMENT RESULTS SUMMARY RECOMMENDATIONS Consider implementing a formal data governance process for equipment performance and maintenance data, and incorporating that information into the asset condition scoring and project planning process Enhance cost and work completion reporting for individual projects, and implement a formal change control process Develop and implement a more comprehensive set of key performance indicators including in-progress project cost performance measures and assessments of project/program impacts on substation reliability, maintenance costs and overall asset health 32
DETAILED FINDINGS 33
STATION REFURBISHMENT RESULTS POWER TRANSFORMER DEMOGRAPHICS Hydro One s power transformer age profile ranks in the older end of the peer group distribution. It s Expected Service Life for power transformers is also somewhat higher than the peer group average Source: Questions A3 and A4 % Manufactured By Decade 28 40 60 64 16 61 51 23 24 0 20 40 60 80 100 Expected Service Life (Years) 59 35 40 40 35 60 35 50 40 Before 1960 1960s 1970s 1980s 1990s Since 2000 Unknown Note: The black lines indicate the approximate % of current in service components that are past their expected service life (ESL) Total Peer Group ESL Average: 48.8 years 34
STATION REFURBISHMENT RESULTS HIGH SIDE SWITCHING AND PROTECTION EQUIPMENT Hydro One s Expected Service Life for high side switching and protection equipment is higher than the peer group average. It s actual age profile for these components is unknown. Source: Questions A3 and A4 64 60 24 51 61 40 28 Service Life % Manufactured By Decade Note: The black (Years) 25 lines indicate the 30 approximate % Before 1960 of current in 40 1960s service 50 40 40 1970s 1980s 1990s components that are past their expected service life (ESL) 0 20 40 60 80 100 Expected 35 45 Since 2000 Unknown Total Peer Group ESL Average 42.7 years 35
STATION REFURBISHMENT RESULTS LOW SIDE SWITCHING AND PROTECTION EQUIPMENT Hydro One s Expected Service Life for low side switching and protection equipment is somewhat lower than the peer group average. Most of its actual age profile for these components is unknown. % Manufactured By Decade 40 28 23 60 61 51 16 64 24 0 20 40 60 80 100 Expected Service Life (Years) 35 55 40 30 40 40 40 25 40 Before 1960 1960s 1970s 1980s 1990s Since 2000 Unknown Note: The black lines indicate the approximate % of current in service components that are past their expected service life (ESL) Total Peer Group ESL Average: 43.8 years Source: Questions A3 and A4 36
STATION REFURBISHMENT RESULTS RELAYS AND CONTROL WIRING DEMOGRAPHICS Hydro One s Expected Service Life for in-service relays and control wiring is higher than the peer group average. Most companies were not able to furnish a complete age profile for these components. 61 24 60 64 51 16 Life % Manufactured By Decade (Years) Note: The black 40 lines indicate the Before 1960 approximate % of 40 current in service 1960s 50 components that 1970s 20 are past their 1980s expected service 25 1990s life (ESL) 0 20 40 60 80 100 Source: Questions A3 and A4 Expected Service Since 2000 Unknown Total Peer Group ESL Average: 40.8 years 37
STATION REFURBISHMENT RESULTS SUBSTATION PROFILES - # OF POWER TRANSFORMERS Hydro One has the highest percentage of single transformer substations within the peer group % Substations By Size (# Power Transformers) 40 16 31 38 24 25 28 23 61 22 27 60 64 0 20 40 60 80 100 1 Xfrmr Stations 2 Xfrmr Stations 3 Xfrmr Stations 4 or More Xfrmr Stations Source: Question A1 38
STATION REFURBISHMENT RESULTS SUBSTATION PROFILES RURAL, URBAN, MIXED Hydro One has the second highest percentage of rural substations (substations serving areas that have 50 or fewer customers per square mile) 40 % Substations By Area Served 64 60 38 27 61 Rural Mixed or Suburban Urban Not Classified 28 0 20 40 60 80 100 Source: Question A1 39
STATION REFURBISHMENT RESULTS FULL STATION REBUILD PROJECTS (PER TRANSFORMER BANK) Peer Group Mean = $3,153,568 Hydro One Project = $2,161,255 $992,313 and 31.5% Below Mean Cost Per Transformer Bank Refurbished Source: Questions C2 and C2a 40
STATION REFURBISHMENT RESULTS FULL STATION REBUILD PROJECTS (PER MVA) Peer Group Mean = $264,203 Hydro One Project = $432,251 $168,048 and 63.6% Above Mean Cost Per Substation MVA Refurbished Source: Questions C2 and C2a 41
STATION REFURBISHMENT RESULTS SUBSTATION CENTRIC PROJECTS (PER TRANSFORMER BANK) Peer Group Mean = $2,689,980 Hydro One Projects Range = $1,589,814 to $4,160,000 $1,100,166 and 40.9% Below Mean, to $1,470,020 and 54.6% Above Mean Cost Per Transformer Bank Refurbished Source: Questions C2 and C2a 42
STATION REFURBISHMENT RESULTS SUBSTATION CENTRIC PROJECTS (PER MVA) Peer Group Mean = $2,980 Hydro One Projects Range = $280,072 to $554,677 $50,092 and 21.8% Above Mean, to $324,697 and 141.2% Above Mean Hydro One s relative performance is driven by lower voltage and capacity distribution stations in their service territory Cost Per Substation MVA Refurbished Source: Questions C2 and C2a 43
CONTACTS BENJAMIN GRUNFELD Director (416) 777-2444 Benjamin.Grunfeld@navigant.com LARRY GELBIEN Director (781) 270-8418 Larry.Gelbien@navigant.com BILHUDA RASHEED Senior Consultant (781) 270-8411 Bilhuda.Rasheed@navigant.com KEN BUCKSTAFF Managing Director (310) 922-0783 Ken.Buckstaff@1QConsulting.com ROB EARLE Managing Associate (315) 944-7610 Rob.Earle@1QConsulting.com DAVE CARTER Senior Advisor (414) 881-8641 Dave.Carter@1QConsulting.com navigant.com 44