Establishing the AMI Business Case Framework Advanced Technology to Support Utility, Customer and Societal Needs
Problem A Flawed Business Case Framework Regulatory economics do not incent business efficiency, customer service or innovation. Utility technology evaluations tend to exclude factors that do not impact the revenue requirement Evaluations of advanced metering focus on the hardware and the utility and fail to recognize the broad value of the information to the entire utility operation, the customer and society.
The Business Case Objective YES Establish a framework to evaluate the economic, customer service and value of overall system opportunities provided by advanced metering infrastructure (AMI). NO Evaluate the economic impact of advanced metering infrastructure on the utility revenue requirement.
Optimizing the Business Case Perspective Emphasis Revenue Requirement Operational Costs Operational Savings System Integration UTILITY CUSTOMER Value of Service Value of Services Value of Information Bill Management SOCIETY Total System Cost Value of Information Responsiveness Risk Management
Business Case Full Utility Perspective Outage Management Work Order Processing System Dispatch Settlements Energy Reconciliation Load Forecasts Performance Monitoring Meter Maintenance Demand Response Management System Operations Service Calls Customer Service Data Warehouse Data Preparation [VEE] Meter Reading Marketing Support Accounting and Billing Energy Information Services Rate Design Cash Management Theft Management Electronic Billing and Presentment EMS Services ESCO Services
Comparing Business Case Options 1 2 3 4 5 6 7 Conventional Framework Methodology - Net Present Value of Costs and Benefits. Utility owns and rate bases all investment. Focus on utility revenue requirement. Metering assumed independent of other systems and applications. Customer impacts not considered. Demand response, innovative pricing and customer education not considered. New customer service and revenue opportunities not considered. Proposed Framework Methodology - Net Present Value of Costs and Benefits Consider financed or outsourced options. Focus on system wide net benefits. Metering considered part of an integrated suite of utility applications. Customer impacts considered. Demand response, innovative pricing and customer education considered. New customer service and revenue opportunities considered.
Why Consider Advanced Metering? Automated Meter Reading (AMR) Functional Capability Advanced Metering Infrastructure (AMI) Average Expected Payback (years) 10 8 6 4 2 6.5 $92 kwh Usage kw Interval Data Dispatchable Rates Tamper Detection Outage Monitoring Read on Demand Selectable Billing Dates Customer Usage Profiles 6.5 $107 $125 $100 $75 $50 $25 Average Dollar Cost per Meter Installed Dynamic Load Research Drive-by Systems Fixed Network Systems NO YES Functions Supported Source: Chris King, September 30, 2004, California CEC, CPUC, Resource Agency presentation.
What comes first Utility Business Process Improvement Demand Response 1. Maximizing Value versus Minimizing Cost AMI supports basic business process improvement. AMI impacts customer service and utility operating efficiency. AMI should provide improvements in utility operations that substantially exceed the cost. 2. AMI is not a Demand Response Program: System-wide implementation captures operational improvements and economies of scale that cost justify the investment in advanced metering. Targeted implementation increases the overall operating and per unit investment costs.
AMI Installations Business Process Oriented Utility Type Technology Quantity Install Completed Kansas City Power & Light (MO) Electric 400,000 1996 Duquesne Light (PA) Electric 580,000 1998 Ameren (MO) Electric & Gas 1,400,000 1999 Xcel Energy (MN) Electric & Gas 1,400,000 1999 Puget Sound Energy (WA) Electric & Gas 1,500,000 2000 United Illuminating (CT) Electric 320,000 2000 Indianapolis Power & Light (IN) Electric 470,000 2000 Exelon (PA) Electric & Gas 2,100,000 2002 Wisconsin Public Service (WI) Gas 200,000 2003 Wisconsin Public Service (WI) Electric Distribution line carrier 650,000 2004 PPL (PA) Electric Distribution line carrier 1,300,000 2004 JEA (FL) Electric & Water 600,000 2005 WE Energies (WI) Electric & Gas 1,000,000 2005 Hundreds of Small Utilities Electric & Gas Various 5,000,000 2004 Source: Chris King, September 30, 2004, California CEC, CPUC, Resource Agency presentation.
Utility AMI Deployment Drivers Ameren KCPL NSP Operational Efficiency PSE IPL Exelon UI JEA IPC PPL WE Energies Operating Costs Improved Accuracy Theft Detection Distribution Service Demand Response Customer Service Rate Options Billing Options Internet Access Outage Response Service Quality
What are the benefits? $3.33 $0.85 $0.45 $0.50 $0.70 $0.71 $0.31 $0.24 $0.61 0.16 0.14 High End Estimated Benefits Low End Estimated Benefits 0.12 $0.10 $0.09 0.10 $0.08 $0.08 $0.08 0.08 $0.07 $0.07 0.06 $0.04 $0.04 0.04 $0.02 0.02 Dollars / Meter / Month Reduced Meter Reading Cost Reduced Problem investigations Improved Meter Accuracy Reduced Meter Testing Eliminate Locks Logical Connects and Disconnects Reduced Estimated Bills Reduced Theft Improved Read to bill time Improved Bill to pay time Reduced uncollectibles Improved Accounting Call Center Cost Reductions Improved Capacity Management Rates System Value of Dmd.Side Mgmt. Outage Reporting Improved Outage Management Reduction in Lost Outage Sales Source: Field Service Benefits Back Office / Admin Benefits Customer Service Benefits System Operating Benefits Capturing the Value: The Future of Advanced Metering and Energy Information, Cambridge Energy Research Associates (CERA), Final Report, Spring 1999, Chapter VI, Figure VI-6 ( Working papers).
Cumulative Utility Benefits versus Cost Duration of Outsource Contract Monthly Cost versus Monthly Benefit Per Meter $7.00 $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 5 Year 7 Year 10 Year 12 Year $1.65 High-Low Meter Cost Low Benefit High Benefit $0.72 $5.69 $0.95 $7.34 $1.15 $7.76 $1.22 $0.00 Field Service + Administrative Customer Service + + System Operations Source: Meter Scoping Study, California Energy Commission, March 2002, Figure 7.
Business Case Problem: Financing versus Ownership Outright Purchase Capital Lease Operating Lease Synthetic Lease Full Outsourcing Advantages Asset included in rate base Implementation limited by capital budget Tax benefits Lower up-front purchase cost May be allowed in rate base Qualifies for depreciation / tax benefits Off Balance Sheet financing Lower rate than Capital Lease Known payment for budgeting purposes Off Balance Sheet for book purposes Owned / rate based for tax purposes Qualifies for accelerated tax / depreciation Minimal up-front cost, no asset ownership Performance criteria on third-party Payments easy to budge and tax deductible Off balance sheet by definition Disadvantages Large, up-front capital requirement May be more costly than other alternatives. Asset / Debt recorded on Balance Sheet may skew financial ratios May not be included in rate base No accelerated tax / depreciation benefits Rate higher than other lease forms because tax benefits accrue to utility, not leasing company. May be subject to high regulatory scrutiny Not allowed in rate base May have to share benefits with provider Contract length may be an issue No direct tax / depreciation benefit (included)
Business Case Problem: Financing Matching Costs and Benefits $15 $10 Pay-for-Read Synthetic Lease NPV ($millions) $5 $0 $5 Outsource Purchase $10 $15 $20 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Year Source: Private communication between and Invensys, background data for a utility highlighted at the Distributech 2001 Utility Conference.
Business Case Problem: Total versus Incremental Cost Cost to implement and maintain AMI Cost to maintain existing system (base case) Year 1 2 3 4 5 6 7 8 9 10 n
Business Case Problem: The Revenue Requirement Dilemma Account for the following: Potential Benefit Value Explanation 1 2 3 4 5 Reduce Theft Reduce kwh unserved (faster outage detection / repair) More Accurate forecasts Improve Information to Customers More accurate and timely billing
Revenue Requirement Dilemma example. Valuing Meter Tampering and Theft Valuing Unidentified Energy Utility United Illuminating Australia Percent of Annual Revenue 2.16% Dollar Cost $4.5million Cal ISO UFE Study May-Aug 1998 PG&E Dollar Cost Per MWh (Percent) $1.78 (15.8%) Dollar Cost $49 million Canadian Electricity Association 1.36% $130.4 million SCE $0.70 (8.9%) $20 million Sierra Pacific Power 1.0% $4.5 - $9.0 million SDGE $0.05 (1.9%) $274,000
Business Case Problem: Revenue Requirement Dilemma Treatment. Account for the following: Potential Benefit Value Explanation 1 Reduce Theft No Value Shifts revenue. 2 Reduce kwh unserved (faster outage detection / repair) No Value Customer productivity difficult to estimate. 3 More Accurate forecasts No Value Shifts revenue 4 Improve Information to Customers No Value Difficult to estimate. 5 More accurate and timely billing No Value Shifts revenue
Business Case Problem: Difficult to Quantify Benefits If you can t accurately estimate the dollar value of a benefit is it no longer a benefit? Will the information, billing, better pricing and other service options facilitated by advanced metering provide customers with additional value? Is this value significant or insignificant relative to the utility claimed savings in meter reading expense say $0.50 per month? Do the information and other services facilitated by advanced metering provide an anticipated aggregate value to the entire system that should significantly influence the business case decision? [ ] Yes [ ] No [ ] Yes [ ] No [ ] Yes [ ] No
Business Case Problem: What are the Opportunity Costs? Utility Outage Incident New York Jersey Central Power Northeast Blackout PG&E outage June 14 th California Statewide Outages Year 1977 1999 2003 2000 2000-2001 $28 million in claims $2 million power failure $26 million pillaging $56 million in lawsuits (250,000 customers out) Cost / Settlement DTE claims $10 million lost revenue Duane Reade Drug Stores (237 outlets) $35-$40 million pre-tax losses $3.3 million lost sales $700,000 inventory losses 3 hour forced outage Silicon Valley $75-$100 million lost product January 2001 - $115-$150 million gross product losses March 2001 $225 - $300 million gross product losses
Business Case Result AMI Evaluation AMI Vendors 200 10.1 9.3 9.3 10 Fully Installed Cost (Metering and Communication) 150 100 50 $181 $119 6.5 $163 7.4 $124 7.7 $133 $78 8.2 $120 7.8 8.3 $111 $163 5 Simple Payback (years) 1 2 3 4 5 6 7 8 9 9.9% 15.3% 10.8% 13.5% 13.0% 12.2% 12.8% 12.0% 10.8% (net benefit as percent of net cost) Source: Confidential communication - California municipal utility, 500,000 point system, no demand response March 2005.