DISTRIBUTION SYSTEM INFRASTRUCTURE PROJECT TECHNICAL PLAN

Transcription

1 DISTRIBUTION SYSTEM INFRASTRUCTURE PROJECT TECHNICAL PLAN Delivering quality at a great value yesterday, today and tomorrow Version R0

2 NWE DSIP Technical Plan Forward-Looking Statement Forward-Looking Statement The following infrastructure plan was developed utilizing the most accurate system information available, which included historical maintenance and inspection results and system performance data along with estimated system component inventories. At the time this plan was developed, an actual system inventory did not exist. A complete system inventory and field inspection are part of the overall infrastructure plan, which will largely drive replacement and maintenance activity through the implementation of the plan. The implementation of the infrastructure plan was deemed too important to be postponed until an independent system inventory could be obtained, which would have yielded more accurate replacement and maintenance estimates. It is anticipated that actual inventory and inspection results may deviate from original estimates. As this occurs, adjustments to the infrastructure plan will be evaluated and implemented as required. This plan contains forward-looking statements that may fall within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of Forward-looking statements often address our expected future business and financial performance, and often contain words such as anticipates, may, will, should, believes, estimates, expects, intends, plans, predicts, projects, targets, will likely result, will continue or similar expressions. The plan is based upon our current expectations as of the date hereof unless otherwise noted. Our actual future needs and performance under the plan may differ materially and adversely from our expectations expressed in any forward-looking statements. We undertake no obligation to revise or publicly update our forward-looking statements or this plan for any reason. Although our expectations and beliefs are based on reasonable assumptions, actual results may differ materially due to a variety of factors, some of which are listed in certain of our press releases and disclosed in our public filings with the SEC. Publication Date: October 21, 2011 October 21, 2011

3 NWE DSIP Technical Plan Table of Contents Table of Contents I. Overview... 1 A. Background... 1 B. Why DSIP? Why Now?... 2 C. Development of the Plan... 3 D. Summary of the Plan Scope Costs Schedule... 7 E. Benefits... 7 II. Principles and Benefits of the Plan... 9 A. Planning Principles... 9 B. Objectives C. The Planning Process Economic Analysis / Justification Participative Process Technical Approach D. Benefits Reliability Safety Regional Economy Costs Technology A. Objectives B. Building the Plan C. Program Summary D. Technical Details Pole Inspections and Replacement Underground Cable and Equipment Overhead Equipment Vegetation Management - Line Clearance Tree Trimming Rural Reliability Program - Worst Circuit Substation Inspection, Repair, Upgrades and Rebuild October 21, 2011 Page i

4 NWE DSIP Technical Plan Table of Contents 7. Capacity Margins Distribution Technology- System Automation & Smart Grid Technology Installation IV. The Natural Gas Plan A. Objectives B. Background The Nature of Natural Gas Systems Sources and Uses of Natural Gas in the US Moving Natural Gas from Source to Customer The Role of the LDC Components of the Natural Gas System C. Building the Plan The Ingredients Minimizing Leaks DIMP A Game Changer The Structure of the Natural Gas Plan Eight Projects The Component Plan The Project Plan D. Program Summary E. Technical Plan Business Districts Farm Taps Stubs Inside Meter Sets- Non-Business Districts Natural Gas Lines under Structures Data Acquisition - DIMP Damage Prevention Operational Review - Zone Valves Applicable Safety Code Requirements Appendix A. A Call to Action B. The National Perspective C. The Electric and Natural Gas Industries D. Evolution of Today s Distribution Systems E. The Moving Target New Needs and Priorities F. The Consequences of Aging The Importance of Reliability Reliability Trends October 21, 2011 Page ii

5 NWE DSIP Technical Plan Table of Contents 3. System Vulnerabilities G. Financial Considerations The Traditional Funding Model What Can Go Wrong? Sources of New Money Windfall Profits? H. The Bottom Line October 21, 2011 Page iii

6 NWE DSIP Technical Plan I. Overview I. Overview The Distribution System Infrastructure Project (DSIP) is a long term initiative by NorthWestern Energy (NWE) to assure that its electric and natural gas distribution systems are aligned to optimally meet its customers needs and expectations for safe, reliable and cost effective service. Virtually all elements of America s infrastructure are aging too fast relative to modernization and replacement efforts, and the nation s utility systems are no exception. Our current systems are safe, reliable and competitively priced, and we are committed to keep them that way. This requires a proactive approach to get in front of the aging infrastructure issue, as opposed to being forced into a more difficult and costly reactive approach later. NWE is fortunate in that it has the time to deal with aging infrastructure in the right way. At the same time, new technologies are emerging that promise to offer many benefits in the future. A modern, adaptable infrastructure will be a prerequisite for seizing those opportunities, and we have the obligation to assure that our system is ready to accept new proven and cost-effective technologies, as they become available to help support our customer needs and Montana s economic foundation. A. Background NWE serves 337,600 electric customers and 181,300 natural gas customers in Montana. An elaborate infrastructure, including 17,200 miles of electric distribution circuits and 4,900 miles of natural gas mains, is required to carry the electric or natural gas commodity to these customers in a safe, reliable and cost effective way. The utility s obligation to serve is not open to discussion; NWE is required to build and maintain the infrastructure necessary to meet its customers needs. In return, the company has the opportunity to earn a fair return on appropriate investments it makes to meet that obligation. Utilities are challenged to determine the optimum investment required to meet their obligations. Too little investment will lead to unacceptable service levels. Too much investment means unnecessarily high costs. Utility managers, under the oversight of regulators, must find the right balance to maintain both reasonable rates and service levels. Adding to this challenge is the reality that the factors influencing the balance are often in flux. The various infrastructure strategies of the past are often no longer appropriate due to natural variations such as changing public or regulatory expectations, aging facilities, resistance to rate increases, evolving technical issues or priorities, or a wide variety of other changing circumstances. Good management carefully monitors such trends and adjusts plans accordingly, preferably by annual fine tuning, but at times by more aggressive, quantum changes in strategy. NWE is now precisely at such a crossroads, where decisive action is appropriate. October 21, 2011 Page 1

7 NWE DSIP Technical Plan I. Overview This Technical Plan describes a thoughtful, measured approach that accelerates our distribution infrastructure management program over the next seven years. It is designed specifically to result in electric and natural gas distribution facilities that will meet the long term customer needs, while maintaining stable and competitive utility rates. Arriving at this balance involves both science and art there are no easy formulas that can produce universally accepted solutions. In all cases, however, the application of science and art has been governed by sound engineering judgment and industry practices. The purpose of this document is to clearly explain that process and why we believe that the technical plan for the maintenance and improvement of our electric and natural gas distribution facilities is the right thing to do, and now is the right time to do it. B. Why DSIP? Why Now? Much like the aging infrastructure trends across the United States in other areas, whether it is bridges, roads, airports or others, electric and natural gas utilities are faced with addressing their aging wires and pipes distribution systems. The result is similar to other types of U.S. infrastructure, that maintenance and new investment have not kept pace as equipment and facilities age. With each year of decline, the difficulty and cost continues to grow to the point where costs can become prohibitive, further restraining new investment. The generic factors now converging to magnify this aging infrastructure challenge include: Aging of key assets the building boom of the late 60s and early 70s has resulted in a variation of the baby boom, in which many facilities are reaching the end of their design life (typically 40 years) at the same time. The cost of modernizing systems continues to rise although inflation has been benign in recent years, this has not been the case in electric construction, as recent studies have shown above average cost increases for labor and material. Further, the cost to replace the aging components is many times their original cost. Absorption of what was once excess capacity in systems the industry has been working off for decades the excess that resulted from the high growth years, with the result that in many cases the excess has turned to a deficit. Nationally, focus on cost containment has impacted modernization and maintenance efforts the industry was especially aggressive in cost cutting in the 90s as it faced the potential for competition. Customer expectations continue to increase the role of electricity in our society continues to grow, with the inevitable result that demands and expectations will also grow. The expectations gap between urban and rural customers has narrowed rural reliability will never equal that of urban customers, but rural customers rightfully expect a reasonable service level. Technology offers mushrooming opportunities the enormous investment now taking place in distribution technology (the Smart Grid) has the potential to lead to significant benefits in the future. After decades in the back seat of national public policy, these factors all suggest that it is time for these many delivery and distribution systems to have a turn in the queue. October 21, 2011 Page 2

8 NWE DSIP Technical Plan I. Overview In terms of urgency and timing, electric and natural gas utilities across the country find themselves in different positions. Virtually all face infrastructure challenges and most view the issue with great concern. However, some are positioned well to deal with it, and others are not. The worst positioned have simply fallen too far behind, and are in the spiral caused by prohibitive costs the challenge of catching up will be difficult. Others are borderline, and should be very aggressive while there is still time. Others still, although challenged, have the time to do it right. However, the half-life of that asset is short, and such firms would be prudent to not allow it to waste away. The nature of the company s schedule, featuring a two-year phase-in followed by five years of high production, is ample evidence that this is not a panicked reaction. On the other hand, the high production levels envisioned in 2013 through 2017, which far exceed what the company has done in the past, are clear evidence that this is indeed a very aggressive program. Such a thoughtful, structured, efficient approach is possible only because NWE has the time to do it right. In Chapter II, A Call to Action, The Liberty Consulting Group will discuss in detail the U.S. trends in infrastructure in general and electric and natural gas distribution in particular. Their analysis shows there are good reasons why America s infrastructure has been in decline, and it will take strong leadership to overcome those reasons. C. Development of the Plan The company retained The Liberty Consulting Group to conduct a formal audit of the company s transmission and distribution infrastructure management in 2004, the results of which included numerous recommendations for improvement. Perhaps the most significant of these relate to the overall management and engineering approach to infrastructure management, and these were the recommendations that were most effectively implemented. As a result, NWE restructured its engineering organization to provide increased focus and enhanced capabilities. In addition, the company recognized the need for better data on the existing infrastructure, and for more sophisticated analytical capabilities to exploit that data. The current ability to knowledgably and efficiently attack the infrastructure challenge is a direct result of the improvement initiatives undertaken by NWE in the wake of the 2004 audit. In 2009, management believed that the time was right for the next logical step and that an aggressive approach to confronting the aging infrastructure challenge was appropriate. The audit actions set the stage and established a strong foundation. The organization had the capability to now attack the bigger distribution infrastructure issues. As a natural bridge to their participation in the 2004 Audit, NWE once again retained The Liberty Consulting Group to provide independent third party views, input and analysis into the planning process. The effort was kicked off with four rather simple objectives applicable to the electric system: Arrest or reverse the trend in aging infrastructure Build margin (capacity) back into the system Maintain reliability over time, and improve it for our rural customers Position NWE to adopt new cost-effective technologies October 21, 2011 Page 3

9 NWE DSIP Technical Plan I. Overview While simple, these objectives nevertheless proved powerful, and they are still the foundation for the DSIP. There is a direct tie for every element in the plan to one or more of these founding objectives. A slightly different but equally powerful approach was applied to natural gas. The overriding importance of safety tends to relegate other objectives to the background. So, in natural gas, the secondary objectives are perhaps less important as a foundation element than are the principles that will guide the organization in achieving the safety objective. A commitment to safety and doing things right is less of an objective than it is a way of life or culture. Accordingly, organizational attributes seemed more appropriate as the founding principles for the natural gas program. Those attributes were defined as follows: Improve, or at minimum, maintain leak rate performance Enthusiastically embrace the industry s new safety model (DIMP) Employ state-of-the-art analytical skills to proactively manage safety The reader will notice that these four electric objectives and three natural gas attributes are repeated throughout this this is no accident. In fact, as the foundation of the DSIP, they were repeated continuously throughout the development of the plan. They appeared at the front of every presentation, regardless of audience and regardless of how many times that audience heard them before. Also, they appeared in every technical discussion, as every decision and every consideration was tested for compliance with them. After project kick-off, the general flow of the planning effort is illustrated below: The importance of a thoughtful process that included a real role for stakeholders cannot be overstated. The participants of the Infrastructure Stakeholder Group (ISG), a diverse mix of October 21, 2011 Page 4

10 NWE DSIP Technical Plan I. Overview customers and stakeholders, further challenged the utility mindset of both NWE and The Liberty Consulting Group resulting in a plan that is rooted in customer expectation. We noted above that infrastructure development has faced very real restraints, and those restraints are not easy to overcome. The strength of those restraints is what has caused the national infrastructure issues we have addressed. Management recognized that a traditional approach, although it served the industry well for decades, is no longer effective, and a new approach is required. We will discuss the criteria for that new approach in Chapter III, Principles and Benefits of the Plan, but will emphasize here the participative aspects, which directly contributed to several instrumental course corrections. D. Summary of the Plan 1. Scope The plan consists of eight elements or projects, each for electric and natural gas. These were identified as the critical parts of the infrastructure, or critical work activities, necessitated by the objectives of the plan and the visions established for the future electric and natural gas systems. The 16 elements are shown to the right. Each of the 16 elements will be managed as a project, with all being integrated into an overall project management scheme. This notion of an integrated DSIP is important because the sequencing of work will be a critical consideration in achieving an optimized, cost-effective implementation. To the extent each element goes its own way, efficiencies will be lost. On the other hand, to the extent work can be packaged, including across project lines, substantial cost and schedule benefits are expected. 2. Costs The estimated costs of the DSIP are summarized on the next page. The electric and natural gas plans will be explained in detail in Chapters IV and V, respectively. The supporting activities, which are shown below the line in the summary, are described as follows: Supervision & Engineering Project Support. Acquire additional staffing necessary for several aspects of the project, including engineering, supervision and project management. The funding listed in this activity is to address the expense portion of the additional staffing. Geographical Information System (GIS) Expansion. Conduct a field inventory of visible electrical components to verify and augment electric distribution facility data in NWE s GIS. Field data collected will include information such as component locations, October 21, 2011 Page 5

11 NWE DSIP Technical Plan I. Overview component phasing, and customer service connectivity to protective devices to support plans to implement an integrated Outage Management / Mobile Workforce Management / Computer Aided Dispatch (OMS/MWM/CAD) solution. Electric Lighting Inventory. Conduct a full inventory of NWE-owned lights. The inventory will include information to assist NWE s Asset Management team to develop a future lighting business plan. Estimated Cost Phase-in to Recommended Plan w/inflation Recommended Plan Electric Utility Plan Primary Activities CAPEX O&M CAPEX O&M CAPEX O&M Pole Inspection Inventory & Ranking Pole Replacement Overhead Line Equipment Patrol & Repair Line Clearance Tree Trimming Underground Equipment Repair Underground Cable Replacement Capacity Margins Improvement Line Clearance Correction 3.92 Worst Circuit - Rural Reliability Improvement Substation Upgrade and Improvement System Automation & Smart Grid Technology Installation Electric Utility Total $ 9.10 $ 2.65 $ $ 4.70 $ $ Phase-in to Recommended Plan Estimated Cost Recommended Plan Natural Gas Utility Plan CAPEX O&M CAPEX O&M CAPEX O&M Business District Inside Meter Set and Vintage Construction Improvements Non-Business District Inside Meter Set and Vintage Construction Improvements Establish a Distribution Integrity Management Program Gas Line Damage Prevention 8.06 Farm Taps Rebuild Gas Line Stub Removal Gas Lines Under Structures Removal or Relocation Zone Valve Installation Plan Natural Gas Utility Total $ 6.35 $ 1.20 $ 6.00 $ 1.25 $ $ CAPEX O&M CAPEX O&M CAPEX O&M Other Related Activities Supervision & Engineering Project Support Geographical Information System Expansion Electric Lighting Inventory Other Total $ 3.40 $ 3.73 $ 8.80 Project Total $ $ 7.25 $ $ 9.68 $ $ CAPEX = Capital Expenditures O&M = Operations and Maintenance Expenses October 21, 2011 Page 6

12 NWE DSIP Technical Plan I. Overview 3. Schedule The main production window for the DSIP is the five-year period beginning in The levels of production in this period are well beyond the size of any prior NWE distribution construction efforts. In addition to a major management challenge, the size of the DSIP is an opportunity to develop additional efficiencies. We are committed to taking advantage of these opportunities, but it will take time to build the capabilities and management systems required. Simply stated, it would be neither prudent nor practical to make such a quantum leap overnight. For this reason, NWE is implementing a two-year phase-in or ramp-up period. On a simplified basis, 2011 can be viewed as a head start on the especially important priorities as well as the engineering and planning actions necessary to support the later years. In 2012, the focus will be on ramping up to a higher level of production while implementing and perfecting the new DSIP organization and management systems. By the end of 2012, we expect to be ready to move to the very high demands of the production years. E. Benefits The benefits of the DSIP come at many levels. The technical benefits will be reviewed in detail in the discussions of the electric and natural gas plans. However, the most valuable benefits will flow simply from the achievement of the visions for the future electric and natural gas systems. The attributes described in those visions have a tangible value to our customers and regional stakeholders. Safety, reliability, the ability to grow with the region and the efficient use of our energy resources, all rolled into a cost effective, competitive package, is a benefit that is hard to quantify, but is nonetheless important. The genesis of the DSIP was the concern for aging infrastructure; the DSIP is well suited to that challenge. It arrests and reverses the aging trend; it restores margins that have eroded through the years; it maintains a high level of reliability; and it positions the distribution system to take advantage of new technologies, including automation in the near term and yet to be defined advances in the longer term. Meanwhile, on the natural gas side, a significant contribution to system safety will result, brought about through targeted leak reductions, supported by a more aggressive program of threat analysis and mitigation. The timing of the DSIP project in itself produces real benefits. The program recognizes the importance of seizing the moment while we still have the time to do it right. There is no question that a failure to act now simply postpones the inevitable. It will be a lot harder and a lot more expensive to face these very same questions five years from now. In addition to the direct electric and gas system benefits of the program, there are other societal benefits from this initiative. The capital spending plan for the next seven years is nearly $300 million, and that is over and above NWE s base level of spending. That represents many jobs for a sustained period, with obvious benefits to the region. Like many utilities, we expect a significant amount of our experienced employees to retire in the next few years. The DSIP provides the added benefit of enabling knowledge transfer to occur so that the next generation is October 21, 2011 Page 7

13 NWE DSIP Technical Plan I. Overview well prepared to carry on the strong traditions that have been instilled in the utility over the past century. It is important that we focus on the utility of the future now to be able to fully support the future economic well-being of the communities that we serve. Modernizing the systems today in preparation for tomorrow s standards can be reasonably accomplished now at a reasonable cost and in a logical, controlled manner. It is the right thing to do, and the right time to do it. October 21, 2011 Page 8

14 II. Principles and Benefits of the Plan II. Principles and Benefits of the Plan In 2009, NWE responded to the call to action and started the process culminating in this plan. Respecting the restraints that have limited infrastructure investment, and which continue to be strong negative forces, it was obvious that a traditional approach would not overcome those restraints. We looked for (a) a new, holistic process that would take the time and effort to act along many fronts to build a credible case for action; (b) a workable, cost-effective plan; (c) a financial strategy that could support the program; (d) developing an approach for timely cost recovery; and (e) a stakeholder strategy to build stakeholder preferences and opinions into the plan. This effort spanned two years so far, with encouraging results. It is not likely that the restraints to infrastructure programs would have been overcome to the same extent had a shorter, narrower planning approach been employed. In this chapter, the process to develop the plan will be explained. The more detailed planning aspects of the electrical and natural gas efforts will be discussed under those chapters. A. Planning Principles The single most important planning principle that guided the project was the necessity to establish a strong foundation in the form of a vision and objectives, and continuously test all subsequent planning activities against that foundation. This principle always recognized that changing that original foundation would, if necessary, be acceptable; but as long as the foundation was in place, no exceptions could be made. Whenever results conflicted with the foundation, the team returned to the original vision and objectives, tested the results against them, and then took remedial action to get back on course. As a result, this plan is fully compliant with the founding concepts. A second equally compelling principle stems from the notion that the plan could only succeed if the restraining factors discussed in Chapter II could be overcome. Otherwise, the effort would succumb to the same factors depressing infrastructure investment around the country. This led to a set of criteria that the planning effort would have to achieve: The plan must demonstrate a credible net benefit to customers and the region. The resulting infrastructure must be demonstrably cost-effective in its scope, design and construction efficiency. There cannot be an unreasonable rate impact. There must be a meaningful voice for stakeholders that are respected in the process. The plan cannot compromise NWE s financial position or its future ability to serve. These principles were not taken lightly. A commitment to them is in fact one of the reasons why the process spanned two years. The company felt the added effort was worth it. In reality, the added effort was, and continues to be, mandatory. Chapter II should have made clear the certain results from a traditional approach to infrastructure planning. The traditional approach served us, and all other public works, well for decades. But it is now, unfortunately, just a recipe for frustration and deteriorating infrastructure. New approaches, as difficult and time-consuming as they may be, are needed. October 21, 2011 Page 9

15 II. Principles and Benefits of the Plan B. Objectives The company is in better shape than many other utilities. Rates are competitive and reliability is high. Infrastructure is aging faster than the company s modernization efforts, but this has not manifested itself in the form of large declines in reliability, large increases in cost or the urgent need for super-expensive programs, at least not yet. Compared to utilities that are clearly in a high cost catch up mode, and perhaps to some for whom it is already too late, we have the time to do things right. But the warning signs are indeed there, and the primary root cause is the challenge of making suitable investment to keep pace with the aging of facilities and equipment. We are not immune from the forces impacting essentially every utility. With this in mind, we started the process with a set of four objectives for the electric distribution system, and this DSIP covering both electric and natural gas distribution is the result. Similar objectives were defined for natural gas. And a vision established for the future electric and natural gas systems. These defining factors form the foundation for the DSIP, as defined below. October 21, 2011 Page 10

16 II. Principles and Benefits of the Plan C. The Planning Process 1. Economic Analysis / Justification The electric and natural gas approaches are substantially different due to the role of cost and economic justification. Simply stated, the safety priority took precedence in the analysis of the natural gas system, whereas the balancing of cost and benefits was the focus in electric. This is not to say that cost was ignored in natural gas, but it was not involved in the initial prioritization of high impact items. That process was governed entirely by safety considerations, including the probability and consequences of leaks. Once the initial highest priorities were established, the more discretionary items were judged on a balance of cost and degree of threat. In planning for the electric scope, a wide range of programs was considered, from relatively minor efforts to the very aggressive. Initial technical preferences were made, but then the options were subjected to economic considerations. A life cycle cost analysis 1 was conducted on each case such that the relative costs and impact on rates for the more and less aggressive cases could be examined. It would certainly be fortuitous if every preferred option could be justified on the basis of life cycle costs. This would mean that for whatever is invested up front on the infrastructure, direct cost savings of a greater amount will be achieved. In fact, in many industrial applications, no 1 A life cycle analysis considers not only the first (capital) cost but all subsequent costs associated with the change. This includes operating costs as well as the savings from any direct benefits, such as reduced outage costs. October 21, 2011 Page 11

17 II. Principles and Benefits of the Plan investment would be made without such justification. The accompanying chart illustrates this line of thinking, and it represents an appropriate analysis. But such an approach does not necessarily work in evaluating all electric (and many other public service) infrastructure needs. Specifically, utilities have obligations to provide an appropriate level of service. What if the optimum point, the least cost option, is to simply wait for the component or facility to fail and then replace it? In fact, from a strictly economic perspective, this is indeed the least cost in many cases, but it is often not an acceptable practice. One cannot simply wait for poles to fall over, or large expensive transformers to fail, or overhead equipment to fall off the pole. In other words, the optimum economic point in the above graphic often falls in the Unacceptable Operations regime. To complicate matters further, the dimensions of that regime are subjective it may be as shown above for one utility and twice that width for another. The result is that, in many cases, the otherwise elegant analysis deteriorates to a subjective judgment of where to draw the line in selecting a frequency of asset replacement. But this is not really unusual, nor should it be troubling. Engineers are trained and paid to make these judgments based on sound technical principles and a reasonable balancing of the competing priorities. And this is indeed the basis for many of the decisions underlying this plan. The life cycle cost of each infrastructure option, expressed as a rate impact 2, was estimated and balanced against the benefits and consequences resulting from that option. That thought process is further explained in each of the technical elements described in this plan. It is important to note that engineering judgment is not some vague excuse to do what one pleases. On the contrary, the costs associated with options are real as are the resulting technical benefits or consequences. The estimation and logic surrounding any decision must be logical, consistent with good engineering practice and subject to validation, both internally in the organization and externally through regulators and others. Despite many decisions being made on such a subjective basis, a rigorous cost analysis is still appropriate, because it both frames the basis for an engineering judgment and suggests alternates for optimization. 2. Participative Process We were committed to a participative process from the start. The key feature, but not the only, was the creation of an ISG. This organization was involved as the plan evolved. Their feedback provided many valuable insights and led to some major shifts in thinking on the part of the company. The material discussed with the ISG, as well as minutes of their meetings, is cataloged on the web. 3 2 Rate impacts are estimated by calculating the revenue requirement associated with an option. The revenue requirement, which is the amount that must be recovered from the customer, equals the operating costs plus the return of the utility s investment plus a fair return on the utility s investment. 3 October 21, 2011 Page 12

18 II. Principles and Benefits of the Plan We also shared information during the process with others as frequently as practical. Regulators, community leaders, employees, and consumer representatives were kept informed as the process moved forward. 3. Technical Approach As a result of The Liberty Consulting Group 2004 audit of NWE s infrastructure management processes, the company launched an effort to significantly upgrade the capabilities of its organization. In fact, it is a direct result of those added capabilities that permitted the creation of this plan. NWE s response was to reorganize its engineering function to provide for an infrastructure management group. That group immediately recognized that infrastructure data necessary for sophisticated analysis was lacking, and set upon developing the data sources and structure necessary. That effort has taken great strides and continues today. In addition, the group enhanced its own capabilities for sophisticated analysis. This has enabled NWE to both better understand the appropriateness of acting now on infrastructure improvement as well as develop a credible plan for that purpose. D. Benefits Each specific element of the plan is justified on the basis of the benefits it contributes. The expected benefits, and their appropriateness versus added costs, are explained under each of the technical descriptions in Chapters IV and V. In addition, there are significant global benefits that flow from the plan as a whole, not the least of which is the achievement of the vision for the future electric and natural gas distribution systems. These other global benefits are described below. 1. Reliability In evaluating the benefits of the DSIP, we have frequently discussed increased reliability. We have attached a tangible dollar savings to reliability only to reflect reduced company costs for responding to outages and restoring service. But this is only a small fraction of the savings to the economy resulting from reliability gains. This is a little understood concept, because our added costs as residential customers do not change one way or another as a result of an outage. In fact, customers respond in surveys that they place little dollar value on reduction of outage minutes. The real value of reliability is seen by business and industry, where the cost impacts of electric outages are enormous. A 2004 study by the Lawrence Berkeley National Laboratories estimated a cost of $80 billion per year as a result of electric interruptions. These costs result from lost business, idled workers, idled manufacturing processes and lost raw materials and products. Commercial customers bear the brunt of this, amounting to 72 percent of the estimate. In a more recent study, the Electric Power Research Institute (EPRI) put the loss at $ billion per year. They included power quality problems in addition to outages and attributed $15-24 billion to that cause. October 21, 2011 Page 13

19 II. Principles and Benefits of the Plan As an example, the cost to a medium or large commercial or industrial customer for four hours on a summer weekday afternoon is estimated at nearly $60,000. The corresponding cost for a small business is $2,700, much less but still very impactful for a small businessman. We would expect therefore that the benefits to the regional economy from increased reliability are both real and substantial. But NWE does not use these benefits to justify investments, nor do most utilities. It is felt that the beneficiaries of such increased reliability are hard to define, as are the actual amounts of the savings. Therefore we leave them out of the analysis, but that does not change the reality that real and tangible benefits will result for the regional economy. 2. Safety The DSIP places its highest priority on natural gas safety, and specifically leak mitigation. The industry does recognize the importance of leak prevention and responding to leaks; however, in rare cases, the consequences of a natural gas leak can be catastrophic. While we can and do estimate the cost to prevent a leak, there is no credible way to estimate the value of that avoided leak. But with each natural gas incident experienced around the country, we are reminded that the value is considerable. Perhaps some of our discussion here will be interpreted as downplaying the role of safety in electric versus natural gas. No one in the industry would make that mistake the danger of the business, especially among electrical workers, is universally respected. There continues to be too many fatalities by electrical contact or other accidents. So there should be no mistaking NWE s, or any other utility s commitment to safety in all of its businesses. Our point vis-à-vis natural gas is that safety is the overriding decision parameter when evaluating natural gas infrastructure. But as will be seen in the plan discussion, safety is an important element of the plan as a whole, and enhanced safety for the public and employees is a real benefit arising from the DSIP. 3. Regional Economy Economic benefits can be visualized in two categories. First, the large capital expenditures spread over many years mean many jobs for a long time. Second, a region cannot be economically strong without a sound utility infrastructure, reliable electric service and reasonable utility rates. In many ways, the DSIP is an investment by Montana in its own future. 4. Costs We have stressed the phrase the time to do it right which means the time to do it costeffectively. The investments recommended herein could, in many cases, be deferred for a few years. In fact, that option, recognizing the state of the economy in the last few years, seemed quite logical during the evaluation of the plan. There is a downside to any deferral, but could not rule out that option. This issue is far less significant today because of the program s phase in in , effectively deferring the main part of the program by two years. Despite these changes, deferral was examined in the consideration of individual elements. A relaxed schedule was an option, and was a key part of the decision-making process. October 21, 2011 Page 14

20 II. Principles and Benefits of the Plan We believe that, under any circumstances, the DSIP investments are necessary. Timing is undeniably an option completing the investments at some time in the future is not. With that said, there are compelling arguments to move ahead promptly, while the work can be scheduled in a reasonable and structured pace. In addition, costs are sure to be less now than later. And finally, it can eventually become too late to catch up the scope becomes prohibitive. In summary, moving ahead expeditiously is the most beneficial option. 5. Technology Distribution technology is one of the electric elements of the plan. As with virtually every other business, technology is playing a driving role in distribution. A large portion of new spending, and virtually all government funding, is dedicated to Smart Grid initiatives in general and smart meters in particular. The extent to which such technologies may eventually benefit our customers is a question that will not be answered for some time. Suffice it to say that the company is committed to major investments only as they prove economically justified. NWE is participating in a regional pilot program that will inform future decisions about costeffective and appropriate timing of large scale deployments of new technology. However, we believe that now is the time to make the system ready for these advancements. The communication backbone necessary to support most new applications is lacking, and the creation of the backbone is a DSIP priority. The subsequent ability to employ new technologies as they come along is a benefit with substantial potential in the future. October 21, 2011 Page 15

21 The electric distribution system of NWE-Montana serves 337,600 customers via 17,200 miles of overhead and underground distribution lines. These customers are spread over more than 100,000 square miles, giving NWE one of the lowest customer densities in the U.S. This rural, or more appropriately frontier, characteristic of the system raises many challenges. Some might say the deck is stacked against the company because of low customer density, which usually is a cause of low reliability and high cost. However, these challenges have been largely overcome, and the nature of the service territory has not resulted in the reliability and cost penalties one would expect. The difficult aspects of managing such a widely spread infrastructure is nevertheless a major consideration in the DSIP and should not be underestimated. A. Objectives The foundation for the electric plan, consisting of the program objectives and vision, was discussed above. The objectives were set from the very start, and all other DSIP activities flowed from them. Those objectives were, and continue to be: Arrest or reverse the trend in aging infrastructure Restore margin (capacity) back into the system Maintain reliability over time, and increase it for our rural customers Position NWE to adopt new technologies All of the objectives are tied directly to one or more specific implementing elements of the DSIP, as illustrated below. There are also indirect and overlapping ties (not shown). October 21, 2011 Page 16

22 The vision, which was initially defined by management and later modified slightly with the help of the ISG, similarly directly ties to every element of the plan. The vision as finally approved is for a distribution system that is: Safe for our employees and the public Reliable consistent with the needs of a society that is increasingly dependent on electricity Able to grow to accommodate the needs of new customers and potential quantum growth from new electric applications Optimized an optimum mix of investment in new plant and maintenance of existing facilities Responsive to all customers minimizes the service gap between urban and rural customers Energy efficient a system that provides the platform to achieve the efficient use of energy resources Cost effective a system designed, built and operated for least, long-term cost while achieving the above objectives State-of-the-art a system that employs effective technologies to further the above objectives The vision represents a view of the system that is very beneficial to the region and NWE s customers. It represents a safe, reliable, efficient, flexible and cost-effective system that will meet the future demands of businesses, industry and consumers. It will be highly supportive of October 21, 2011 Page 17

23 economic development and the benefits that it will bring to Montana s communities. This is a vision that hopefully can gain a wide degree of support among stakeholders. B. Building the Plan Management s initial direction to the planning team was to develop an aggressive program for dealing with the aging infrastructure issue, specifically aimed at the four objectives discussed above. A first challenge was to fully understand just how aggressive the program should be, recognizing that the question entailed both economic and technical factors. The first action of the team was therefore to frame the possibilities, from less investment to a high level of investment. Five scenarios were defined as a starting point, with the stipulation that each would be examined for its economic and technical impacts on the distribution system. These scenarios were intended to frame the early discussions and not to produce a precise selection of one box or another. This allowed the full spectrum to be considered, even clearly unacceptable options. As a result, the team developed a healthy and full understanding of the possibilities and the cost to move forward. This same framework was then applied to each proposed element of the plan. A scope was defined for each element that sought to meet the criteria of each scenario. The resulting matrix allowed a quick cut of many options. Once the obvious non-contenders were removed, a more detailed technical analysis could be conducted. For each plan element, the specific problems to be addressed were identified and the various solutions examined in more detail. The combination of an awareness of the current situation with the guiding principles of the objectives, allowed a narrowing of options. October 21, 2011 Page 18

24 As preferred solutions began to emerge, a more detailed cost analysis was conducted. The intent was to determine the relative costs and values of the options and to seek optimum, or least cost, solutions. The final decisions on each element evaluated were based on an engineering assessment balancing costs and benefits. C. Program Summary The full production elements of the DSIP electric plan are being planned for A phase-in period will span , in which initial inspections, high priority work and capability building will take place. The workload envisioned for represents production levels not previously seen by NWE. As such, they are considered to be a major management challenge. A new organizational approach to management, additional resources and expanded management systems are necessary. These will all be put in place and built to their full capability during the phase-in period. The table below sets forth the estimated costs of the eight elements comprising the electric plan. Electric Plan Electric Utility Plan Primary Activities CAPEX Estimated Cost Phase-in to Recommended Plan w/inflation Recommended Plan O&M CAPEX O&M CAPEX O&M Pole Inspection Inventory & Ranking Pole Replacement Line Clearance Correction Underground Equipment Repair Underground Cable Replacement Overhead Line Equipment Patrol & Repair Line Clearance Tree Trimming Worst Circuit - Rural Reliability Improvement Substation Upgrade and Improvement Capacity Margins Improvement System Automation & Smart Grid Technology Installation Electric Utility Total $9.10 $2.65 $12.20 $4.70 $ $48.87 October 21, 2011 Page 19

25 D. Technical Details 1. Pole Inspections and Replacement a. Background This program involves the management of the NWE wood distribution poles. It has been estimated that between 160 million and 180 million wood poles support the electric transmission and distribution systems in the United States. 4 These lines represent up to 40 percent of the net value of some utilities. 5 Wood poles have a long history of providing excellent service for supporting overhead electrical and telecommunication lines for nearly a century. They are still unsurpassed as the structural foundation of the overhead distribution system due to their combination of economy, sustainability, flexibility and strength. Wood distribution pole NWE has over 289,000 wood distribution poles in Montana. These poles vary in terms of wood types, wood preservative treatments and suppliers. Once any wood pole is placed into the ground, it begins a slow process of aging and decay. The aging of these poles must be monitored until eventually the pole will require replacement. A treated distribution pole can easily have a life of over 40 years. 6 The National Electrical Safety Code (NESC) requires that wood poles be replaced when they deteriorate to below ⅔ of their original design strength requirement. Decay of a pole is usually in the form of gradual deterioration in an area just below the groundline caused by fungi and other low forms of plant life. Also, insect attack (termites and ants) and excessive weathering and splitting at the pole top can contribute to pole failure or need for replacement. However, such failures are not considered as major as groundline decay, and happen much later in the pole's life. By far, the main cause of pole replacement is active decay in the groundline area of the pole to 18 inches below. Moisture and oxygen in this area greatly speed up the decay process. The pole decay below the groundline may be on the exterior of the pole, but usually the decay area is in the soft center wood of the pole. As the decay progresses the interior of the pole becomes hollow. In order to check for decay properly, each pole must be excavated to about two feet below the surface. After the exterior is checked for decay, the pole must be bored and measured for interior rot. If the pole still has sufficient strength to remain in service, it is then prudent and cost effective to apply preservative to the excavated pole area and the pole interior. This preservative treatment stabilizes and reduces the future decay rate of the pole. With this regular inspection and maintenance, it is possible to extend the life of wood poles to over 75 years. 7 4 Forest Products Journal, 2002 Utility Survey, Nov Ibid. 6 Osmose Internet website data, Apr Ibid. October 21, 2011 Page 20