Public Power

PUBLIC VALUE

ROBERT BRIGGS
AUGUST 2005

Introduction
A shifting political environment has been leading to significant changes in legislation that effectively deregulate the industry and fundamentally affect the way utilities are run. Ever since the 1992 Energy Policy Act power companies have shifted their priority from the historic “quality of service” to “competitive pricing.” Under this new paradigm the electric system is operated closer to its limits, large capital expenditures are often deferred and reducing expenses by cutting maintenance are all part of a modern utility’s strategic plan. The deregulation of wholesale electricity supply has led to a number of changes and new challenges for the electric utility industry. As the initial rush of building power plants to cash in on deregulation subsided, spending on new equipment and replacement transformers has fallen to its lowest level in decades. All this has happened at a time when power consumption is increasing, and the load on each transformer continues to grow.
Of all the critical infrastructures in this nation, electricity plays the pivotal role in delivery of all of them. For example, the delivery of water depends on electric pumps maintain the water pressure for utilities to deliver water to your tap, cell phone towers depend on electricity to put through your calls when you are driving down the freeway and the banking sector has become increasingly dependent on the use of Automatic Teller Machines. The importance of reliable electrical power has a huge impact on this nation’s economy. Society has become increasingly dependent on e-commerce and dependable electricity is fundamental for our nation’s economic prosperity, social welfare and security. We live in a culture that is based on the assumption that electricity will always be available. As such, the destruction or degradation of the electric grid could cause serious harm to our economic and national security.
The existing problem is how to deliver reliable and affordable electric service despite sweeping changes in the electric industry. Public power utilities have a duty to remain true to their fundamental obligation of providing public value to their customer-owners.
Early Political Environment.
The history of electricity has been a constant battle about power, money and control in which even Thomas Edison was entangled. In 1882, Thomas Edison installed the world's first central generating plant in New York City's financial district. His vision consisted of cities being populated by numerous power plants that sold electricity to customers. Whereas Edison wanted to own the equipment and sell electricity, bankers such as J.P. Morgan wanted big profits by selling expensive generators to individual industrial companies.
At that time Samuel Insull was serving as Thomas Edison’s secretary. Samuel Insull captured Edison’s confidence and eventually co-founded the company that would become General Electric. In what amounted to a double-cross, J.P. Morgan refused to loan Edison more than a small portion of the money he needed to make his vision work and instead backed Samuel Insull, who fought to make enormous profits by selling generators to individual companies for the private generation of electricity. By the mid-1920’s, Insull had amassed a utilities empire that spanned across 30 states. He did this by conceiving two very cunning ideas. First he established a State Public Utility Commission as a means to prevent competition between private and municipality utilities. Secondly he established “holding companies” that controlled utilities in complicated pyramid structures, where a few investors at the top held controlling shares of many subsidiary companies. This pyramid structure led to a variety of problems and some analysts believe that utility holding company abuses greatly contributed to the Stock Market Crash of 1929.
After the crash in 1929, Congress enacted the Public Utility Holding Company Act of 1935 (PUHCA) as a response to the shady the business practices of huge utility holding companies during the 1920s and 30s.
To this date, the Public Utility Holding Company Act (PUHCA) of 1935 is the only law that prevents utility holding companies from subsidizing unregulated business activities from profits obtained from their regulated business activities and captive customers. PUHCA requires that all side businesses be kept separate from the regulated business. Some large utilities want PUHCA repealed, arguing that the law is obsolete and is restricting competition and diversification in the electric industry. But simply repealing PUHCA without enacting consumer protections would most likely result in a wave of mergers that would create a few disproportionately large and influential companies, rendering competition meaningless and harming consumers and the environment.



What has been done?

There have been several things done through history to counter the problems that the Utility Industry has faced. The need for a national association such as the American Public Power Association (APPA) was recognized in the 1940s as Government became increasingly involved with the electric utility industry. Over the years, the APPA has attempted to advance public power’s legislative interests and restrain Congress from giving away the milk cow. The APPA works to address significant issues that impact Public Power, including provisions to strengthen consumer protections. As APPA’s membership, resources and staff have increased, so has its political clout. The APPA is now the collaborative effort for this nation’s more than 2,000 community and state owned electric utilities. It is the spokesman for public power’s interests in Washington, D.C., and attempts to influence public policy on the behalf of its members and their consumers.
The APPA’s mission is to advocate policies that:

Ensure the success of public power in a changing electric utility market through superior representation, information and support services.
Ensure reliable electricity service at competitive costs.
Protect the rights of citizens to control their own affairs through the democratic process.
Advance diversity and equity in the electric utility industry.
Promote competition in the wholesale electricity marketplace.
Protect the environment, and the health and safety of electricity consumers.

Why it has not been Successful
Despite the efforts of the APPA it cannot overcome the huge amount of money that lobbyists were floating out there. President Bush signed the new Energy Bill on Aug. 8th that would be completely abolishes the Public Utility Holding Company Act within 6 months. For the first time since 1935, any one company can own approximately $1 trillion worth of electric generation transmission and distribution assets and natural gas distribution assets.
In PUHCA’s place, The Federal Energy Regulatory Commission (FERC) has been stripped of its teeth and has a virtually meaningless right to look at the “books and records” of conglomerates in the off-chance that FERC could discover something. The only rates state utility commissions will have any control over at all will be distribution facility costs; the rest will be determined by FERC, which has abandoned its rate review to “the market.” However, with PUHCA repealed, interstate holding companies will also be free to buy up and consolidate distribution companies. Analysts agree that there will be “substantial consolidation” in the utility industry once PUHCA is repealed, which will effectively eliminate local control and accountability, plus any adequate regulation of rates.
The repeal of PUHCA means we will have again the huge “power trusts,” and a huge loss of essential consumer protection that ensures that electric utilities exist to serve the people, not the profit interests of large corporations.


Effects on the maintenance side
Despite deregulation, maintenance engineers still have to find a way to deliver reliable and affordable electric service despite the changes in the electric industry. This has led to a number of changes and new challenges for the electric utility industry. One of the main things that have been done so far to address these issues is the industry has made a significant shift to Asset Management. Asset Management is basically the drive to leverage the most out of existing equipment that is nearing the end of its’ useful life. Large power transformers are the most significant portion of these assets and a major concern to every electric utility.
The Asset Management approach is typically a three-step process:
1) Risk Assessment screening of transformer fleet Risk assessment involves the probable maximum loss, in dollars, and the strategic impact of the transformer.

2) Condition Assessment of individual transformers. Condition assessment involves a rigorous inspection and extensive testing of the transformer.

3) Life Cycle Decisions: retire, refurbish, replace, or relocate.

Other Items and issues that fall under the paradigm of electric utilities operating at its limits while reducing operating costs;
1. Conventional methods for supplying electric power are not able to keep up with load growth and there may not be adequate incentives for building power new production.
3. Mechanisms for sharing information on maintenance best practices and equipment performance among distribution utilities are not always used.
4. Utilities may experience lengthy delays in replacing failed critical equipment.
5. Planned distribution system upgrades are not implemented on schedule.
6. Substation maintenance programs do not anticipating component weaknesses.
7. Transmission and distribution maintenance expenditures decline over time and become inadequate.
All of these items are the facts of life that Utilities face each day. Decisions are made today for which the consequences will be paid for at a later date. The desire to operate this system closer to its limits increases the importance of actions needed to maintain a reliable electricity delivery system, including making timely investments, performing maintenance, developing new technologies, enhancing modeling & analysis tools, and installing system additions.
One of the answers for the Utilities is to focus on preventative maintenance to forestall any problems and catch any life threatening problems. Much like your doctor telling you to get a check-up to catch any health problems early, preventative maintenance has an undeniable effect on the reliability of the system. A poor maintenance program has arbitrary and irregular evaluations of its equipment. The way in which work is assigned is selected in a random fashion and follows no strategic plan. In contrast, an excellent maintenance program with regular evaluations to assess the condition of the equipment and has a vision of where it is headed.
What are you proposing to do?
Out of the box thinking is required for offering services for our large industrial customers that can loose millions of dollars a year in lost production due to outages. While Asset Management, preventative maintenance and strategic work assignments inside the substations can pay dividends. More needs to be done to create public value for our customers and counteract the paradigm of “profits first and people later.”
For customers who own their own high voltage electrical equipment, providing maintenance, and outage-related service is a critical task. Anaheim can provide preventative and diagnostic practices to keep equipment operating properly and help identify developing problems. Diagnostic services offer the biggest bang for the buck because they can find big problems with a minimum of effort and it is feasibly do-able. By offering the following services, Anaheim limits its’ exposure to liability because both items are non-invasive and there is not a lot of personnel needed to do the job. In fact it would be a one-man job in most cases.
1) Infrared imaging of customers equipment while it is still in service. Infrared can help identify electrical problems but also problems with overheating motors and bearings.
2) Testing the oil in high voltage equipment. By taking oil samples at the customers site and submit them to a lab for analysis, potential costly failures can be avoided.
In order to implement the additional demands of providing diagnostic services to customers several things would have to happen along a time-line. From start to finish about 6 months would be needed to get the project rolling with another 3 to 6 months after that to hire any additional personnel. After a full year of operation an analysis of the results of the program can be done.

A situational analysis of where we are now.
Currently we are short handed by one man and everyone has the training to take good oil samples. Oil samples are sent out to a lab for independent analysis and the lab itself makes recommendations on a course of action. For the infrared thermography a certification course would be a good idea for our personnel if they were going to be making recommendations to our customers on the basis of the results of the scan. This would also be a good idea in the case of a lawsuit where training may come up as an issue.

A target of where we want to be and what the goals are.
We would like to have perhaps a core group of thirty of our large industrial customers as clients and have them happy with the service. A file would be kept on each customer with the maintenance history.

A proposal of what we do to get there.
1) An action plan of who is going to do what and by when. Someone has to be made accountable for the program. Most likely it would be the Substation Department because of the expertise that is needed.
2) It would have to be incorporated into the strategic plan of the Utility Department.
3) Brainstorm and get proposals and solutions from the players that are going to be involved.
4) Risk Management would have to review the program for legalities.
5) Customer service would have to start advertising the availability of the services and a list of potential customers has to be established along with contact information.
6) Large customers like Boeing would be contacted first by phone and then in person and made aware of the services being offered.
7) After finding the customer base an analysis of the man-hours needed to support the additional demands of the services on our staff.
8) Evaluate the results, take corrective action where necessary and celebrate the successes.
An Analysis of the barriers and threats.
No significant barriers or threats really come into play except from the organization itself. Substations would have to mobilize support and resources from the different departments while enlisting the aid of others beyond their organizational boundaries who can help them achieve the results for which they are accountable.
A Political Management Plan
It is a fact of life that managers must participate in their external political environment to achieve their goals. An “Entrepreneurial Advocacy” will be used as the political management plan. This is the approach that focuses on what a public manager needs to do to maximize the chance that his preferred policy will be authoritatively adopted and solidly backed.
It involves:
1) Who will be involved
2) The likely positions of the players involved
3) The current political setting.
4) How to frame the issues for tactical success
5) Choosing the right moment to present the idea.
How does all of this create Public Value?
Offering large customers preventative and diagnostic services to keep their equipment operating properly helps create public value by helping them maintain a reliable electric maintenance program and therefore avoid outages and equipment failures that could affect there bottom line. Public power utilities have a duty to remain true to their fundamental obligation of providing public value to their customer-owners. By offering these services it offers real benefits to the public; it will be politically supported because it is high visibility a positive benefit and it is operationally and administratively feasible to accomplish. By integrating politics, substance, and administration managers can strategically bring more value to public management.