TVM Application
Electric Utility Reliability

What is the cost of a power outage?

COMMENTARY
This is a discussion draft ... the concepts are fairly solid ... the argument should be improved
Peter Burgess

What is the cost of a power outage?

The way a power utility company operates in the present day (2011), there is hardly any cost to the utility company for a power outage ... the cost of a power outage is almost totally born by the customers.

In the capitalist economic model, this is the way the market should be behaving. The business is doing everything in its power to earn profits, and one of the most reliable ways of doing this is to reduce to the absolute minimum the routine inspection and maintenance of the distribution system. When a distribution system is maintained at the minimum level for an extended time, the reliability of the system is degraded, and any unusual event such as a windstorm, or a snow storm will cause the system to break at one or many of its stress points.

A recent hurricane ... Irene ... that came into the NorthEast of the United States showed that the electric distribution system was fragile, and many thousands of customers were without electic power for days. A subsequent October snowstorm in the same area again demonstrated that the electic distribution system was unacceptably unreliable. Many customers did not have their power restored until more than a week after the storm. This performance is worse than it would have been 50 or more years ago ... why?

The capitalist market economy has operated in favor of the investor for a very long time. Arguably there was a time when pride in workmanship ensured that practical work was done in a professional manner, but over time a new academically trained management class has come into being. The flagship educational institutions for this have been places like the Harvard Business School, Wharton, and others. They have taught people to do sophisticated financial analysis, but have done little or nothing to link practical workmanship and basic ethics into the curriculum.

Unions and workers are not completely blameless ... but compared to the management class, the issues of worker performance are a second order of magnitude. With decent leadership, the American worker, can be highly productive ... but decent leadership has been increasingly absent in the past 30 odd years.

The cost of a power outage is born almost totally by the customers and by society. The utility has more profit because it has reduced maintenance to a minimum ... and the only costs it has to incur are the costs of maintenance it should have done before, but chose not to. The customer has all sorts of costs ... especially in the 'all electric' house.

The perishable food in the refigerator and freezer are one area of cost. More and more customers make heavy use of frozen foods, which do not survive extended periods without cooling. Some customers rely on water pumped from a well. They are out of luck. Some have sump pumps in basements. Some have grinder pumps required to operate toilets. The lives of customers are turned upside down when the electricity is not delivered.

Small business is ever more dramatically affected. They can lose critical inventory, and lose customer revenue. Where they are already struggling, it can easily be the end of the business.

Does the utility have any costs? Well yes. They have the cost of getting the system back up and running ... and usually paying a lot of overtime to do it. But they are merely paying now for what they should have done ahead of time to avoid the damage.

The cost they don't have is to pay customers for their losses. In general these costs are for the account of the customer. This is wrong ... and should get changed. The incentive needs to be structured so that reliability is improved, and to do this something different is needed. For example: where customers have loss, there should be an automatic credit to the customer that fully covers the loss. It can be argued there should be a standard scale of reimbursement or credit that is based on the duration of the outage and the customer's normal rate of electricity use at this time of the year. It should also be argued that these payments or credits do not get included as part of the cost base in rate computations.

In the recent (October 2011) storms in the NorthEast of the United States, I have been surprised at the number of people who have standby generators. This is an appalling commentary on the run-down state of the electricity infrastructure and its unreliability.

When I learned about electircity generation, transmission and distribution as a student more than 50 years ago, I learned something of how these systems should be designed to give reliability. Whatever happened? I also learned many years ago how to do financial engineering ... but never forgot that you can never do financial engieering of any substance when the underlying real engineering is incompetent.