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Utility Regulation: some considerations for the future

Utility regulation is generally complex, no matter where in the world it exists. By nature utilities tend to be a monopoly in the areas they serve, as there is generally only one utility connection of each type (water, electricity, gas, telecom) serving a property. Governments are rightly concerned that customers receive good service and value for money, however does the regulation need to be complex, and are there issues that are not being addressed through regulation?
 
Utility regulation is commonly split into two areas, the first being customer service. Various qualitative and quantative measure are used here. For quantative measures, time of response to queries, and the avoidance of repeat queries, are generally used. Qualitative measures are based on some form of structured survey of customers who have contacted the utility. Companies are then ranked against each other, and in some cases these rankings used as incentive mechanisms (i.e. the top ranked gains incentives, the bottom ranked loses incentives).
 
The second area is investment. This covers new or replacement assets (capital expenditure, or CAPEX), and maintenance of existing assets (operational expenditure, or OPEX). Sometimes these are combined in net present value (NPV) or similar calculations to give 'benefit over time' values (total expenditure, or TOTEX). Recently there has been a focus on base operating expenditure (or BOTEX), however this is really a subset of OPEX. Regulators ask utilities to prepare business plans for future investment over a period, scaling risks (e.g. asset failures), issues (e.g. population growth, climate change) and opportunities (e.g. improved quality) against expenditure options. After some discussion between regulators, the utility, customer bodies, other regulators and government (local and/or national), a business plan is agreed for the particular period. The utility is then measured against this plan by the regulator.
 
However is this overly complex? Whilst the customer measures are simple, in reality most customers regard a utility as a 'fit and forget' service. As long as clean water comes out of the taps, the toilets flush, the lights come on and the gas flows, then they are happy, subject to them paying what they regard as a fair price. The prime focus should therefore be on providing a reliable and safe service. Reliability of service forms part of regulation in some cases, but not all. In terms of investment, the main factors that affect cost are the distance to provide the service and the number of units provided. So for each customer, the more units provided and the further this has to travel, the more that service will cost. There is therefore a curve that can be drawn against units and distance per customer, with companies below the average curve performing more efficiently.
 
All of the above mechanisms do miss a key issue, and that is ageing assets, an area largely not addressed by current regulation. Many utility assets are old, and replacement cycles very long. For example there are electricity cables over 75 years old, and water mains and sewers over 150 years old. Current replacement rates mean that water mains would only be totally replaced after 150-200 years, and sewers 400-600 years. The replacement cycles for electricity and gas are similarly long, with transformers often only replaced after 80 years. Are such timescales realistic, or are we building up problems for the future? A good measure for any utility would therefore be the 'residual life of assets'. Across their asset base this 'residual', or time before failure, should at least be maintained, or ideally improved, so that burden is not placed on future generations. However more research is needed on rate and probability of failure, so realistic asset life for each type of asset can be determined. There has been some work in this area (such as condition based risk management and pipeline integrity management), and modern tools such as AI and Computer Vision may be a great help in such research and analysis.
 
So is current regulation fit for the future? I would argue that we need to both simplify measures with regard to customer service and investment, as well as building new measures to ensure that the utility is looking after their assets for future generations. We need to address these issues very soon, otherwise we may find that we are increasingly chasing asset failures. Fixing things before they break is generally much cheaper, and avoids a lot of pain for us all.

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