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February 2009
Filling the regulatory void

Filling the regulatory void

02 February 2009

Dr Andrew Dodds - Director of group development

A recent report issued by the McKinsey Global Institute, one of the world’s most respected economic research organisations, proposes that after years of successful operation, the price cap mechanism in the Performance Based Rate (PBR) regulatory framework, which effectively controls the income and profitability of many European deregulated electricity distribution companies, is fast approaching the end of its useful life.
The PBR regime attempts to align the motives of the utilities with those of the regulator and consumer and was originally devised to provide an ongoing incentive for power companies to improve productivity, quality and reliability of services while simultaneously increasing efficiency through cutting costs. To achieve this, the PBR regime requires the regulator to set lower rates each year. Until now, says the McKinsey report, this arrangement has worked well and has yielded much improved efficiencies amongst the distribution companies along with far fewer supply disconnections.

The problem is that the distribution companies now have nowhere left to cut. It simply isn’t possible for them to make further significant efficiency increases without major investment, but the PBR regime, which dictates continually falling prices for their services, makes investment very difficult if not impossible. In fact the regime not only militates against investment for the future but also against essential investment to replace existing plant and cables that are at the end of their working life. As a consequence, the transmission companies are increasingly being forced to rely on life-expired equipment, particularly transformers. This is a serious threat to the reliability of their networks, and puts at risk the efficiency gains that have been among the most notable successes of the PBR regime.

The regulators around Europe are aware of this problem and most are working toward regulatory regime change. Indeed, the bulk of the McKinsey report is devoted to recommendations on the form that this change might take. However, even if change is coming, they will take years to formulate and implement, especially given the four- and five-year review cycles built into most implementations of the current PBR regime.
The question therefore remains how can transmission and distribution companies bridge this investment gap and not penalise earnings until the regulatory regime changes?

There is no completely satisfactory answer, but a damage limitation strategy at least, is possible. This requires further extending the life and maintaining performance of existing plant, even though much may have already exceeded its original design life.

One solution to implementing this strategy is predictive testing – essentially regular testing of key items of plant to detect signs of performance deterioration that indicate the need for further investigation or action. In many cases, this early warning of an incipient fault will allow remedial measures to be put in place to eliminate the risk of a complete failure.

A good example relates to power transformers, where testing to manage transformer life can lead to timely recognition of defects.

The transformer life can be extended through reduced loading (if possible), prior to attempts to improve the transformer condition through remedial action. This may include in field drying out techniques to remove excessive moisture, replacement of contaminated oil or mechanical maintenance which may extend the useful life of the transformer by years. This will most certainly be less than that needed to source a replacement transformer given manufacturers are quoting delivery times in excess of two years for new power transformers.
Advances achieved through modern test equipment are now providing powerful predictive maintenance test techniques. These include swept frequency analysis (SFRA) for power transformers enabling detection of mechanical and electrical changes of the core and winding assembly, similarly Dielectric Frequency Response measurements on transformers are useful to determine moisture content in oil/paper insulation systems. High moisture content in transformers curbs the loading capability whilst accelerating the aging process and is of vital importance for decisions on maintenance or load restriction.

To support justification for investments into new test equipment, it is worth considering the costs in relation to the potential for savings. If the new equipment eliminates the need to replace just one transformer, it will have paid for itself many times over. Even the best of predictive testing programmes cannot of course, indefinitely prolong the life of ageing electrical plant. A change to the PBR regime that facilitates investment in new equipment is essential. Until this change occurs however, it is incumbent on the transmission and distribution utilities to make best possible use of the plant they have. Predictive testing, with modern test equipment is without doubt the key.